<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
AMENDMENT NO. 2
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 26, 1999
AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-23340
(Commission File Number)
21-0332317
(IRS Employer Identification Number)
105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices)
(615) 373-3100
Registrant's telephone number, including area code:
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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<PAGE> 2
America Service Group, Inc. hereby amends and replaces in their entirety
Item 7(a) and 7(b) of its Report on Form 8-K which was originally filed with the
Commission on February 10, 1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
The following audited financial statements for EMSA, together with the
independent public accountants' report thereon, and unaudited pro forma
financial information for the Company are included in this Form 8-K:
EMSA Government Services, Inc. Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Net Invested Capital for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
America Service Group Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Income Statement for the year ended December 31,
1998
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31,
1998
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
1
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
EMSA Government Services, Inc.
We have audited the accompanying consolidated balance sheets of EMSA
Government Services, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, net invested capital and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 EMSA Government
Services, 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.
As discussed in Note 2, the Company changed its method of accounting for
costs of start-up activities.
/s/ ERNST & YOUNG LLP
--------------------------------------
Nashville, Tennessee
March 20, 1999, except for the
fifth paragraph of Note 2, as to
which the date is June 30, 1999
2
<PAGE> 4
EMSA GOVERNMENT SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---------- -------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,252 $ 631
Accounts receivable, less allowance for doubtful accounts
of $1,199 and $549 in 1998 and 1997, respectively...... 40,137 34,811
Prepaid expenses and other current assets................. 481 526
------- -------
Total current assets.............................. 42,870 35,968
Property and equipment, net................................. 1,288 998
Cost in excess of net assets acquired, net of accumulated
amortization of $128 and $31 in 1998 and 1997,
respectively.............................................. 2,286 2,383
Other assets................................................ 83 1,398
------- -------
Total assets...................................... $46,527 $40,747
======= =======
LIABILITIES AND NET INVESTED CAPITAL
Current liabilities:
Medical claims............................................ $ 6,400 $ 7,495
Accrued expenses.......................................... 11,059 5,250
Accounts payable.......................................... 4,530 3,603
Deferred revenue.......................................... 608 184
------- -------
Total current liabilities......................... 22,597 16,532
Net invested capital........................................ 23,930 24,215
------- -------
Total liabilities and net invested capital........ $46,527 $40,747
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
EMSA GOVERNMENT SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- -------- --------
(RESTATED)
<S> <C> <C> <C>
Healthcare revenue.......................................... $160,780 $135,025 $100,867
Healthcare expenses......................................... 152,833 127,072 88,466
-------- -------- --------
Gross profit.............................................. 7,947 7,953 12,401
General and administrative expenses......................... 5,915 5,288 3,661
MedPartners' management fee................................. 2,827 3,116 4,218
-------- -------- --------
Operating income (loss)................................... (795) (451) 4,522
Interest expense............................................ 66 22 2
-------- -------- --------
Income (loss) before income taxes (benefit)............... (861) (473) 4,520
Income tax expense (benefit)................................ (278) (319) 1,767
-------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle...................................... (583) (154) 2,753
Cumulative effect of a change in accounting principle, net
of taxes of $576.......................................... 901 -- --
-------- -------- --------
Net income (loss)........................................... $ (1,484) $ (154) $ 2,753
======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 6
EMSA GOVERNMENT SERVICES, INC.
CONSOLIDATED STATEMENTS OF NET INVESTED CAPITAL
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT JANUARY 1, 1996.................................. $12,152
Net transfers from Parent................................. 2,741
Parent's management fee................................... 4,218
Net income................................................ 2,753
-------
BALANCE AT DECEMBER 31, 1996................................ 21,864
Net transfers to Parent................................... (611)
Parent's management fee................................... 3,116
Net loss.................................................. (154)
-------
BALANCE AT DECEMBER 31, 1997................................ 24,215
Net transfers to Parent................................... (1,628)
Parent's management fee................................... 2,827
Net income................................................ (1,484)
-------
BALANCE AT DECEMBER 31, 1998................................ $23,930
=======
</TABLE>
See accompanying notes.
