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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)
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DELAWARE 51-0332317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
105 WESTPARK DRIVE, SUITE 300
BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices) (Zip Code)
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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. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant as of March 23, 1999 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $43,927,182. As of March 23, 1999, the registrant had
3,576,163 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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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") and indirect subsidiaries EMSA Correctional
Care, Inc. ("EMSA Correctional") and EMSA Military, Inc. ("EMSA Military"),
contracts to provide managed healthcare services to correctional facilities and
military installations 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 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 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 and EMSA Military Services, each of which became indirect
subsidiaries of the Company as a result of 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 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. EMSA Military
currently provides such services for military personnel and their dependants at
10 DOD and VA medical facilities.
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 in the Stock Purchase Agreement), 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 of $24.0 million. Accordingly, InPhyNet repaid $3.6
million of the purchase price. 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
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of January 26, 1999 (the "Credit Agreement"), with NationsBank, N.A., as
Administrative Agent and Issuing Bank ("NationsBank"), which provides for a
revolving credit facility of up to $52.0 million (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"), private equity funds managed by Ferrer Freeman Thompson
& Co. ("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"). ASG received aggregate consideration of
$20.0 million for the Notes, Warrants and Preferred Stock. The Notes, Warrants
and Preferred Stock are referred to collectively as the "Convertible
Securities."
The following table sets forth the sources and uses of funds for the EMSA
acquisition (in millions):
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SOURCES:
Cash........................................................ $ 2.1
Borrowings under the Credit Facility........................ 47.0
Proceeds from sale of the Notes............................. 15.0
Proceeds from sale of the Preferred Stock................... 5.0
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Total Sources..................................... $69.1
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USES:
Cash Consideration for EMSA ("Purchase Price").............. $67.0
Transaction costs........................................... 2.1
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Total Uses........................................ $69.1
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At the option of either the Company or the holders of the Notes, the Notes
are convertible, subject to certain conditions, into shares of Preferred Stock
at a conversion ratio of one share of Preferred Stock for each $100 of
outstanding principal amount of Notes. The Warrants entitle the holder thereof
to purchase 135,000 shares of Common Stock at the lower of $9.45 and the average
closing sale price of the Common Stock for the thirty consecutive trading days
prior to the Stockholder Meeting (as defined), provided that such price shall in
no event be less than $5.50 per share (subject to adjustment) (the "Warrant
Exercise Price"). Subject to certain adjustments, each share of Preferred Stock
is convertible, at the option of the holder thereof, into the number of shares
of Common Stock determined by dividing the face value of such share of Preferred
Stock by the lower of $9.45 and the average closing sale price of the Common
Stock for the thirty consecutive trading days prior to the Stockholder Meeting,
provided that such price shall in no event be less than $5.50 per share (subject
to adjustment).
The conversion of the Notes into shares of Preferred Stock is conditioned
upon, among other things, the Company's stockholders approving the issuance of:
(i) the shares of Preferred Stock issued to Capital Partners and Executive
Partners on January 26, 1999, (ii) the shares of Preferred Stock issuable upon
conversion of the Notes and (iii) the shares of Common Stock issuable upon
conversion or exercise, as applicable, of the Convertible Securities, to the
extent that the number of shares of Common Stock to be issued will be in excess
of 20% of the number of shares of Common Stock outstanding, without regard to
the shares of Common Stock issuable upon conversion of the Convertible
Securities (the "Stock Issuance"). The Securities Purchase Agreement obligates
the Company to convene a meeting of its stockholders (the "Stockholder Meeting")
to consider and vote upon the approval of the Stock Issuance (the "Stockholder
Approval") as soon as practicable following the closing of the Securities
Purchase Agreement and no later than July 26, 1999.
If the Company fails to convene the Stockholder Meeting on or before July
26, 1999, the interest on the Notes will increase by 0.05% on July 27, 1999 and
will further increase by 0.05% per month to a maximum monthly interest rate of
1.5% (which represents an annual interest rate of 18%) until the Company
convenes the Stockholder Meeting. In addition, if the Company fails to convene
the Stockholder Meeting on or before
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July 26, 1999, fails to take other actions in connection with obtaining
Stockholder Approval or fails to take certain other actions required by the
terms of the Warrants, the Warrant Exercise Price will be reduced to $.01 per
share. The interest on the Notes will not be increased as described above and
the Warrant Exercise Price will not be reduced as described above until the
maturity of the Notes, in each case, if the sole reason the Company fails to
obtain Stockholder Approval is the failure of the holders of the Common Stock to
approve the Stock Issuance at a meeting duly called and convened in accordance
with the Securities Purchase Agreement.
The Company entered into a Registration Rights Agreement, dated as of
January 26, 1999 (the "Registration Rights Agreement"), with Capital Partners
and Executive Partners pursuant to which it agreed to register the Common Stock
issuable upon conversion of the Preferred Stock issued or issuable to Capital
Partners and Executive Partners pursuant to the Securities Purchase Agreement
and exercise of the Warrants for resale by the holders thereof.
The summaries contained herein of certain provisions of the Credit
Agreement, the Securities Purchase Agreement, the Notes, the Warrants, the
Certificate of Designation of the Preferred Stock, the Registration Rights
Agreement, the Stock Purchase Agreement and the First Amendment are qualified in
their entirety by reference to all the provisions of such documents, including
the definitions therein of certain terms which are not otherwise defined herein.
Copies of all such documents except the Stock Purchase Agreement, which was
filed as an exhibit to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on January 5, 1999, were
filed as exhibits to the Company's Current Report on Form 8-K filed with the
Commission on February 10, 1999.
CORRECTIONAL HEALTHCARE SERVICES
Generally. ASG, through PHS and EMSA Correctional, 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.
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PRO
FORMA (1) HISTORICAL
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DECEMBER 31,
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1998 1998 1997 1996 1995 1994
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Number of correctional contracts(2).......... 96 35 32 34 35 35
Average number of inmates in all facilities
covered by correctional contracts(3)....... 132,991 63,783 54,364 83,288 82,310 51,939
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(1) Indicates the combined number of contracts or inmates, as the case may be,
for PHS and EMSA Correctional as of December 31, 1998.
(2) Indicates the number of contracts in force at the end of the period
specified.
(3) Based on an average number of inmates during the last month of each period
specified.
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
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prison contracts. State prison contracts often cover a larger number of
facilities and often have longer terms than jail contracts.
Services Provided. Generally, ASG's obligation to provide services to a
particular inmate begins upon the inmate's admission into the correctional
facility and ends upon the inmate's release. Emphasis is placed upon early
identification of serious injuries or illnesses so that prompt and
cost-effective treatment is commenced.
Medical services provided on-site include physical and mental health
screening upon intake. Screening includes the compilation of the inmate's health
history and the identification of any current, chronic or acute healthcare
needs. After initial screening, services provided may include regular physical
and dental screening and care, psychiatric care, OB-GYN screening and care and
diagnostic testing. Sick call is held on a regular basis and infirmary bed care
is provided in some facilities. Nursing rounds are regularly conducted and
physicians, nurse practitioners, physicians' assistants and others are also
involved in the delivery of care on a regular basis. Appropriate medications are
administered by nursing staff, as needed.
Medical services provided off-site include specialty out-patient diagnostic
testing and care, emergency room care, surgery and hospitalization. In addition,
ASG provides administrative support services both on-site and at ASG's
headquarters and regional offices. Administrative programs include on-site
medical records and management and employee education and licensing. Central and
regional offices provide quality assurance, medical audits, credentialing,
continuing education and clinical program development activities. ASG maintains
a utilization review system to monitor the extent and duration of most
healthcare services required by inmates on an inpatient and outpatient basis.
See "-- Administrative Systems."
Most of the Company's correctional contracts require it to staff the
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 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. Most
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 76% of revenues for the year ended
December 31, 1998, and 63% on a pro forma basis after giving effect to the EMSA
acquisition, 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 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.
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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. 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 stop loss insurance from an unaffiliated insurer covering
hospitalization for amounts in excess of $200,000 per inmate for PHS contracts
and $170,000 per inmate for EMSA Correctional contracts. Such stop loss
insurance covers 80% of ASG's exposure for such treatment costs. ASG believes
this insurance mitigates its exposure to unanticipated expenses of catastrophic
hospitalization. See "-- Risk Management."
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 fixed payment on a per inmate, per day
basis. The City of Philadelphia Contract provides for a fixed payment on a fixed
dollar basis with a per diem price adjustment based on any increase in the size
of the inmate population above a set number. The remainder of ASG's largest
existing contracts for the year ended December 31, 1998 -- contracts with the
Kansas Department of Corrections, the Delaware Department of Corrections and
Alameda County, California -- 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. 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
refine its bids 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 a clinically appropriate 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, (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 a 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.
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, 1998, generally ranged between 4% and 60% (and in one case, 100%)
of the 1998 contract fee.
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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, emergency healthcare needs
of corrections employees 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 contracts with those facilities.
ASG maintains a staff of sales and marketing representatives assigned to
specific geographic areas of the United States. In addition, ASG uses
consultants to help identify marketing opportunities, to determine the needs of
specific potential customers and to engage customers on ASG's behalf. ASG uses
paid advertising and promotion to reach prospective clients as well as to
reinforce its image with existing clients.
Risk Management. Prior to December 1, 1997, Harbour Insurance, Inc.
("Harbour"), a wholly owned subsidiary of PHS and a captive insurance company,
provided insurance covering PHS's medical professional and general liability
arising out of its provision of healthcare services. Since December 1, 1997, the
Company has maintained professional and general liability insurance through an
unaffiliated insurer. ASG was able to substantially fix its insurance costs for
medical malpractice liability exposure over the next two years through such
unaffiliated insurer. In October 1998, ASG liquidated Harbour and entered into a
novation agreement pursuant to which an unaffiliated insurer assumed
substantially all of the liabilities of Harbour for outstanding claims as of
August 31, 1998.
Prior to October 1998, for contracts where ASG's exposure to the risk of
inmates' catastrophic illness or injury was not limited, the Company maintained
stop loss insurance for an unaffiliated insurer with respect to hospitalization
for amounts in excess of $125,000 per inmate. This stop loss insurance covered
70% of the Company's exposure for such treatment costs. Since October 1998, for
contracts where ASG's exposure to the risk of inmates' catastrophic illness or
injury is not limited, ASG has maintained stop loss insurance to cover 80% of
ASG's exposure with respect to hospitalization for amounts in excess of $200,000
per inmate for PHS contracts and $170,000 per inmate for EMSA Correctional
contracts. 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.
MILITARY SERVICES
EMSA Military provides a broad range of emergency medicine and primary
healthcare services to active and retired military personnel and their
dependents in medical facilities operated by the DOD and the VA. EMSA Military
began providing healthcare services to DOD clients in 1988 and has provided in
excess of 3.5 million patient visits. During the fiscal year ended December 31,
1998, EMSA Military provided services under 10 contracts.
Most military contracts are for a period of five years, with an initial one
year base period and four one year options. EMSA Military's bidding strategy is
to seek contract opportunities that will be awarded on a best value, rather than
a low cost basis. This allows EMSA to highlight the Company's operational
expertise and the overall quality of its provider staff. Margins are determined
by the size and risk associated with a specific
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contract. The current target markets include VA emergency departments ($1.4 to
$2.4 million per site per year in annual revenue) and multi-level facilities
operated by TRICARE Prime, a healthcare provider for military personnel and
their dependents ($8 to $10 million per site per year in annual revenue).
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 to nurses, ASG's staff of employees or independent contractors
includes physicians, dentists, psychologists and other healthcare professionals.
As of December 31, 1998, on a pro forma basis after giving effect to the
EMSA acquisition, ASG had approximately 2,950 full-time equivalent employees,
including 2,050 medical personnel. ASG also had, on such pro forma basis, under
contract 375 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. ASG is in direct competition with local,
regional and national correctional healthcare providers. 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.
MAJOR CONTRACTS
ASG's operating revenue with respect to its correctional healthcare
operations is derived exclusively from contracts with state, county and local
governmental agencies. ASG's contracts with the States of Indiana and Kansas,
the City of Philadelphia and Alameda County, California, accounted for
approximately 21%, 17% 16% and 11%, respectively, of revenues during the year
ended December 31, 1998. 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; ASG's ability to integrate EMSA's operations
successfully into its existing operations; and the other risk factors described
in ASG's reports filed from time to time with the Securities and Exchange
Commission.
Dependence on Major Contracts. ASG's operating revenue is derived
exclusively from contracts with federal, 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
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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 federal, state, county and
local law. Under certain circumstances, a government contractor may be debarred
or suspended from obtaining future contracts. While ASG considers the
possibility remote, such debarment or suspension could have a material adverse
effect on ASG.
Privatization of Government Services, Competition and Correctional
Population. ASG's future financial performance will depend in part on continued
privatization by state, county and local governmental agencies of healthcare
services for correctional facilities. There can be no assurance that this market
will continue to grow or that existing contracts will continue to be made
available to the private sector. The business of providing correctional
healthcare services to governmental agencies is highly competitive. ASG is in
direct competition with local, regional and national correctional healthcare
providers. 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. 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. The Company took a
significant step toward implementing this strategy with the EMSA acquisition.
ASG has limited experience acquiring businesses and integrating them into its
operations. There can be no assurances that ASG will be able to integrate EMSA
or any additional acquired business successfully into its existing operations.
Furthermore, there can be no assurance that ASG will be able to operate EMSA or
any additional acquired business in a profitable manner.
Catastrophic Limits. Contracts accounting for 76% of revenues for the year
ended December 31, 1998, and 63% on a pro forma basis after giving effect to the
EMSA acquisition, contain no limits on ASG's exposure for treatment costs
related to catastrophic illnesses or injuries to inmates. For those contracts
that contain no catastrophic limits, ASG maintains stop loss insurance for 80%
of its exposure with respect to catastrophic illnesses or injuries for amounts
in excess of $200,000 per inmate for such PHS contracts and $170,000 per inmate
for such EMSA Correctional contracts. 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 depends 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 Michael Catalano, President and Chief Executive
Officer, Gerard F. Boyle, Executive Vice President and Chief Operating Officer
of the Company, Bruce A. Teal, Senior Vice President and Chief Financial
Officer, and Jean L. Byassee, Senior Vice President, General Counsel and
Secretary.
Dependence on Healthcare Personnel. ASG's success depends 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.
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
healthcare professionals who are employees of ASG. ASG may also have potential
liability for the negligence of healthcare professionals engaged by ASG as
8
<PAGE> 10
independent contractors. ASG's contracts generally provide for ASG to indemnify
the governmental agency for losses incurred related to healthcare provided by
ASG and its agents. ASG maintains professional liability insurance and requires
its independent contractors to maintain 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.
ITEM 2. PROPERTIES
The Company occupies approximately 12,500 square feet of leased office
space in Brentwood, Tennessee, where it maintains its corporate headquarters.
The Company's lease on its current headquarters expires in October 2003. The
Company leases additional office facilities in Newark, Delaware; Indianapolis,
Indiana; Alameda, California; Topeka, Kansas, Fort Lauderdale, Florida and
Concordeville and Pittsburgh, Pennsylvania. 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on The Nasdaq Stock Market's National Market
System under the symbol "ASGR." As of March 25, 1999, there were approximately
187 holders of record of the Common Stock. The high and low prices of the Common
Stock as reported on The Nasdaq Stock Market during each quarter from January 1,
1997 through December 31, 1998 are shown below:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------ ------
<S> <C> <C>
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
March 31, 1998.............................................. $15.00 $ 7.44
June 30, 1998............................................... 14.50 12.00
September 30, 1998.......................................... 13.00 7.63
December 31, 1998........................................... 14.00 8.63
</TABLE>
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Healthcare revenues......................... $113,287 $129,211 $152,282 $115,238 $109,983
Income (loss) before income taxes
(benefits)................................ 5,099 1,786 (9,933) 1,146 1,646
Net income (loss)........................... 5,724 1,685 (8,686) 687 996
Net income (loss) attributable to common
shares.................................... 5,724 1,742 (8,912) 687 996
Net income (loss) per common
shares -- basic........................... 1.61 0.50 (2.81) 0.23 0.33
Net income (loss) per common
shares -- diluted......................... 1.57 0.48 (2.81) 0.21 0.32
Weighted average common shares
outstanding............................... 3,554 3,480 3,171 3,027 2,994
Weighted average common shares outstanding
and common equivalent shares
outstanding............................... 3,653 3,657 3,171 3,221 3,126
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................... $ 10,515 $ 257 $ (2,434) $ 2,692 $ 2,302
Total assets................................ 28,375 27,754 42,709 42,501 32,108
Redeemable common stock, common stock,
additional paid-in-capital, retained
earnings (deficit) and treasury stock..... 12,791 6,641 4,384 8,667 8,188
</TABLE>
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 1998 1997 1996
- ---------------------------- ----- ----- -----
<S> <C> <C> <C>
Healthcare revenue.......................................... 99.5% 99.5% 99.5%
Interest income............................................. .5 .5 .5
----- ----- -----
Total revenue............................................... 100.0 100.0 100.0
Healthcare expenses......................................... 88.3 91.3 95.2
----- ----- -----
Gross margin................................................ 11.7 8.7 4.8
Selling, general and administrative expenses................ 8.3 7.3 7.2
Nonrecurring (gain) loss.................................... (1.1) -- 4.1
----- ----- -----
Income (loss) from operations............................... 4.5 1.4 (6.5)
Provision for income taxes (benefits)....................... (.5) .1 (.8)
----- ----- -----
Net income (loss)........................................... 5.0 1.3 (5.7)
----- ----- -----
Change in redeemable common stock........................... -- -- .1
----- ----- -----
Net income (loss) attributable to common stock.............. 5.0% 1.3% (5.8%)
===== ===== =====
</TABLE>
1998 Compared to 1997
Healthcare revenues decreased $15.9 million from $129.2 million in 1997 to
$113.3 million in 1998, representing a 12% decrease. The decline in revenues
resulted from the termination of the Georgia Department of Corrections Contract
(the "Georgia Contract") which expired in June 1997, and provided revenue of
$31.3 million in the year ended December 31, 1997. The Company added three new
contracts in 1998, which generated $0.8 million in new revenues, and experienced
$14.6 million of revenue growth from
10
<PAGE> 12
existing contracts through population increases, contract renegotiations,
automatic price adjustments and from being in effect a full year. The Company
did not lose any contracts in 1998.
Interest income of $0.6 million in 1998 declined from $0.7 million in 1997
due to the dissolution of Harbour and the subsequent liquidation of its
long-term restricted investments.
The cost of healthcare decreased $18.0 million or 15% to $100.6 million in
1998. Healthcare expenses as a percentage of revenues were 88% in 1998 versus
91% in 1997. The medical loss ratio was favorably impacted by certain healthcare
expenses and lease costs being reimbursed by MedPartners pursuant to a
settlement agreement entered into upon the termination during the first quarter
of 1998 of MedPartners' agreement to acquire the Company (the "Settlement
Agreement"). These costs were approximately $1.5 million or 1% of total revenue.
Healthcare expenses exclusive of the Georgia Contract were 89% in 1997.
Personnel costs and fringe benefits related to inmate care were 45% of revenues
in 1998 versus 57% of revenues in 1997. The significant decline is attributable
to the existing contracts generally being more full service versus staffing only
and the Indiana Contract, where PHS is not responsible for nursing coverage.
Costs related to outside services (defined as hospitalization, emergency room
and ambulance and outpatient surgeries and visits) were 15% of revenues in 1998
and 17% of revenues in 1997. The decline is due to the Company's continued
emphases on network development and case management.
Selling general and administrative expenses were $9.4 million in 1998
compared to $9.5 million in 1997. The decrease is due to the Company's continued
attempt to streamline the corporate support functions.
The Company recorded a nonrecurring gain of $1.2 million which is directly
related to the Settlement Agreement.
The income tax benefit was $0.6 million in 1998 compared to $0.1 million
expense in 1997. The benefit relates to the elimination of valuation allowances
on the Company's deferred tax assets in 1998. As of December 31, 1998, the
Company had approximately $5.7 million in net operating loss carry forwards.
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 expiration in June 1997 of the Georgia Contract. The
Georgia Contract generated $31.3 million in the year ended December 31, 1997,
compared to $56.7 million in 1996. The Company added five new contracts in 1997,
which generated $9.9 million in new revenues, and experienced $13.0 million of
revenue growth from existing contracts through contract renegotiations,
automatic price adjustments and from contracts 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 expenditure 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 estimates of
medical malpractice claims.
11
<PAGE> 13
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 $0.1 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and short-term investments as of
December 31, 1998 were $7.2 million compared to $5.0 million as of December 31,
1997. The increase is attributable to the dissolution of Harbour, which provided
approximately $4.6 million in cash offset by funding the increase in accounts
receivable. Accounts receivable increased due to the timing of payment on two
major contracts' base fees. Payments were received subsequent to December 31,
1998 for both contracts' base fees. During 1998, the Company received $0.3
million in cash from the exercise of stock options.
Accrued expenses of the Company decreased $3.4 million from $16.5 million
at December 31, 1997 to $13.1 million at December 31, 1998. The reduction is
attributable to the portfolio transfer of all outstanding medical malpractice
claims covered by Harbour and the Company's reduction in average days
outstanding of medical claims under at-risk contracts.
As part of the EMSA acquisition, the Company increased its $20 million line
of credit facility to a $52 million Credit Facility. Under the Credit Facility,
the Company has available a $10 million line of credit for general corporate
purposes, including working capital and the funding of acquisitions. The
interest rate is based upon LIBOR or prime rate, subject to the quarterly
operating performance of the Company and other funding criteria, as defined in
the Credit Facility. The Credit Facility 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 1998 over 1997 was 3.2%, compared
to an overall increase in the Consumer Price Index of 1.6% 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 estimated used
in the bidding and negotiation process.
IMPACT OF YEAR 2000
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 tested and upgraded, as needed. Timekeeping
software is currently being upgraded and this process is 87% complete. The
timekeeping upgrades will be completed by April 30, 1999. The Company's most
significant outsourcing
12
<PAGE> 14
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 effort to obtain such
information from all critical suppliers and vendors and feels that it will be
able to determine its vendors' status by April 30, 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 communicated with many of 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.
The Company expects to expend approximately $110,000 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the report
thereon of Ernst & Young LLP, dated February 12, 1999, 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.
13
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, including ownership of
the Common Stock, as of March 23, 1999, with respect to: (i) each continuing
director or nominee; (ii) each executive officer; and (iii) all continuing
directors and executive officers as a group. Except as disclosed under Item 12,
"Security Ownership of Certain Beneficial Owners and Management -- Preferred
Stock" with respect to David A. Freeman, none of such persons owned any shares
of Preferred Stock.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
Michael Catalano, 47 President and Chief Executive 1998 50,666 1.4%
Officer since September 1,
1998; Executive Vice
President of Development,
General Counsel and Secretary
of the Company from July 1996
to September 1, 1998; Senior
Vice President Planning and
Development and Chief Legal
Counsel of Magellan Health
Services, Inc. (formerly
Charter Medical Corporation)
from 1989 through February
1996.