5
<PAGE> 7
EMSA GOVERNMENT SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(1,484) $ (154) $ 2,753
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 422 522 317
Cumulative effect of change in accounting principle....... 1,477 -- --
MedPartners' management fee............................... 2,827 3,116 4,218
Changes in operating assets and liabilities:
Accounts receivable.................................... (5,326) (6,800) (11,814)
Prepaid expenses and other current assets.............. 45 9 (274)
Accounts payable and accrued expenses.................. 5,641 7,513 2,723
Deferred revenue....................................... 424 184 --
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 4,026 4,390 (2,077)
INVESTING ACTIVITIES
Purchases of property and equipment, net.................... (615) (862) (375)
Changes in other assets..................................... (162) (2,689) 114
------- ------- --------
Net cash used in investing activities....................... (777) (3,551) (261)
FINANCING ACTIVITIES
Net transfers from (to) Parent.............................. (1,628) (611) 2,741
------- ------- --------
Net cash provided by (used in) financing activities......... (1,628) (611) 2,741
------- ------- --------
Increase in cash............................................ 1,621 228 403
Cash, beginning of year..................................... 631 403 --
------- ------- --------
Cash, end of year........................................... $ 2,252 $ 631 $ 403
======= ======= ========
</TABLE>
See accompanying notes.
6
<PAGE> 8
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
DECEMBER 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
EMSA Government Services, Inc. (together with its subsidiaries "EMSA" or
the "Company") f/k/a InPhyNet Government Services, Inc is an indirect
wholly-owned subsidiary of MedPartners, Inc. ("MedPartners" or "Parent"). The
Company and its consolidated subsidiaries provide comprehensive managed health
care services to correctional facilities under capitated contracts with state
and local governments and hospital physician services to military facilities
under contracts with the United States Department of Defense.
In June 1997, MedPartners, Inc. acquired EMSA as part of its acquisition of
InPhyNet Medical Management, Inc., a public company, which was incorporated in
May 1994. The MedPartners acquisition of InPhyNet Medical Management, Inc. was
accounted for as a pooling-of-interests by MedPartners.
Prior to the June 1997 MedPartners acquisition, the Company was a
subsidiary of InPhyNet Medical Management, Inc. and included in its consolidated
operations.
MedPartners and its subsidiaries' net investment in EMSA ("net invested
capital") is shown in lieu of stockholder's equity in the accompanying
consolidated financial statements.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, EMSA Correctional Care, Inc. ("Corrections")
and EMSA Military Services, Inc. ("Military"). All significant intercompany and
inter-affiliate accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Financial Instruments
The carrying amounts of the Company's financial instruments, which consist
of cash, accounts receivable and accounts payable approximate their fair values
due to their short-term nature.
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.
The Company accrues losses under its grouped fixed price contracts when it
is probable that a loss has been incurred and the amount of the loss can be
reasonably estimated.
The Company has restated its consolidated financial statements for the year
ended December 31, 1998 to reflect an accrual of $5,373 for loss contracts. The
restatement decreased net income by $3,278. The accrual for loss in 1998 was
primarily the result of higher than anticipated utilization combined with
limited revenue growth on a significant contract. The accrual includes an
estimate of future healthcare costs of services, including hospitalization,
outpatient, and pharmacy costs, and allocable indirect costs, such as
depreciation, rent, risk management and other overhead costs, less the future
revenues anticipated under certain contracts
7
<PAGE> 9
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides for the compensation of physicians, nurses and other
healthcare professionals including any related benefits and all other direct
costs of providing medical services under its contracts. The cost of healthcare
services provided or contracted for are recognized in the period in which they
are provided.
The Company provides for claims incurred but not yet paid based on past
experience together with current factors. Estimates are adjusted as changes in
these factors occur and such adjustments are reported in the year of
determination. Although considerable variability is possible in such estimates,
management believes that those reserves are adequate.
Accounts Receivable
Accounts receivable result primarily from medical services provided to
inmates in state and local institutions under capitated contracts, adjusted for
census and staffing fluctuations. Accounts receivable arising from contracts
with the Department of Defense are based on a fixed amount related to the number
of patient visits or the number of hours worked. EMSA is at risk for the medical
services provided if the number of patient visits or hours worked exceed certain
limits as defined in the contracts. These receivables are geographically
dispersed throughout the United States.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over useful lives of the assets. Equipment and furniture
are depreciated over a 5-7 year period. Leasehold improvements are amortized
over the underlying assets' useful lives or the term of the lease, whichever is
shorter. Property and Equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Equipment and Furniture..................................... $ 2,422 $ 1,841
Leasehold Improvements...................................... 172 138
------- -------
2,594 1,979
Less: Accumulated Depreciation.............................. (1,306) (981)
------- -------
$ 1,288 $ 998
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $325, $445 and $265, respectively.
Costs in Excess of Net Assets Acquired
Costs in excess of net assets acquired are stated net of accumulated
amortization and are amortized on a straight-line basis over a period of fifteen
years. These costs relate to the Company's acquisition of NHS National Health
Services, Inc. (NHS) on July 2, 1996, which was accounted for under the purchase
method. As a result of this transaction, the Company acquired certain assets of
NHS and contracts to provide medical services to inmates in correctional
institutions. Annually, over a period of five years, the Company is obligated to
pay contingent consideration of 20% of the excess of the acquired contracts'
earnings before taxes over certain amounts. No additional contingent
consideration has been earned or paid.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that companies consider whether indicators
8
<PAGE> 10
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 costs in
excess of net assets acquired and has determined there were no indications of
impairment as of December 31, 1998 and 1997.
Change in Accounting Principle
Effective January 1, 1998, the Company wrote off approximately $1.5 million
in organizational and development costs in accordance with SOP 98-5, "Reporting
Costs of Start-Up Activities." This is accounted for as a cumulative effect of
change in accounting principle.
Income Taxes
The Company files as part of the consolidated federal tax return of
MedPartners. As a result, the provisions for income taxes are calculated and
allocated to the Company from MedPartners. All balance sheet tax accounts have
been included as a component of net invested capital for this presentation.
Net Invested Capital
Net transfers to/from Parent includes non-interest bearing advances from
Parent to fund operating and investing activities and amounts advanced to Parent
from operating cash flows generated by the Company. Net transfers are included
as part of net invested capital as EMSA is not required to settle these amounts
on a current basis.
The Parent provides certain corporate services to the Company, including
legal services, risk management, certain employment benefit administration, tax
advice and preparation of tax returns, software support services and certain
financial and other services. These fees are charged by the Parent to the
Company based on actual costs or department usage and approximate costs
incurred. The Company believes this method of allocation to be reasonable. The
amounts recorded by the Company for these allocations in the accompanying
consolidated statements of operations were approximately $2.8 million, $3.1
million and $4.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The amounts allocated are not necessarily indicative of the actual
costs which may have been incurred had the Company operated as an entity
unaffiliated with MedPartners.
MedPartners maintains professional medical malpractice, workers
compensation and other general liability insurance on behalf of the Company.
MedPartners maintains reserves for estimated incurred losses not covered by
third parties and charges premiums to the Company. Accordingly, no reserve for
liability risks is recorded on the accompanying consolidated balance sheets.
9
<PAGE> 11
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. Significant
components of the Company's deferred tax assets and (liabilities), included in
net invested capital, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
------ ----
<S> <C> <C>
Accrued vacation............................................ $ 158 $102
Bad debt allowance.......................................... 214 474
Deferred revenue............................................ 237 72
Depreciation................................................ (20) --
Reserve for loss contracts.................................. 2,095 --
Other....................................................... (7) (5)
------ ----
Net deferred tax assets..................................... $2,677 $643
====== ====
</TABLE>
Significant components of the federal income tax expense (benefit) were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ----- -------
<S> <C> <C> <C>
Current:
Federal................................................... $1,486 $(244) $ 1,998
State..................................................... 271 (28) 365
------ ----- -------
Total current..................................... 1,757 (272) 2,363
Deferred:
Federal................................................... (1,832) (42) (535)
State..................................................... (203) (5) (61)
------ ----- -------
Total expense (benefit)........................... $ (278) $(319) $ 1,767
====== ===== =======
</TABLE>
The reconciliation of income tax expense (benefit) computed at the federal
statutory tax rate to the effective income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal tax................................................. 35.0% 35.0% 35.0%
State income taxes, net of federal.......................... 5.1 4.5 4.4
Other....................................................... (7.8) 27.9 (0.3)
---- ---- ----
32.3% 67.4% 39.1%
==== ==== ====
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Company participates in the InPhyNet 401(k) Retirement Plan (the
"Plan"), which also includes employees from another subsidiary of MedPartners,
Inc., covering substantially all full time and part time employees who have
completed two months and 240 hours of service or one year and 1,000 hours of
service, respectively. 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 equal to 50%, but limited to the lesser of 5%
of compensation or three thousand dollars. The Company recorded an expense of
$501, $377 and $247 for the years ended December 31, 1998, 1997 and 1996,
respectively, related to the matching contributions of the Plan.