William D. Eberle, 75(2) Chairman of the Executive 1991 49,000(3) 1.4%
Committee of the Board of
Directors since September 1,
1998; Chairman of the Board
of Directors from March 1995
to September 1, 1998;
Chairman, Manchester
Associates, Ltd., an
international consulting
company, since 1995; Of
Counsel to Kaye Scholer,
Fierman, Hays & Handler, a
law firm, since 1993.
David A. Freeman, 37 Member of Ferrer Freeman 1999(3) 664,100(4) 15.7%
Thompson & Co., General Part-
ner of Health Care Capital
Partners L.P. and Health Care
Executive Partners L.P., each
of which is an investment
management company, since
October 1995; Managing
Director of J.P. Morgan &
Co., Inc., an investment
banking firm, from Septem-
ber 1983 through September
1995.
John W. Gildea, 55(5) Managing Director, Gildea 1986 39,115 1.1%
Management Co., an investment
management company.
Carol R. Goldberg, 68(6) President, AVCAR Group, Ltd., 1991 23,000 *
a management consulting firm.
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
Jeffrey L. McWaters, 42 Chairman, President and Chief N/A 0 --
Executive Officer of
Amerigroup Corporation
(formerly Americaid, Inc.), a
managed health care company,
since October 1994; President
and Chief Executive Officer
of Options Mental Health, a
managed mental health care
company and a subsidiary of
First Hospital Corporation,
from 1991 through September
1994.
Richard M. Mastaler, 53 Chairman and Chief Executive N/A 0 --
Officer of CCN Managed Care,
Inc., a managed health care
company, since August 1997;
Executive Vice
President -- Mergers and
Acquisitions and Product
Development of Magellan
Health Services, Inc., a
managed behavioral health
care company, from September
1996 through August 1997;
President and Chief Execu-
tive Officer of Unilab
Corporation, a clinical and
pathological laboratory, from
April 1994 through March
1996.
Scott L. Mercy, 37 Chairman and Chief Executive 1996 361,000(7) 9.6%
Officer of LifePoint
Hospitals, a group of rural
hospitals to be spun out of
Columbia/HCA Healthcare Corp.
during the second quarter of
1999, since September 1998;
Chairman of the Board of
Directors since September 1,
1998; President and Chief
Executive Officer of the Com-
pany from April 1, 1996
through September 1, 1998;
Senior Vice
President -- Financial
Operations of Columbia/HCA
Healthcare Corporation from
1994 through 1995; Vice
President -- Financial
Operations and
Director -- Financial
Operations Support of
Hospital Corporation of
America from 1987 through
1994.
Richard D. Wright, 53 Chairman, President and Chief N/A 0 *
Executive Officer of Covation
LLC, a provider of software
inte-
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
gration and data management
services for health care
providers and organizations,
since December 1998;
Co-Founder and Executive Vice
President, Corporate Services
of PhyCor, Inc., a physi-
cian practice management com-
pany, from 1997 through
December 1998; Executive Vice
President of Operations from
1988 through 1997.
OTHER EXECUTIVE OFFICERS
Gerard F. Boyle, 44 Executive Vice President of -- 25,671 *
the Company since February
1998; President and Chief
Executive Officer of Prison
Health Services, Inc., a
wholly owned subsidiary of
the Company ("PHS"), since
March 1998; Vice President of
Operations of EMSA Correc-
tional Care, Inc., from
September 1996 through
February 1998; Vice President
and Administrator of Sales
for EMSA Correctional Care,
Inc. from July 1994 through
August 1996; Regional
Administrator for Operations
(Southeast Virginia) for EMSA
Correctional Care, Inc. from
January 1993 through July
1994.
Bruce A. Teal, 37 Senior Vice President and -- 23,807 *
Chief Financial Officer of
the Company since February
1998; Vice President,
Controller and Treasurer of
the Company from December
1996 through February 1998;
Vice President of Financial
Operations of Vendell
Healthcare from October 1992
through November 1996.
All continuing Directors and 1,236,359 27.6%
executive officers as a
group (10 persons)
</TABLE>
- ---------------
* Less than 1%
(1) Includes the following shares subject to options exercisable presently or
within 60 days: Mr. Catalano, 44,000 shares; Mr. Eberle, 48,000 shares; Mr.
Gildea, 38,000 shares; Ms. Goldberg, 23,000 shares; Mr. Mercy, 175,000
shares; Mr. Boyle, 25,000 shares; Mr. Teal, 22,110 shares; and all
continuing directors and executive officers as a group, 375,110 shares.
16
<PAGE> 18
(2) Mr. Eberle also serves on the Boards of Directors of Ampco-Pittsburgh
Corporation, Mitchell Energy & Development Corporation, Konover Property
Trust and Showscan Entertainment, Inc.
(3) Mr. Freeman was appointed to the Board of Directors on January 26, 1999
pursuant to the terms of the Securities Purchase Agreement (as defined
below). See "Certain Transactions."
(4) Mr. Freeman is deemed to beneficially own the shares of Common Stock which
are issuable upon the exercise of the Warrants and Preferred Stock issued to
Health Care Capital Partners L.P. and Health Care Executive Partners L.P.
See Item 13, "Certain Relationships and Related Transactions."
(5) Mr. Gildea also serves on the Boards of Directors of General Chemical Group
Inc. and Konover Property Trust.
(6) Ms. Goldberg also serves on the Board of Directors of The Gillette Company
and Selfcare, Inc.
(7) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(as defined), (which are presently held in the name of his spouse and
beneficial ownership of which he disclaims), and options to purchase 175,000
shares of Common Stock. The shares of Common Stock purchased by Mr. Mercy
and the shares of Common Stock issued under the Old Mercy Employment
Agreement are subject to certain repurchase rights in favor of the Company
and Mr. Mercy. See Item 11, "Executive Compensation -- Employment
Agreements."
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the two most highly compensated
executive officers other than the CEO (the "Named Executives") for each of the
years 1996 through 1998. The Company has no other executive officers other than
the individuals named below.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- --------------------------------------------
OTHER ANNUAL RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK ($) OPTIONS(#) COMPENSATION (1)
- --------------------------- ---- -------- -------- ------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy (2).......... 1998 $155,000 $175,375 $ -- $ -- -- $ --
1997 190,000 -- -- -- -- 16,533
1996 138,846 -- -- 350,000 175,000 9,223
Michael Catalano (3)........ 1998 $186,862 $187,832 $ -- $ -- -- $ 3,454
President and Chief 1997 165,500 -- 56,000(4) -- -- 13,384
Executive Officer 1996 83,077 -- -- -- 60,000 4,452
Gerard F. Boyle (5)......... 1998 $162,413 $ 71,445 $29,068(3) $ -- 85,000 $ 2,500
Executive Vice 1997 -- -- -- -- -- --
President and Chief 1996 -- -- -- -- -- --
Operating Officer
Bruce A. Teal (6)........... 1998 $159,259 $160,643 $ -- $ -- 33,000 $ 2,500
Senior Vice 1997 115,000 -- -- -- -- 102
President and Chief 1996 4,423 -- -- -- 17,000 9
Financial Officer
</TABLE>
- ---------------
(1) Includes matching contributions by the Company to its 401(k) Profit Sharing
Plan and life and health insurance premiums paid by the Company on behalf of
the Named Executives.
(2) Mr. Mercy became President and Chief Executive Officer of the Company on
April 1, 1996. Mr. Mercy resigned his position as President and Chief
Executive Officer on September 1 , 1998.
(3) Mr. Catalano served as Executive Vice President of Development, General
Counsel and Secretary of the Company from July 12, 1996 through September 1,
1998. Mr. Catalano became President and Chief Executive Officer of the
Company on September 1, 1998.
(4) Represents reimbursement for relocation costs.
17
<PAGE> 19
(5) Mr. Boyle became Executive Vice President and Chief Operating Officer of the
Company on February 12, 1998.
(6) Mr. Teal served as Vice President, Controller and Treasurer of the Company
from December 10, 1996 through February 20, 1998. Mr. Teal became Senior
Vice President and Chief Financial Officer of the Company on February 20,
1998.
STOCK OPTION GRANTS AND VALUES
The following table sets forth certain information with respect to stock
options granted to the Named Executives during 1998 and the potential realizable
value of such options.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTION TERM
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- -------------- ------------ ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Michael Catalano
Feb. 20, 1998.......................... 12,000 3.7 9.69 Feb. 20, 2008 73,080 185,280
Sept. 1, 1998.......................... 50,000 15.8 8.69 Sept. 1, 2008 273,000 692,000
Gerald Boyle
Feb. 12, 1998.......................... 75,000 23.4 9.37 Feb. 12, 2008 442,500 1,120,500
Sept. 1, 1998.......................... 10,000 3.1 8.69 Sept. 1, 2008 54,600 138,400
Bruce Teal
Feb. 20, 1998.......................... 33,000 10.3 9.69 Feb. 20, 2008 200,970 509,520
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information with respect to option
exercises by the Named Executives during 1998 and the value of options owned by
the Named Executives at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES ------------------------ ------------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Scott L. Mercy............... -- $-- 175,000/0 $ 743,750/-
Michael Catalano............. -- -- 40,000/82,000 -/225,406
Gerard F. Boyle.............. -- -- 0/85,000 -/315,380
Bruce A. Teal................ -- -- 11,220/38,780 41,374/130,643
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock on the Nasdaq National Market
System on December 31, 1998 of $13.00 per share.
EMPLOYMENT AGREEMENTS
Scott L. Mercy was employed as President and Chief Executive Officer of the
Company from April 1, 1996 through September 1, 1998 pursuant to an employment
agreement, which was amended on June 30, 1997 (the "Old Mercy Agreement"). The
Old Mercy Agreement provided for a minimum annual base salary of $190,000, an
annual bonus based upon performance objectives, and such additional compensation
as determined by the Compensation Committee from time to time. On September 1,
1998, Mr. Mercy and the Company amended and restated the Old Mercy Agreement
(the "New Mercy Agreement") pursuant to which Mr. Mercy was appointed Chairman
of the Board of Directors. Pursuant to the New Mercy Agreement, Mr. Mercy was
paid a base salary of $60,000 for his service as Chairman of the Board during
1998. For years after 1998, the New Mercy Agreement establishes a minimum annual
base salary of $24,000 and such additional compensation as may be determined by
the Compensation Committee from time to time. Pursuant
18
<PAGE> 20
to the Old Mercy Agreement, Mr. Mercy purchased 146,000 shares of Common Stock
from the Company at $8.75 per share, the mean between the high and low sale
prices for the Common Stock on April 1, 1996, received 40,000 shares as a
restricted stock award under the Company's Incentive Stock Plan, and was awarded
options to purchase 175,000 additional shares of Common Stock, at $8.75 per
share. Pursuant to the Old Mercy Agreement the restricted stock and stock
options were to vest in installments over four years, or earlier in one-third
installments when the closing price of the Common Stock reached $12, $14 and
$16, respectively. Mr. Mercy's restricted stock and stock options vested in 1996
when the closing price of the Common Stock exceeded $16 per share. Pursuant to
the New Mercy Agreement, Mr. Mercy has the right to require the Company to
purchase (and the Company has the right to require Mr. Mercy to sell), at a
price not less than $9.90 per share, the purchased shares and the award shares,
but not the option shares, upon Mr. Mercy's termination of employment. Mr. Mercy
is subject to certain non-competition and confidentiality agreements following
termination. The New Mercy Agreement provides for perpetual employment until
terminated by 30 days written notice by either party. The New Mercy Agreement
also provides that the Board of Directors shall take all necessary actions to
ensure that Mr. Mercy is slated as a management nominee to the Board and elected
Chairman of the Board during his employment. Pursuant to the New Mercy
Agreement, Mr. Mercy may terminate his position as Chairman of the Board, remain
a director and otherwise continue his employment under the New Mercy Agreement,
unless it is otherwise terminated.
Michael Catalano was employed as Executive Vice President of Development,
General Counsel and Secretary of the Company from July 12, 1996 through
September 1, 1998 pursuant to an employment agreement (the "Old Catalano
Agreement") which established a minimum annual base salary of $160,000 and such
additional compensation as determined by the Compensation Committee from time to
time. On September 1, 1998, Mr. Catalano and the Company amended and restated
the Old Catalano Agreement (the "New Catalano Agreement") pursuant to which Mr.
Catalano was appointed President and Chief Executive Officer of the Company. The
New Catalano Agreement establishes a minimum annual base salary of $190,000 and
such additional compensation as may be determined by the Compensation Committee
from time to time. Pursuant to the Old Catalano Agreement, on July 12, 1996, the
Company awarded to Mr. Catalano options to purchase 60,000 shares of Common
Stock at an exercise price of $13.125 per share under the Company's Amended
Incentive Stock Plan. The stock options vest ratably on each of the succeeding
three anniversaries of the date of the options and shall be exercisable for a
period of ten years from the date of the grant. Upon termination without cause
or a change of control of the Company, all unexercised stock options granted to
Mr. Catalano under the Company's Amended Incentive Stock Plan shall accelerate
and immediately vest. The issuance of the Preferred Stock to Capital Partners
and Executive Partners upon conversion of the Notes would constitute a change of
control under the New Catalano Agreement. Also, in the event of termination as a
result of death or disability, termination without cause or termination
following a change in control of the Company, Mr. Catalano or his estate is
entitled to two-year's compensation plus an amount equal to the incentive
compensation that Mr. Catalano would have earned in the year of termination, not
to be less than 45% of Mr. Catalano's annual base salary on the date of
termination. Mr. Catalano is subject to certain non-competition and
confidentiality agreements following termination. The New Catalano Agreement
provides for perpetual employment until terminated by appropriate written notice
by either party. The New Catalano Agreement also provides that the Board of
Directors shall take all necessary actions to ensure that Mr. Catalano is slated
as a management nominee to the Board during his employment.
On February 12, 1998, Gerard F. Boyle entered into an employment agreement
(the "Boyle Agreement") with the Company pursuant to which he was appointed
Executive Vice President and Chief Operating Officer of the Company. The Boyle
Agreement establishes a minimum annual salary of $180,000 and such additional
compensation as may be determined by the Compensation Committee from time to
time. The Boyle Agreement provides for perpetual employment until terminated by
either party upon thirty days notice. If there is a change of control of the
Company, all unexercised stock options granted to Mr. Boyle under the Company's
Amended Incentive Stock Plan shall accelerate and immediately vest. The issuance
of the Preferred Stock to Capital Partners and Executive Partners upon
conversion of the Notes would constitute a change of control under the Boyle
Agreement. Also, in the event of a termination without cause, including
termination following a change in control, Mr. Boyle's options shall vest and
his annual base salary as of the
19
<PAGE> 21
date of his termination shall be continued for one year following such
termination date. Mr. Boyle is subject to certain non-competition and
confidentiality agreements following termination.
On February 20, 1998, Bruce Teal entered into an employment agreement
(the"Teal Agreement") with the Company pursuant to which he was appointed Senior
Vice President and Chief Financial Officer of the Company. Mr. Teal had been
serving as Vice President, Controller and Treasurer of the Company since
December 1996; however, the Company and Mr. Teal had not entered into an
employment agreement for his service in that capacity. The Teal Agreement
establishes a minimum annual salary of $160,000 and such additional compensation
as may be determined by the Compensation Committee from time to time. The Teal
Agreement provides for perpetual employment until terminated by either party
upon thirty days notice. If there is a change of control of the Company, all
unexercised stock options granted to Mr. Teal under the Company's Amended
Incentive Stock Plan shall accelerate and immediately vest. The issuance of the
Preferred Stock to FFT upon conversion of the Notes would constitute a change of
control under the Teal Agreement. Also, in the event of a termination without
cause, including termination following a change in control, Mr. Teal's options
shall vest and his annual base salary as of the date of his termination shall be
continued for one year following such termination date. Mr. Teal is subject to
certain non-competition and confidentiality agreements following termination.
COMPENSATION OF DIRECTORS
During 1998, the Company granted each non-employee Director options to
purchase 4,000 shares of Common Stock at an exercise price of $13.56 per share
for serving on the Board and its committees. The Chairman of the Board of
Directors of the Company until September 1, 1998, Mr. William D. Eberle, was
also paid $25,000 for consulting services which he provided to the Company
during 1998. Directors who are also employees of the Company receive no
additional compensation from the Company for attendance at Board or committee
meetings. Under the terms of the Company's Amended Incentive Stock Plan, any
person who is not an employee or independent contractor of the Company and who
becomes a Director will receive an option to purchase 15,000 shares of the
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date such person becomes a Director. Such options will vest with
respect to 25% of the shares covered thereby on each successive anniversary of
the date of grant. David A. Freeman was granted such options, effective January
26, 1999, upon his appointment to the Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
Information with respect to the beneficial ownership of the Common Stock,
as of March 23, 1999, by the Company's directors, director-nominees and
executive officers is included above in Item 10 and is incorporated herein by
reference. The following table sets forth certain information with respect to
the beneficial ownership of the Common Stock, as of March 23, 1999, by each
person who was known by the Company to own beneficially more than 5% of the
Common Stock as of such date, based on information furnished to the Company.
Except as otherwise indicated, each person has sole voting and dispositive power
with respect to the shares beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY % OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
- ---------------- ------------ ------------
<S> <C> <C>
A group comprised of Health Care Capital Partners L.P.
("Capital Partners")and Health Care Executive Partners
L.P. ("Executive Partners")............................... 664,100(1) 15.7%
A group comprised of J. Carlo Cannell D/B/A Cannell Capital
Management, Tonga Partners LP, Pleiades Investment
Partners, LP, the Cuttyhunk Fund Limited and Canal
Ltd.(2)................................................... 397,300(3) 11.1%
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY % OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
- ---------------- ------------ ------------
<S> <C> <C>
Scott L. Mercy.............................................. 361,000(4) 9.6%
Columbia/HCA
4526 Harding Road
Nashville, Tennessee 37205
Sirach Capital Management, Inc.............................. 267,000(5) 7.5%
3323 One Union Square
Seattle, Washington 98101
A group comprised of Mark E. Brady, Robert J. Suttman, III
and Ronald Eubel.......................................... 190,170(6) 5.3%
777 Washington Village Drive
Suite 210
Dayton, Ohio 45459
A group comprised of Wachovia Corporation and Wachovia Bank,
N.A. (collectively, the "Wachovia Group")................. 183,500(7) 5.1%
100 North Main Street
Winston Salem, North Carolina 27104
A group comprised of Sandera Partners, L.P., Sandera Capital
Management, L.L.C., Sandera Capital, L.L.C., John A.
Bricker, Jr., Hunt Financial Partners, L.P. (collectively,
the "Sandera Group"), and Newcastle Partners, L.P. and
Mark Schwartz (collectively, the "Newcastle Group")(8).... 155,500(9) 4.4%
</TABLE>
- ---------------
(1) Includes shares of Common Stock issuable upon exercise of the Warrants and
the Preferred Stock issued to Capital Partners and Executive Partners on
January 26, 1999 which such entities are deemed to beneficially own. Based
on a Schedule 13D filed with the SEC on February 5, 1999, Capital Partners
beneficially owns 637,788 shares of Common Stock and Executive Partners
beneficially owns 26,312 shares of Common Stock.
(2) The address of J. Carlo Cannell D/B/A Cannell Capital Management and Tonga
Partners LP is 600 California Street, Floor 14, San Francisco, California
94108. The address of Pleiades Investment Partners, LP is 6022 West Chester
Pike, Newtown Square, Pennsylvania 19073. The address of the Cuttyhunk Fund
Limited is 73 Front Street, Hamilton, HM12, Bermuda. The address of Canal,
Ltd. is 9 Church Street, HM 951, Hamilton HM DX, Bermuda.
(3) Based on a Schedule 13G filed with the SEC on March 1, 1999, J. Carlo
Cannell D/B/A Cannell Capital Management beneficially owns 397,300 shares of
Common Stock, Tonga Partners, LP beneficially owns 167,800 shares of Common
Stock, Pleiades Investment Partners beneficially owns 46,600 shares of
Common Stock, the Cuttyhunk Fund Limited beneficially owns 146,200 shares of
Common Stock and Canal Ltd. beneficially owns 36,700 shares of Common Stock.
(4) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(which are presently held in the name of his spouse and beneficial ownership
of which he disclaims), and options to purchase 175,000 shares of Common
Stock. The shares of Common Stock purchased by Mr. Mercy and the shares of
Common Stock issued under the Old Mercy Agreement are subject to certain
repurchase rights in favor of the Company and Mr. Mercy. See "Executive
Compensation -- Employment Agreements."
(5) Based upon a Schedule 13G filed with the SEC on February 2, 1999.
(6) Based on a Schedule 13G filed with the SEC on March 11, 1999, each of Mark
E. Brady, Robert J. Suttman and Ronald Eubel beneficially owns 190,170
shares of Common Stock.
(7) Based on a Schedule 13G filed with the SEC on February 12, 1999, each of
Wachovia Corporation and Wachovia Bank, N.A. beneficially owns 183,500
shares of Common Stock.
21
<PAGE> 23
(8) The address of each member of the Sandera Group is 1601 Elm Street, Suite
4000, Dallas, Texas 75201. The address of each member of the Newcastle Group
is 4650 Cole Avenue, Suite 331, Dallas, Texas 75205.
(9) Based upon Amendment No. 1 to Schedule 13G filed with the SEC on February
16, 1999, the Sandera Group beneficially owns 151,500 shares of Common
Stock, Newcastle Partners L.P. beneficially owns 4,000 shares and Mark
Schwartz beneficially owns 155,500 shares.
PREFERRED STOCK
Capital Partners owns 48,020 shares of Preferred Stock, which represents
approximately 96% of the outstanding shares of Preferred Stock. Executive
Partners owns 1,980 shares of Preferred Stock, which represents approximately 4%
of the outstanding shares of Preferred Stock. The principal business address of
Capital Partners and Executive Partners is c/o Ferrer Freeman Thompson & Co.
LLC, The Mill, 10 Glenville Street, Greenwich, Connecticut 06831. The shares of
Preferred Stock owned by Capital Partners and Executive Partners constitute all
of the outstanding shares of Preferred Stock. The general partner of each of
Capital Partners and Executive Partners is Ferrer Freeman Thompson & Co ("FFT").
David A. Freeman, a director and director-nominee of the Company, is a member of
FFT and is thereby deemed to beneficially own all of the Preferred Stock owned
by Capital Partners and Executive Partners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David A. Freeman, a director and a director-nominee of the Company, is a
member of FFT. On January 26, 1999, the Company entered into the Securities
Purchase Agreement and certain other agreements with Capital Partners and
Executive Partners, investment management companies whose general partner is
FFT, pursuant to which the Company issued the Convertible Securities to Capital
Partners and Executive Partners. See Item 13, "Business -- Recent Developments."