10
<PAGE> 12
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases various office space under operating leases with various
renewal options. Certain rental expenses are charged to the Company through
intercompany allocations.
Future minimum annual lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 463
2000...................................................... 463
2001...................................................... 453
2002...................................................... 269
2003...................................................... --
Thereafter................................................ --
------
$1,648
======
</TABLE>
Rental expense under operating leases was approximately $504, $504, and
$350 for the years ended December 1998, 1997 and 1996, respectively.
6. LETTERS OF CREDIT
MedPartners has open letters of credit on behalf of the Company of $2,500
at December 31, 1998 (none at December 31, 1997) supporting performance
guarantees on specific contracts.
7. CONTINGENCIES
EMSA is a party to various pending legal actions arising in the ordinary
operation of its business such as contractual disputes, employment disputes and
general business actions as well as malpractice actions. EMSA does not believe
that the result of such legal actions, individually or in the aggregate, will
have a material adverse effect on the Company's business or its results of
operations, cash flows or financial condition.
On January 20, 1999, a complaint was filed against InPhyNet Administrative
Services, Inc. and MedPartners, Inc. by a former potential buyer of the Company
alleging breach of contract. The complaint requests recovery of costs incurred
related to the failed transaction. Management believes that the ultimate outcome
of this matter will not have a material adverse effect on the financial position
or results of operations of the Company. The Company is not aware of any
material unasserted claims that would have a material adverse effect on its
consolidated financial position or results of operations.
11
<PAGE> 13
EMSA GOVERNMENT SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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 Maryland.................... $26,808 16.7% $ 9,348 6.9% $ 706 0.7%
State of Pennsylvania................ 20,499 12.7 21,105 15.6 10,381 10.3
State of Florida..................... 49,592 30.8 44,483 32.9 35,148 38.0
</TABLE>
Estimated credit losses associated with the receivables are provided for in
the consolidated financial statements.
9. SUBSEQUENT EVENTS
On January 26, 1999, America Service Group Inc. ("ASG") purchased the
outstanding stock of EMSA Government Services, Inc., including its subsidiaries
EMSA Correctional Care Inc. and EMSA Military Services, Inc., for a purchase
price of approximately $67 million.
10. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue refers to the inability of a date-sensitive computer
program to recognize a two-digit date field designated as "00" as the year 2000.
Any of the Company's hardware, software and embedded systems that have time/date
sensitive software and hardware may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations causing disruptions to the Company's operations. The Company has
conducted an inventory and assessment of its technology to identify the computer
systems that could be affected by the Year 2000 issue. The inventory includes
information technology ("IT") systems and non-IT systems, including
telecommunications, data processing services and equipment, utilities and
security systems related to the Company's operating facilities. The Company
relies on third parties in operating its business and relies on equipment and
medical device manufacturers regarding the Y2K compliance status of their
products. The Company can provide no assurances that applications and equipment
the Company believes to be Y2K compliant will not experience difficulties.
Consequently, the Company can give no assurances that issues related to Y2K will
not have a material adverse effect on the Company's financial condition or
results of operations. Total Y2K costs incurred by the Company to date have been
minimal and no further material costs are expected to be incurred.
12
<PAGE> 14
AMERICA SERVICE GROUP INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INTRODUCTION
The accompanying Unaudited Pro Forma Condensed Consolidated Financial
Statements are based on the historical presentation of the consolidated
financial position of America Service Group Inc. and subsidiaries (the
"Company") and EMSA Government Services, Inc. ("EMSA") including its
wholly-owned subsidiaries, EMSA Correctional Care, Inc. and EMSA Military
Services, Inc. The Unaudited Pro Forma Condensed Consolidated Financial
Statements and related notes give effect to the acquisition of EMSA by the
Company as a purchase. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet presents the financial position of the Company as if the acquisition had
been completed on December 31, 1998. The Unaudited Pro Forma Condensed
Consolidated Income Statement has been prepared as if the acquisition occurred
on January 1, 1998.