Capital Partners and Executive Partners currently own 100% of the outstanding
shares of the Preferred Stock, the Notes and the Warrants. In addition, if the
Stock Issuance is approved by the Company's stockholders at the Company's 1999
Annual Meeting, Capital Partners and Executive Partners will have the right to
receive additional shares of Preferred Stock upon conversion of the Notes and
shares of Common Stock upon conversion of the Preferred Stock and the Warrants.
Mr. Freeman is deemed to beneficially own the Convertible Securities currently
owned by Capital Partners and Executive Partners and will be deemed to
beneficially own any additional Convertible Securities or Common Stock acquired
by Capital Partners and Executive Partners.
On the January 26, 1999, the Board of Directors appointed Mr. Freeman to
the Board of Directors, pursuant to a provision of the Securities Purchase
Agreement which obligated the Company to appoint a designee of Capital Partners
and Executive Partners to the Board of Directors on the date of the closing of
the Securities Purchase Agreement. Pursuant to the Securities Purchase
Agreement, if the stockholders approve the Stock Issuance at the Company's 1999
Annual Meeting, the Company will be obligated to increase the number of members
of the Board of Directors to nine and to nominate designees of Capital Partners
and Executive Partners to three of the nine directorships. Capital Partners and
Executive Partners have designated Mr. Freeman, Richard D. Wright and Jeffrey L.
McWaters to be nominated to directorships. FFT has a 17.3% ownership interest in
Amerigroup Corporation of which Mr. McWaters is Chairman, President and Chief
Executive Officer.
Scott L. Mercy, Chairman of the Board of Directors, is a limited partner of
Executive Partners. His interest in Executive Partners represents 1.5% of
Executive Partners' capital.
Scott L. Mercy is Chairman and Chief Executive Officer of LifePoint
Hospitals, a group of rural hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia"). Richard M. Mastaler, a director-nominee, is the Chairman and
Chief Executive Officer of CCN Managed Care, Inc. In ordinary course of its
business, the Company makes payments to Columbia and CCN for health care
services rendered by Columbia and CCN to the Company on terms no less favorable
than those that it would have received from independent third parties.
22
<PAGE> 24
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
- ------- -----------
<C> <S> <C>
2.1 -- Stock Purchase Agreement, dated as of December 18, 1998,
between the Company and InPhyNet Administrative Services,
Inc. (incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 5,
1999).
2.2 -- First Amendment to Stock Purchase Agreement, dated as of
January 26, 1999, between the Company and InPhyNet
Administrative Services, Inc. (incorporated herein by
reference to Exhibit 99.8 to the Company's Current Report on
Form 8-K filed on February 10, 1999).
2.3 -- Securities Purchase Agreement , dated as of January 26,
1999, among the Company, Health Care Capital Partners L.P.
and Health Care Executive Partners L.P. (incorporated herein
by reference to Exhibit 99.2 to the Company's Current Report
on Form 8-K filed on February 10, 1999).
2.4 -- Plan and Agreement of Merger, as amended, dated October 1,
1997, between the Company, MedPartners, Inc. and ASG Merger
Corporation, a wholly-owned subsidiary of MedPartners, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on form 8-K filed on October 2,
1997 and Exhibit 2.1 to the Company's Current Report on Form
8-K filed on December 30, 1997).
2.5 -- Consent and Agreement, dated January 19, 1998, by and among
the Company, MedPartners, Inc. and ASG Merger Corporation, a
wholly-owned subsidiary of MedPartners, Inc. (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on January 20, 1998).
2.6 -- Release and Settlement Agreement, dated February 25, 1998,
by and among the Company, MedPartners, Inc. and ASG Merger
Corporation and EMSA Correctional Care, Inc. (incorporated
herein by reference to Exhibit 2.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.1 -- Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No. 33-43306).
3.2 -- Certificate of Designation of the Series A Convertible
Preferred Stock (incorporated herein by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K filed on
February 10, 1999).
3.3 -- Amended and Restated Bylaws of America Service Group Inc.
(incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
4.1 -- The Company's 12% Subordinated Convertible Bridge Notes due
January 26, 2000, issued to Health Care Capital Partners
L.P. on January 26, 1999 (incorporated herein by reference
to Exhibit 99.4 to the Company's Current Report on Form 8-K
filed on February 10, 1999).
4.2 -- The Company's 12% Subordinated Convertible Bridge Notes due
January 26, 2000, issued to Health Care Executive Partners
L.P. on January 26, 1999 (incorporated herein by reference
to Exhibit 99.5 to the Company's Current Report on Form 8-K
filed on February 10, 1999).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-1, Registration No. 33-43306, as amended).
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S> <C>
10.1 -- Amended and Restated Credit Agreement, dated as of January
26, 1999, among the Company, as Borrower, the Company's
subsidiaries as listed therein, as Guarantors, the Lenders
identified therein and NationsBank, N.A., as Administrative
Agent and as Issuing Bank (incorporated herein by reference
to Exhibit 99.1 to the Company's Current Report on Form 8-K
filed on February 10, 1999).
10.2 -- Warrant, dated as of January 26, 1999, issued by the Company
to Health Care Capital Partners L.P. to purchase shares of
the Common Stock (incorporated herein by reference to
Exhibit 99.6 to the Company's Current Report on Form 8-K
filed on February 10, 1999).
10.3 -- Warrant, dated as of January 26, 1999, issued by the Company
to Health Care Executive Partners L.P. to purchase shares of
the Common Stock, dated as of January 26, 199 (incorporated
herein by reference to Exhibit 99.7 to the Company's Current
Report on Form 8-K filed on February 10, 1999).
10.4 -- Registration Rights Agreement , dated as of January 26,
1999, among the Company, Health Care Capital Partners L.P.
and Health Care Executive Partners L.P. (incorporated herein
by reference to Exhibit 99.8 to the Company's Current Report
on Form 8-K filed on February 10, 1999).
10.5 -- Prison Health Services, Inc. 1986 Employees' Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1, Registration
No. 33-43306, as amended).
10.6 -- 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 Company'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.
10.7 -- America Service Group Inc. 401(k) Profit Sharing Plan
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992).
10.8 -- Prison Health Services, Inc. Medical Services Agreement for
Alameda County, California, dated July 1, 1992 (incorporated
by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992).
10.9 -- 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 Company's Registration
Statement on Form S-1, Registration No. 33-43306, as
amended).
10.10 -- 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 Company's Annual Report
on Form 10-K for the year ended December 31, 1994).
10.11 -- 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 Company's
Annual Report on Form 10-K for the year ended December 31,
1993).
10.12 -- Healthcare Services Contract with the State of Delaware,
dated June 3, 1996 (incorporated by reference to Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q for the
three month period ending June 30, 1996).
10.13 -- 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
Company's Quarterly Report on Form 10-Q for the three month
period ending June 30, 1997).
10.14 -- 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 Company's Quarterly Report on Form 10-Q
for the three month period ending June 30, 1997).
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S> <C>
10.15 -- Employment Agreement, dated April 1, 1996, between Scott L.
Mercy and the Company, as amended (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for the three month period ended June 30, 1996
and 10.28 to the Company's Quarterly Report on Form 10-Q for
the three month period ended June 30, 1997).
10.16 -- Amended and Restated Employment Agreement, dated September
1, 1998, between Scott L. Mercy and America Service Group
Inc.
10.17 -- Employment Agreement, dated November 1, 1996, between
Jeffrey J. Bairstow and the Company (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.18 -- Non-qualified Stock Option by the Company and Jeffrey J.
Bairstow, dated December 18, 1996, (incorporated by
reference to Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.19 -- Employment Agreement, dated July 12, 1996, between Michael
Catalano and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the three month period ending September 31, 1996).
10.20 -- Amended and Restated Employment Agreement, dated September
1, 1998, between Michael Catalano and the Company
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three month period
ending September 31, 1998).
10.21 -- Non-Qualified Stock Option between the Company and Michael
Catalano, dated July 12, 1996, (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.22 -- Employment Agreement dated February 20, 1998 between Bruce
A. Teal and the Company (incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.23 -- Non-Qualified Stock Option between the Company and Bruce A.
Teal dated, December 18, 1996, (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.24 -- Employment Agreement, dated February 12, 1998, between
Gerard F. Boyle and the Company (incorporated by reference
to Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.25 -- Non-Qualified Stock Option between the Company and Gerard F.
Boyle, dated February 12, 1998 (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.26 -- Lease Agreement for office located at Two Penns Way, Suite
200, New Castle, Delaware 19720, and amendments thereto
(incorporated herein by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.27 -- Lease by and between Principal Mutual Life Insurance Company
and America Service Group Inc. dated September 6, 1996
(incorporated herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.28 -- Sublease Agreement, dated April 22, 1997, between the
Company and Citibank Delaware for office space located at
Two Penns Way, Suite 200, New Castle, Delaware (incorporated
herein by reference to Exhibit 10.24 to the Company's
Quarterly Report on Form 10-Q for the three months ending
March 31, 1997).
10.29 -- Amended and Restated Incentive Stock Plan of the Company
(incorporated by reference to Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for the three months ending
June 30, 1997).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule for the year ended December 31, 1998
(for SEC use only).
</TABLE>
25
<PAGE> 27
(b) Reports on Form 8-K.
The following report on Form 8-K was filed during the fourth quarter
of 1998.
(a) Current Report on Form 8-K dated September 3, 1998 reporting
certain changes in the executive officers and Chairman of the Board of the
Company.
26
<PAGE> 28
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 26, 1999.
AMERICA SERVICE GROUP INC.
By: /s/ MICHAEL CATALANO
------------------------------------
Michael Catalano
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 26, 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ MICHAEL CATALANO Director, President and Chief Executive
- -------------------------------------------------- Officer
Michael Catalano
/s/ BRUCE A. TEAL Senior Vice President and Chief Financial
- -------------------------------------------------- Officer
Bruce A. Teal
/s/ SCOTT L. MERCY Director, Chairman of the Board
- --------------------------------------------------
Scott L. Mercy
Director
- --------------------------------------------------
Thomas Bogan
/s/ JACK O. BOVENDER, JR. Director
- --------------------------------------------------
Jack O. Bovender, Jr.
/s/ WILLIAM EBERLE Director
- --------------------------------------------------
William Eberle
/s/ DAVID A. FREEMAN Director
- --------------------------------------------------
David A. Freeman
/s/ JOHN GILDEA Director
- --------------------------------------------------
John Gildea
/s/ CAROL R. GOLDBERG Director
- --------------------------------------------------
Carol R. Goldberg
</TABLE>
27
<PAGE> 29
AMERICA SERVICE GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996......................... F-4
Consolidated Statements of Changes in Common Stock,
Additional Paid-in Capital, Retained Earnings (Deficit)
and Treasury Stock for the years ended December 31, 1998,
1997 and 1996............................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
FINANCIAL STATEMENT SCHEDULE
Valuation and qualifying Accounts and Reserves (Schedule II)
for the years ended December 31, 1998, 1997 and 1996...... F-20
</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> 30
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Service Group Inc.