The Unaudited Pro Forma Condensed Consolidated Financial Statements are
presented for illustrative purposes only. They do not purport to be indicative
of the financial position or results of operations of the Company which would
have occurred if the acquisition had been effected on the date or dates
indicated, nor do they purport to be indicative of future financial position or
results of operations. The Unaudited Pro Forma Condensed Consolidated Financial
Statements have been prepared based upon the historical financial statements of
the Company and EMSA, adjusted as described in the accompanying notes. No effect
has been given in the pro forma income statement for efficiencies or other
benefits which may be realized through the acquisition, other than the
elimination of certain compensation costs under acquisition-related severance
arrangements.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the respective historical financial
statements of the Company reported on Form 10-K for the year ended December 31,
1998, which are incorporated herein by reference, and with the historical
consolidated financial statements and notes thereto of EMSA, which appear
elsewhere herein.
13
<PAGE> 15
AMERICA SERVICE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICA SERVICE
GROUP INC. EMSA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Healthcare revenue............................. $113,287 $160,780 $ -- $274,067
Investment and interest income................. 600 600
-------- -------- ------- --------
Total revenue................................ 113,887 160,780 274,667
Healthcare expenses............................ 102,119 152,833 254,952
-------- -------- ------- --------
Gross margin................................. 11,768 7,947 19,715
Selling, general, and administrative expenses,
and management fees.......................... 10,716 8,742 142(1) 21,822
2,222(3)
MedPartners settlement gain.................... (4,047) (4,047)
-------- -------- ------- --------
Income from operations....................... 5,099 (795) (2,364) 1,940
Interest expense............................... 66 6,179(2) 6,245
-------- -------- ------- --------
Income before income taxes................... 5,099 (861) (8,543) (4,305)
Provision (benefit) for income taxes........... (625) (278) (3,332)(4) (4,235)
-------- -------- ------- --------
Income before cumulative effect of a change
in accounting principle................... 5,724 (583) (5,211) (70)
Cumulative effect of a change in accounting
principle, net............................... 901 901
-------- -------- ------- --------
Net income........................... 5,724 (1,484) (5,211) (971)
Preferred stock dividends...................... 250(5) 250
-------- -------- ------- --------
Net income available to common
stockholders....................... $ 5,724 $ (1,484) $(5,461) $ (1,221)
======== ======== ======= ========
Earnings per common share -- Basic:
Income before cumulative effect change....... $ 1.61 $ (0.09)
Cumulative effect change, net................ -- (0.25)
-------- --------
Net income........................... $ 1.61 $ (0.34)
======== ========
Earnings per common share -- Diluted:
Income before cumulative effect change....... $ 1.57 $ (0.09)
Cumulative effect change, net................ -- (0.25)
-------- --------
Net income........................... $ 1.57 $ (0.34)
======== ========
Weighted average common shares outstanding:
Basic........................................ 3,554 3,554
======== ========
Diluted...................................... 3,653 --(5) 3,653
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
14
<PAGE> 16
AMERICA SERVICE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMERICA
SERVICE
GROUP INC. EMSA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 7,211 $ 2,252 $ (1,229)(1) $ 9,774
(2,100)(2)
3,640(3)
Accounts receivable, net......................... 13,760 40,137 53,897
Prepaid expenses and other current assets........ 1,098 481 1,579
Current deferred taxes........................... 2,730 2,730
------- ------- -------- --------
Total current assets..................... 24,799 42,870 311 67,980
Property and equipment, net........................ 1,886 1,288 3,174
Deferred taxes..................................... 1,341 1,341
Cost in excess of net assets acquired, net......... -- 2,286 44,438(5) 46,724
Other assets....................................... 349 83 520(4) 952
------- ------- -------- --------
Total assets............................. $28,375 $46,527 $ 45,269 $120,171
======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Account payable.................................. $ 2,438 $ 4,530 $ -- $ 6,968
Accrued expenses................................. 11,846 17,459 2,522(6) 31,827
Subordinated convertible bridge notes............ 14,341(4) 14,341
Current portion of long-term debt................ 7,000(4) 7,000
Deferred revenue................................. -- 608 608
------- ------- -------- --------
Total current liabilities................ 14,284 22,597 23,863 60,744
Noncurrent portion of accrued expenses............. 1,300 1,300
Long-term debt..................................... 40,000(4) 40,000
Mandatory redeemable convertible preferred stock... 5,000(4) 5,000
Mandatory redeemable common stock.................. 1,842 1,842
Net invested capital............................... 23,930 (23,930)(7) --
Common stock....................................... 36 36
Additional paid-in-capital......................... 8,351 336(4) 8,687
Retained earnings.................................. 2,562 2,562
------- ------- -------- --------
Total liabilities and stockholders'
equity................................. $28,375 $46,527 $ 45,269 $120,171
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated financial statements.