We have audited the accompanying consolidated balance sheets of America
Service Group Inc. as of December 31, 1998 and 1997, 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 three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule 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. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, 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.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 12, 1999, except for
Note 3, as to which the date is
March 16, 1999
F-2
<PAGE> 31
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,211,000 $ 3,445,000
Short-term investments.................................... -- 1,559,000
Accounts receivable: Healthcare and other less allowance
for doubtful accounts of $20,000 and $384,000 at
December 31, 1998 and 1997............................. 13,760,000 8,242,000
Prepaid expenses and other current assets................. 1,098,000 2,384,000
Current deferred taxes.................................... 2,730,000 2,116,000
----------- -----------
Total current assets........................................ 24,799,000 17,746,000
Restricted investments...................................... -- 5,639,000
Property and equipment, net................................. 1,886,000 2,468,000
Deferred taxes.............................................. 1,341,000 1,193,000
Cost in excess of net assets acquired, net.................. -- 411,000
Other assets................................................ 349,000 297,000
----------- -----------
Total assets................................................ $28,375,000 $27,754,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,438,000 $ 3,243,000
Accrued expenses.......................................... 11,846,000 12,836,000
Deferred revenue.......................................... -- 1,410,000
----------- -----------
Total current liabilities................................... 14,284,000 17,489,000
Noncurrent portion of accrued expenses...................... 1,300,000 3,624,000
Commitments and contingencies
Redeemable common stock, $.01 par value, 186,000 shares
issued and outstanding at December 31, 1998 and 1997...... 1,842,000 1,842,000
Preferred stock, $.01 par value, 2,000,000 shares
authorized; none outstanding.............................. -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
3,573,000 and 3,529,000 shares issued and outstanding at
December 31, 1998 and 1997................................ 36,000 35,000
Additional paid-in-capital.................................. 8,351,000 7,926,000
Retained earnings (deficit)................................. 2,562,000 (3,162,000)
----------- -----------
Total liabilities and stockholders' equity.................. $28,375,000 $27,754,000
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 32
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Healthcare revenue................................... $113,287,000 $129,211,000 $152,282,000
Investment and interest income....................... 600,000 679,000 751,000
------------ ------------ ------------
Total revenue........................................ 113,887,000 129,890,000 153,033,000
Healthcare expenses.................................. 100,619,000 118,631,000 145,618,000
------------ ------------ ------------
Gross margin......................................... 13,268,000 11,259,000 7,415,000
Selling, general, and administrative expenses........ 9,416,000 9,461,000 11,065,000
Nonrecurring (gain) loss............................. (1,247,000) -- 6,241,000
------------ ------------ ------------
Income (loss) from operations........................ 5,099,000 1,798,000 (9,891,000)
Interest expense..................................... -- 12,000 42,000
------------ ------------ ------------
Income (loss) before income taxes (benefits)......... 5,099,000 1,786,000 (9,933,000)
Provision for income taxes (benefits)................ (625,000) 101,000 (1,247,000)
------------ ------------ ------------
Net income (loss).................................... 5,724,000 1,685,000 (8,686,000)
Decrease (increase) in redeemable common stock....... -- 57,000 (226,000)
------------ ------------ ------------
Net income (loss) attributable to common shares...... $ 5,724,000 $ 1,742,000 $ (8,912,000)
============ ============ ============
Net income (loss) per common share:
Basic.............................................. $ 1.61 $ .50 $ (2.81)
============ ============ ============
Diluted............................................ $ 1.57 $ .48 $ (2.81)
============ ============ ============
Weighted average common shares outstanding:
Basic.............................................. 3,554,000 3,480,000 3,171,000
============ ============ ============
Diluted............................................ 3,653,000 3,657,000 3,171,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 33
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, 1996........... 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 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) --
Issuance of common stock under
employee stock plan................ 13,000 -- 138,000 -- --
Exercise of options.................. 31,000 1,000 287,000 -- --
Net income........................... -- -- -- 5,724,000 --
--------- ------- ----------- ----------- -----------
3,573,000 $36,000 $ 8,351,000 $ 2,562,000 $ --
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 34
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ 5,724,000 $ 1,685,000 $(8,686,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 802,000 1,114,000 1,533,000
Write-off of cost in excess of net assets acquired.... 397,000 -- --
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
Deferred income tax provision......................... (762,000) (101,000) --
Loss on asset disposals............................... -- 457,000 --
Changes in operating assets and liabilities:
Accounts receivable................................ (5,518,000) 63,000 5,621,000
Assets held for sale............................... -- 2,900,000 --
Prepaid expenses and other current assets.......... 1,286,000 1,304,000 (2,136,000)
Other assets....................................... (52,000) (132,000) (72,000)
Accounts payable................................... (805,000) (4,413,000) 243,000
Accrued expenses................................... (3,314,000) (9,209,000) 4,839,000
Deferred revenue................................... (1,410,000) (3,590,000) (4,109,000)
Income taxes payable............................... -- -- (284,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities..... (3,652,000) (9,098,000) 5,019,000
INVESTING ACTIVITIES
Proceeds (purchases) of short-term investments.......... 1,559,000 546,000 (1,405,000)
Proceeds from sale of restricted investments............ 7,191,000 625,000 1,392,000
Purchases of restricted investments..................... (1,552,000) (806,000) (2,276,000)
Capital expenditures.................................... (739,000) (961,000) (4,268,000)
Proceeds from sale of property and equipment............ 533,000 -- 81,000
----------- ----------- -----------
Net cash provided by (used in) investing activities..... 6,992,000 (596,000) (6,476,000)
FINANCING ACTIVITIES
Purchase of treasury stock.............................. -- -- (875,000)
Issuance of redeemable common stock..................... -- -- 1,278,000
Issuance of common stock................................ 138,000 68,000 67,000
Exercise of stock options............................... 288,000 521,000 1,487,000
----------- ----------- -----------
Net cash provided by financing activities............... 426,000 589,000 1,957,000
Net increase (decrease) in cash and cash equivalents.... 3,766,000 (9,105,000) 500,000
Cash and cash equivalents at beginning of year.......... 3,445,000 12,550,000 12,050,000
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 7,211,000 $ 3,445,000 $12,550,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................. $ -- $ 12,000 $ 42,000
=========== =========== ===========
Cash paid for income taxes.............................. $ 58,000 -- $ 326,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 35
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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 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 liquidated and dissolved Harbour in November 1998 and sold all fixed
operating assets of UniSource during 1998. 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 reported in the
Consolidated Balance Sheets, consist of cash and cash equivalents, short-term
investments, accounts receivable, restricted investments, and accounts payable
and approximate their fair values.
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.
F-7
<PAGE> 36
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-Term Investments
Short-term investments consist of temporary investments in certificates of
deposit. 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.
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 $14,000, $42,000 and $43,000 for 1998,
1997 and 1996, respectively, was computed using the straight-line method over 15
years. Accumulated amortization as of December 31, 1997 was $323,000. The
Company wrote off the unamortized portion of cost in excess of net assets
acquired of $397,000 in June 1998 with the sale of UniSource.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Used 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.
Treasury Stock
Prior to December 1996, the Board of Directors had authorized the Company
to purchase treasury stock to be available for issuance under stock options and
other benefits under the Company's Incentive Stock Plan. Upon exercise of the
stock options, the difference between the cost of the treasury shares, on a
first-in, first-out basis, and the price of options exercised is reflected in
additional paid-in capital. Treasury stock includes 31,000 common shares at
December 31, 1996. The 31,000 common shares held in treasury as of December 31,
1996, were issued during 1997.
Preferred Stock
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, 1998 and 1997, 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.
F-8
<PAGE> 37
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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"),
which provides for a revolving credit facility of up to $52.0 million (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 &
F-9
<PAGE> 38
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Notes, Warrants and Preferred Stock are referred
to collectively as the "Convertible Securities."
The Company used $47.0 million in borrowings under the Credit Facility and
the aggregate $20 million in proceeds received from its issuance of the
Convertible Securities to Capital Partners and Executive Partners to finance, in
part, the EMSA acquisition.
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").
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.
Approximately $1,700,000 of these payments reimbursed the Company for costs
directly associated with the terminated merger. In connection with the
anticipated merger, all of the UniSource employees were informed of the
Company's intent to cease operations and sell or dispose of all of UniSource's
operating assets. Accordingly, all costs associated with the disposal of
UniSource, including $397,000 of unamortized cost in excess of net assets
acquired, severance and other miscellaneous expenses, have been considered in
determining the non-recurring gain of $1,247,000.
5. 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 of 1999, upon notification from the state in
October 1996 of its intention not to renew the contract when it expired in June
1997. The estimate includes an approximate $500,000 write-down of equipment,
which the State of Georgia agreed to purchase for $2,900,000.
In April 1996, the Company entered into an agreement to grant the former
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 1996, 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 former Chief
Executive Officer was also awarded 40,000
F-10
<PAGE> 39
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
6. RESTRICTED INVESTMENTS
Restricted investments represent required funding for Harbour, the captive
insurance subsidiary, and accordingly, were 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, 1997
-----------------------------
AMORTIZED COST MARKET VALUE
-------------- ------------
<S> <C> <C>
U.S. Treasury and governmental agency obligations.......... $1,723,000 $1,738,000
Corporate bonds............................................ 3,262,000 3,194,000
Mortgage backed securities................................. 654,000 654,000
---------- ----------
$5,639,000 $5,586,000
========== ==========
</TABLE>
In October 1998, the Company completed a portfolio transfer of all
outstanding medical malpractice claims covered under Harbour related to the
period December 1, 1997 and prior through the execution of a Novation Agreement,
which transferred the risk of all reported claims to a third party. Subsequent
to all restrictions being removed on the investments, the Company dissolved
Harbour in November 1998.
7. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- ESTIMATED
1998 1997 USEFUL LIVES
----------- ----------- ---------------
<S> <C> <C> <C>
Building and improvements.................... $ 41,000 $ 604,000 10 - 31.5 years
Equipment and furniture...................... 3,326,000 3,988,000 5 - 10 years
Medical equipment............................ 366,000 344,000 5 - 7 years
Automobile................................... 12,000 14,000 3 - 5 years
----------- ----------- ---------------
3,745,000 4,950,000
Less: Accumulated depreciation............... (1,859,000) (2,482,000)
----------- -----------
$ 1,886,000 $ 2,468,000
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $788,000, $1,072,000 and $1,490,000, respectively.
F-11
<PAGE> 40
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Salaries and employee benefits.............................. $ 5,937,000 $ 4,345,000
Medical claims.............................................. 4,243,000 6,047,000
Liability claims............................................ 2,408,000 4,494,000
Legal....................................................... 190,000 429,000
Severance................................................... 19,000 290,000
Merger costs................................................ -- 247,000
Accrued loss on Georgia contract............................ -- 200,000
Other....................................................... 349,000 408,000
----------- -----------
13,146,000 16,460,000
Less: Noncurrent portion of liability claims................ (1,300,000) (3,624,000)
----------- -----------
$11,846,000 $12,836,000
=========== ===========
</TABLE>
9. BANKING ARRANGEMENTS
On March 28, 1997, the Company entered into a $20,000,000 line of credit
facility expiring September 2000 for general corporate purposes including
working capital, the issuance of letters of credit for performance bonds and the
funding of acquisitions. The interest rate was based on LIBOR or prime rates
subject to the quarterly operating performance of the Company, as defined in
such facility. The line of credit was collateralized by all assets of the
Company and its operating subsidiaries and is also subject to certain quarterly
financial covenants of which the Company was in compliance with throughout 1998.
No borrowings were outstanding under the lines of credit at December 31, 1998
and 1997. Such credit facility was replaced by the Credit Facility.
PHS had open letters of credit of $503,000 and $3,641,000 at December 31,
1998 and 1997, respectively, supporting performance guaranteed on specific
contracts. Subsequent to December 31, 1998, the Company had the remaining
$503,000 letters of credit returned.
10. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- -------- -----------
<S> <C> <C> <C>
Current income taxes:
Federal........................................... $ 50,000 $ -- $(1,110,000)
State............................................. 87,000 -- (137,000)
--------- -------- -----------
137,000 -- (1,247,000)
Deferred taxes:
Federal........................................... (682,000) -- --
State............................................. (80,000) 101,000 --
--------- -------- -----------
(762,000) 101,000 --
--------- -------- -----------
Income taxes (benefits)............................. $(625,000) $101,000 $(1,247,000)
========= ======== ===========
</TABLE>
F-12
<PAGE> 41
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $2,161,000 $ 2,835,000
Executive stock options..................................... 773,000 773,000
Self-insurance reserves..................................... 733,000 1,714,000
Accrued vacation............................................ 421,000 299,000
Bad debt allowance.......................................... 59,000 146,000
Depreciation................................................ 48,000 (461,000)
Accrued legal............................................... (134,000) 140,000
Accrued severance........................................... 6,000 109,000
Accrued merger costs........................................ -- 247,000
Accrued loss on Georgia contract............................ -- 76,000
Other....................................................... 4,000 96,000
---------- -----------
4,071,000 5,974,000
Valuation allowance......................................... -- (2,665,000)
---------- -----------
$4,071,000 $ 3,309,000
========== ===========
</TABLE>
The valuation allowance for deferred tax assets has been eliminated at
December 31, 1998 as it is more likely than not that the deferred tax assets
will be realized through the future reversion of existing taxable temporary
differences and the generation of future taxable income. As of December 31,
1998, the Company had federal and state net operating loss carryforwards of
$5,686,000 expiring in 2005 through 2006.
A reconciliation of the federal statutory rate to the effective tax rate is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal tax................................................. 34.0% 34.0% (34.0)%
State income taxes.......................................... 4.0 5.7 (1.4)
Alternative minimum tax..................................... 1.0 -- --
Other....................................................... 1.0 1.0 --
Increase (decrease) in valuation allowance.................. (52.3) (35.0) 22.8
----- ----- -----
(12.3)% 5.7% (12.6)%
===== ===== =====
</TABLE>
11. REDEEMABLE COMMON STOCK
During 1996, the Company sold 146,000 shares of common stock (purchased
shares) and awarded 40,000 shares (awarded shares) of common stock to its then
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 could be, and
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. As of March 31, 1997, the redemption price was fixed at $9.90
per share, through an amendment to the 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 decreased the redemption value of the purchased and awarded
shares, respectively, by $57,000 and $17,000, and during 1996 increased the
redemption value by $226,000 and $62,000.
F-13
<PAGE> 42
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. 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, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
NUMERATOR:
Net Income (loss)................................. $5,724,000 $1,685,000 $(8,686,000)
Redeemable Common Stock........................... -- 57,000 (226,000)
---------- ---------- -----------
Numerator for basic and diluted earnings per
share -- income (loss) available to common
stockholders.................................... $5,724,000 $1,742,000 $(8,912,000)
========== ========== ===========
DENOMINATOR:
Denominator for basic earnings per
share -- weighted average shares................ 3,554,000 3,480,000 3,171,000
Effect of dilutive securities:
Employee stock options.......................... 99,000 177,000 --
---------- ---------- -----------
Denominator for diluted earnings per
share -- adjusted weighted average shares and
assumed conversions............................. 3,653,000 3,657,000 3,171,000
========== ========== ===========
Basic earnings per share.......................... $ 1.61 $ .50 $ (2.81)
========== ========== ===========
Diluted earnings per share........................ $ 1.57 $ .48 $ (2.81)
========== ========== ===========
</TABLE>
During any given quarter for the years ended December 31, 1998, 1997, and
1996 there were no more than 388,000, 175,100 and 762,000 options, respectively,
to purchase common stock with weighted average exercise prices of $12.04, $12.84
and $8.60, respectively, not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price for the period of the common shares or there was a loss for the year and,
therefore, the effect would be antidilutive.
In addition, during any given quarter for the year ended December 31, 1998
and 1997 there were no more than 186,000 shares of common stock which the
Company is required to repurchase upon termination of the former Chief Executive
Officer, as part of the written put option included in the employment agreement,
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.
13. 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 1,483,000 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 can not be less than the fair market value at the date of grant. Options
and other benefits expire at such times as the committee determines at the time
of grant, but no later than ten years from the grant date.
F-14
<PAGE> 43
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, December 31, 1995............... 668,000 $2.33 -- $11.19 $ 5.00
Granted.................................... 402,000 6.93 -- 13.13 10.53
Exercised.................................. (325,000) 2.33 -- 6.50 3.39
Stock award vested......................... (40,000) 8.75 -- 8.75 8.75
Canceled................................... (19,000) 4.50 -- 13.12 12.16
-------- --------------- ------
Outstanding, December, 1996.................. 686,000 2.67 -- 13.12 8.66
Granted.................................... 97,000 10.19 -- 14.44 12.98
Exercised.................................. (147,000) 2.67 -- 13.13 3.45
Canceled................................... (42,000) 4.50 -- 13.88 11.91
-------- --------------- ------
Outstanding, December 31, 1997............... 594,000 4.50 -- 14.44 10.41
Granted.................................... 186,000 8.69 -- 13.56 9.89
Exercised.................................. (6,000) 6.50 -- 10.63 9.19
Canceled................................... (91,000) 6.31 -- 14.44 11.33
-------- --------------- ------
Outstanding, December 31, 1998............... 683,000 $4.50 -- $14.44 $10.12
======== =============== ======
</TABLE>
Total options available for future grants at December 31, 1998 and 1997,
were 280,000 and 76,000, respectively. Under separate plans and as part of the
recruitment of the Chief Operating Officer and Vice President of Marketing, the
Company granted 75,000 options and 60,000 options, respectively, at fair market
value during 1998.
In April 1996, the Company granted the former 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, 1998, 439,000 options were exercisable under all plans.
The Company has reserved 1,483,000 shares of common stock for options
outstanding and for options which may be granted in the future.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------- -------------------------------------
WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE NUMBER EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIVE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
$4.50 -- 6.50........ 63,000 5.91 $5.69 63,000 $5.69
8.69 -- 11.19........ 574,000 9.49 9.52 274,000 9.45
13.13 -- 14.44........ 181,000 8.87 13.58 102,000 13.44
- ---------------------- ------- -------
$4.50 -- 14.14........ 818,000 439,000
====================== ======= =======
</TABLE>
Options exercisable at December 31, 1998 had a weighted average exercise of
$9.84.
F-15
<PAGE> 44
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1998 1997
---- ----
<S> <C> <C>
Volatility................................................ 0.6 0.7
Interest rate............................................. 5.0% 5.8%
Expected life (years)..................................... 3 3
Dividend yields........................................... 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- ------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------ -------- ------ -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).................. $5,724 $5,231 $1,685 $1,029 $(8,686) $(7,190)
Income per common share:
Basic............................ $ 1.61 $ 1.47 $ .50 $ .30 $ (2.81) $ (2.04)
Diluted.......................... $ 1.57 $ 1.44 $ .48 $ .28 $ (2.81) $ (2.04)
</TABLE>
The resulting pro forma disclosures may not be representative of that to be
expected in future years. The weighted average fair value of options granted
during 1998, 1997 and 1996 is $4.26, $5.41 and $4.93, respectively.
14. 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 $316,000, $266,000 and $299,000 for the years
ended December 31, 1998, 1997 and 1996, 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 had recorded $136,000, included in accrued expenses,
related to a one-time opportunity
F-16
<PAGE> 45
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
15. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
Subsequent to December 1, 1997, the Company has maintained third party
commercial insurance on a claims-made basis with primary limits of $1,000,000
each occurrence and $3,000,000 in the aggregate. In addition, the Company has
maintained excess liability insurance of $15,000,000 for each claim and
$15,000,000 annual aggregate. For the period prior to December 1, 1997, Harbour
Insurance, Inc., a wholly-owned captive insurance company incorporated under the
laws of the State of Delaware, provided 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 1997 and 1996 was
$3,500,000 and $3,250,000, 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 are covered
by third-party insurance policies on a claims-made 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.
The Company records a liability for reported and unreported professional
and general liability claims based upon an actuarial estimate of the cost of
settling losses and loss adjustment expenses discounted at 7% in 1998 and 6% in
1997. Amounts accrued were $2,408,000 and $4,494,000 at December 31, 1998 and
1997, 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, 1998, represent management's
best estimate of the amounts necessary to discharge the Company's obligations.
During 1998, the Company completed a portfolio transfer of all Harbour
claims made prior to December 1, 1997 through the execution of a Novation
Agreement and dissolved Harbour resulting in no gain or loss.
16. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment through October 2003 under
certain noncancelable operating leases.
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, 2000. The original lease term expires July 31,
2000.
In connection with the MedPartners Settlement Agreement, the Company closed
its regional offices in Atlanta, Georgia, and Newark, Delaware and assigned
future lease payments to MedPartners.
F-17
<PAGE> 46
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual lease payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999...................................................... $ 725,000
2000...................................................... 605,000
2001...................................................... 349,000
2002...................................................... 290,000
2003...................................................... 254,000
Thereafter................................................ 19,000
----------
2,242,000
Sublease receipts........................................... (499,000)
----------
$1,743,000
==========
</TABLE>
Rental expense under operating leases was $394,000, $516,000, and $564,000
for the years ended December 1998, 1997 and 1996, 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 through September 1998 and $200,000 per
inmate thereafter. The Company believes this insurance significantly mitigates
its exposure to unanticipated expenses of catastrophic hospitalization.
Litigation and Claims
The Company is a party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. An estimate of the
amounts payable on existing claims for which the liability of the Company is
probable is included in accrued expenses at December 31, 1998 and 1997. 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.
F-18
<PAGE> 47
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. MAJOR CUSTOMERS AND GEOGRAPHICAL CONCENTRATIONS
The Company considers its managed healthcare services business to be one
segment for reporting under Financial Accounting Standards Board Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
Consequently, other than the following enterprise-wide disclosures relating to
major customers and geographic concentrations, reportable segment information is
not applicable. The following is a summary of revenues from major customers:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
State of Indiana......... $23,968 21.2% $ 7,688 5.9% $ -- --%
State of Kansas.......... 19,223 17.0 18,095 14.0 17,096 11.2
City of Philadelphia..... 17,966 15.9 17,865 13.8 16,034 10.5
County of Alameda........ 12,122 10.7 11,601 9.0 11,619 7.6
State of Georgia......... 291 .02 30,854 23.9 56,662 37.2
State of Maryland........ -- -- 6,022 4.6 15,479 10.2
</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.
18. FOURTH QUARTER ADJUSTMENTS
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.
The Company made a year end adjustment in 1998 resulting from a change in
estimate relating to the valuation allowance for deferred tax assets. The
adjustment of $763,000 increased basic and diluted earnings per share by $.21.
F-19
<PAGE> 48
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, 1998
Allowance for doubtful accounts................. $ 384,000 $ -- $ 364,000 $ 20,000
Valuation allowance for deferred tax asset...... 2,665,000 -- 2,665,000 --
========== ========== ========== ==========
$3,049,000 $ -- $3,029,000 $ 20,000
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
F-20
<PAGE> 1
EXHIBIT 10.16
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AGREEMENT originally dated the lst day of April, 1996 (the "Original
Date") subsequently amended by Amendment No. 1 dated the 30th day of June, 1997,
further amended and restated by these presents dated September 1, 1998, between
Scott L. Mercy ("Employee") and America Service Group Inc. a Delaware
corporation (the "Company").
WHEREAS, the Board of Directors of the Company (the "Board") heretofore
recruited and employed the Employee as President and Chief Executive Officer of
the Company and a director of the Company;
WHEREAS, the Board now desires to employ the Employee as the
nonexecutive Chairman of the Board of Directors of the Company, in addition to
serving as a director;
WHEREAS, the Employee has made a meaningful personal investment in the
common stock of the Company; and
WHEREAS, the Employee accepts the position of Chairman as contemplated
herein;
NOW, THEREFORE, the parties hereby agree as follows:
1. Employment and Duties. The Company hereby employs the Employee
as Nonexecutive Chairman of the Board of Directors of the Company to perform the
duties of such office. The Board shall also take all necessary steps to ensure
that Employee is slated as a nominee to the Board and elected Chairman during
his employment, provided that Employee may terminate his chairmanship, as
provided herein, and remain a director and Employee hereunder.
2. Performance. Employee agrees to devote reasonable time and
effort to the performance of his duties hereunder and to promote the interests
and welfare of the Company. However, it is understood that Employee has
additional employment with and provides services for third parties (except as
otherwise provided in Section 9).
3. Term. The term of Employee's employment hereunder commenced as
of the Original Date and shall continue from the date hereof as an employment at
will unless terminated by written notice from either party to the other as
herein provided.
4. Compensation. For all services rendered by Employee, the
Company agrees from the date hereof to pay Employee from and after the date
hereof: (i) a salary at a minimum annual rate of $60,000 until January 1, 1999,
and $24,000 per annum thereafter; (ii) with respect to calendar year 1998,
incentive compensation at a rate and under the incentive compensation plan as
presently approved by the Board, to be calculated upon the total amount of
Employee's base salary payments for 1998; plus (iii) such additional
compensation as the
<PAGE> 2
Compensation Committee of the Board shall from time to time determine.
Employee's compensation as a director shall be separate and equal to the
amount set by the Board of Directors for all directors.
5. Purchase of Stock.
(a) Purchase. Employee has purchased from the Company
146,000 shares of common stock of the Company at a price of $8.75 per share (the
"Purchase Price").
(b) Put Option. Upon termination of Employee's employment
hereunder for any reason or without cause, Employee, or Employee's estate if
applicable, shall, for a period of forty-five (45) days following the
Termination Date (as defined hereafter), have the right to sell, and the Company
shall thereupon have an obligation to purchase (or cause a third party to
purchase) such number of the shares purchased under Section 5(a) (the "Mercy
Shares") and of the shares vested pursuant to the stock award received under
Section 6(a) (the "Vested Award Shares") as Employee, or Employee's estate if
applicable, shall elect, at $9.90 per share. Completion of said transaction,
including stock certificate delivery and wire transfer of proceeds in accordance
with the Employee's instructions, shall occur within five (5) business days of
said notification. "Termination Date" shall mean the date of death, or the date
specified in the notice of termination, as the case may be, provided that if a
dispute exists, the Termination Date shall be the date on which the dispute is
finally determined either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction.
(c) Company's Right to Repurchase. Upon termination of
Employee's employment hereunder for any reason or without cause, the Company
shall for a period for forty-five (45) days following the Termination Date have
the right to purchase (or cause a third party to purchase), and Employee shall
thereupon have an obligation to sell to the Company (or to such purchaser) such
number of the Mercy Shares and of the Vested Award Shares as the Company shall
elect, at a price equal to the average closing price of the Company's common
stock for the thirty (30) trading days immediately preceding notification by the
Company to the Employee of the Company's intention to exercise this right.
Completion of said transaction, including stock certificate delivery and wire
transfer of proceeds in accordance with the Employee's instructions, shall occur
within five (5) business days of said notification.
(d) Registration of Mercy Shares. The sale of the Mercy
Shares to Employee has been registered by the Company on Form S-8 in accordance
with all applicable laws and regulations.
(e) Exception to Repurchase Obligation. Anything to the
contrary notwithstanding, the Company shall not be obligated to purchase the
Mercy Shares or the Vested Award Shares if and to the extent such purchase would
violate the Delaware General Corporation Law, or any loan agreement to which the
Company is then a party. Within five business days following notification by
Employee or his estate, if applicable, of an election (the "Original
2
<PAGE> 3
Election") to sell shares under Section 5(b), the Company shall determine
whether and to what extent the requested purchase would violate the Delaware
General Corporation Law or any such loan agreement and so advise the Employee or
his estate, in writing (the "Company Notice"). If and to the extent the Employee
or his estate sells the shares which the Company is prohibited from purchasing,
as described above (the "Restricted Shares"), within thirty (30) days (or such
longer period as the parties shall agree) following the Company Notice, the
Company shall pay the Employee or his estate, if applicable, the amount, if any,
by which the price otherwise payable for such shares under Section 5(b) exceeds
the net proceeds received, provided that:
(i) neither the Employee nor his estate sells
any shares of Common Stock other than Restricted Shares between the
date of the Original Election and the last date on which Restricted
Shares are sold hereunder; and
(ii) Employee and his estate use commercially
reasonable efforts to realize the maximum net proceeds from the sale of
Restricted Shares hereunder.
(f) Transfer of Mercy Shares and Vested Award Shares.
Sections 5(b), 5(c) and 5(e) hereof shall continue to apply to any Mercy Shares
and/or Vested Award Shares transferred by Employee to trusts for his benefit or
to his spouse or direct descendants or trusts for their benefit (collectively,
"Permitted Transferees"). Each such person shall have the same rights and
obligations under Section 5(b), 5(c) and 5(e) as Employee or his estate, if
applicable, would have with respect to such shares upon termination of
Employee's employment hereunder. Sections 5(b), 5(c) and 5(e) hereof shall cease
to apply to any Mercy Shares and/or Vested Award Shares otherwise transferred by
Employee (or by his Permitted Transferees) and the transferee thereof shall have
no rights or obligations under Sections 5(b), 5(c) or 5(e).
(g) Legend. All certificates representing Mercy Shares
and Vested Award Shares, including any Mercy Shares or Vested Award Shares
transferred to a Permitted Transferee, shall bear the following legend:
The shares represented by this certificate are
subject to certain options and rights to repurchase,
as set forth in an Amended and Restated Employment
Agreement between America Service Group Inc. and
Scott L. Mercy dated____________, 1998.
(h) Precedence. In the event rights to sell are exercised
under Section 5(b) and rights to purchase are exercised under Section 5(c),
following Employee's termination of employment, then, notwithstanding the order
in which such rights are exercised, rights to sell exercised under Section 5(b)
by the Employee, his estate or Permitted Transferees shall take precedence.
3
<PAGE> 4
6. Incentive Compensation.
(a) Stock Awards. The Company has awarded to Employee
40,000 shares of the Company's common stock as a restricted stock award pursuant
to the Company's Incentive Stock Plan, subject to the terms and conditions set
forth in Exhibit A hereto. The issuance of such shares has been registered on
Form S-8.
(b) Stock Options. The Company has granted to the
Employee, pursuant to stockholder approval of the Company's Amended Incentive
Stock Plan, options to purchase 175,000 shares of the Company's common stock at
$8.75 per share (the "Options") pursuant to the terms of the Company's Amended
Incentive Stock Plan and subject to the terms and conditions set forth in
Exhibit B. The Options will expire ten (10) years from the date of grant and
have fully vested.
7. 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.
8. Termination.
(a) Resignation; Termination. Employee may resign or be
terminated as Chairman hereunder and this Agreement, as applicable, shall
remain in force. Either party to this Agreement may terminate Employee's
employment on thirty (30) days' notice.
(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 during the term of this Agreement, the Company shall have the
right to terminate this Agreement. Except as otherwise provided herein, and
except for Section 5(b) and 5(c), 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.
4
<PAGE> 5
9. Covenant Not to Compete.
(a) Employee acknowledges that in the course of his employment he
has 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
5
<PAGE> 6
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
engage in any business similar to the Business of the Company, as described
below, anywhere in the United States of America, or have any interest directly
or indirectly in any Business; provided, however, that nothing herein shall
prohibit Employee from (i) owning in the aggregate not more than 5% of the
outstanding stock of any class of stock of a corporation so long as Employee has
no active participation in the business of such corporation, (ii) affiliating
with any company which may participate in the Business, so long as that
participation at the time of affiliation aggregates less than 10% of such
company's revenue, or (iii) directly or through an affiliate, acquiring, merging
or otherwise gaining control, or purchasing an interest in an organization as
long as the Business represents less than 10% of the acquiree's revenue at the
time of the transaction. For purposes hereof, the "Business" shall consist of
(A) delivery of contract health care to correctional facilities, (B) drug and
alcohol abuse treatment programs by correctional institutions or criminal
justice programs, and (C) any other business in which the Company is engaged as
of the date that Employee ceases to perform duties hereunder.
(b) If, at the time of enforcement of this Section 9, 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.
(c) In the event of the breach by Employee of any of the
provisions of this Section 9, 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.
10. 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:
Mr. Scott L. Mercy
3600 Franklin Road
Nashville, TN 37204
6
<PAGE> 7
11. 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 expressed provided. This Agreement shall inure to
the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, 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.
12. 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.
13. Severability. The provisions of this Agreement are severable,
and the invalidity of any provision shall not affect the validity of any other
provision. In the event that any arbitrator or court of competent jurisdiction
shall determine that any provision of this Agreement or the application thereof
is unenforceable because of the duration or scope thereof, the parties hereto
agree that said arbitrator or court in making such determination shall have the
power to reduce the duration and scope of each provision to the extent necessary
to make it enforceable, and that the Agreement in its reduced form shall be
valid and enforceable to the full extent permitted by law.
14. 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.
15. Governing Law. This Agreement shall be construed under and
governed by the internal laws of the State of Delaware.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a binding contract as of the day and year first above written.
AMERICA SERVICE GROUP INC.
By: /s/ W.D. Eberle
-----------------------------------------
W.D. Eberle
Chairman of the Executive Committee,
Board of Directors
EMPLOYEE:
By: /s/ Scott L. Mercy
-----------------------------------------
Scott L. Mercy
8
<PAGE> 1
EXHIBIT 21.1
America Service Group Inc.
List of Subsidiaries State of Incorporation
1. Prison Health Services, Inc. Delaware
2. Prison Health Services of Indiana LLC Indiana
3. EMSA Government Services, Inc. Florida
4. EMSA Correctional Care, Inc. Florida
5. EMSA Military, Inc. Florida
6. EMSA, L.P.
<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 Statements on Form S-8 (Registration Nos. 33-48231, 333-03010,
333-04903, 333-04895, 333-26903, 333-26905, 333-50161, 333-50171, 333-58093),
of our report dated February 12, 1999, except for Note 3, as to which the date
is March 16, 1999, with respect to the consolidated financial statements and
schedule of America Service Group Inc. included in the Annual Report (Form
10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN SERVICE CORP. FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,211,000
<SECURITIES> 0
<RECEIVABLES> 13,780,000
<ALLOWANCES> (20,000)
<INVENTORY> 329,000
<CURRENT-ASSETS> 24,799,000
<PP&E> 3,745,000
<DEPRECIATION> (1,859,000)
<TOTAL-ASSETS> 28,375,000
<CURRENT-LIABILITIES> 14,284,000
<BONDS> 0
1,842,000
0
<COMMON> 36,000
<OTHER-SE> 10,913,000
<TOTAL-LIABILITY-AND-EQUITY> 28,375,000
<SALES> 113,287,000
<TOTAL-REVENUES> 113,887,000
<CGS> 100,619,000
<TOTAL-COSTS> 110,035,000
<OTHER-EXPENSES> (1,247,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,099,000
<INCOME-TAX> (625,000)
<INCOME-CONTINUING> 5,724,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,724,000
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.57
</TABLE>