15
<PAGE> 17
AMERICA SERVICE GROUP INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Adjustments for the Unaudited Pro Forma Condensed Consolidated
Income Statement for the Year Ended December 31, 1998 are as follows:
(1) To record amortization expense on the deferred financing costs
associated with the Company's $47 million outstanding revolving credit
facility.
(2) To reflect interest expense on borrowings to fund the acquisition
under the Company's revolving credit facility ($3,720) and the 12%
Subordinated Convertible Bridge Notes (the "Notes") ($1,800), including
accretion ($659) of the Notes. The effect of a 1/8% change in the interest
rate for the amount borrowed under the revolver is $58. Although the Notes
are convertible into shares of the Company's common stock, no conversion
has been assumed for the 1998 pro forma income statement due to the
contingency relating to the required stockholder approval of the stock
issuance.
(3) To reflect amortization of cost in excess of net assets acquired
of EMSA over a period of 20 years ($2,222).
(4) To adjust the provision for income taxes to reflect the tax
expense related to the pro forma adjustments at the statutory tax rate of
39%.
(5) To reflect the 5% dividend requirement. The effect on weighted
average common shares outstanding of the 50 shares of convertible preferred
stock issued in the transaction is antidilutive for pro forma purposes and,
as such, is not assumed to be converted. The detachable warrants issued in
the transaction are not assumed to be dilutive because the warrants were
issued at an exercise price which approximates the fair value of the
Company's common stock. The Notes are not assumed to be converted due to
the contingency relating to the required stockholder approval of the stock
issuance.
Pro Forma Adjustments for the Unaudited Pro Forma Condensed Consolidated
Balance Sheet at December 31, 1998 are as follows:
(1) To adjust cash by amount retained by seller under the purchase
agreement. Cash balances included $922 in petty cash and $307 related to a
specific contract.
(2) To reflect costs of the acquisition funded by cash.
(3) To reflect cash received by the Company from the seller under a
working capital settlement required by the purchase agreement.
(4) To reflect $47,000 in borrowings under the Company's revolving
credit facility ($7,000 of which is current), including deferred financing
costs of $520, the issuance of Notes (valued at $14,341) and detachable
warrants (valued at $659, net of warrant costs of $323) and the issuance of
$5,000 of the Company's Series A Convertible Preferred Stock to fund the
acquisition.
(5) To reflect cost in excess of net assets acquired associated with
the acquisition, equal to the difference between the fair value of
identifiable net assets acquired, including acquisition-related liabilities
assumed, and the aggregate consideration paid. Cost in excess of net assets
acquired is being amortized over a period of 20 years. The allocation of
the purchase price to property and equipment, cost in excess of net assets
acquired and the fair value of certain liabilities assumed in the
transaction are based on the Company's preliminary valuations, which are
subject to change upon receiving independent appraisals and performing a
final valuation. To the extent independent appraisals differ from the
Company's initial valuations, tangible and any identified intangible
assets, such as customer contracts in force, and liabilities will be
adjusted to the independent appraisals and cost in excess of net assets
acquired would be adjusted accordingly. Should any amounts be allocated to
tangible and any identified
16
<PAGE> 18
AMERICA SERVICE GROUP INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
intangible assets with estimated amortization periods of less than 20
years, amortization expense would increase in the near term and negatively
impact the related operating results.
(6) To reflect obligations incurred in connection with the
acquisition, including accrued severance and related costs ($249), and
other acquisition-related obligations ($2,273) in accordance with APB16.
(7) To eliminate EMSA's historical equity of parent accounts.
The allocation of the purchase price to property and equipment, cost in
excess of net assets acquired and the fair value of certain liabilities assumed
in the transaction are based on the Company's preliminary valuations, which are
subject to change upon receiving independent appraisals and performing a final
valuation. To the extent independent appraisals differ from the Company's
initial valuations, tangible and any identified intangible assets, such as
customer contracts in force, and liabilities will be adjusted to the independent
appraisal and cost in excess of net assets acquired would be adjusted
accordingly. Should any amounts be allocated to tangible and any identified
intangible assets with estimated amortization periods of less than 20 years,
amortization expense would increase in the near term and negatively impact the
related operating results.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunder duly authorized.
AMERICA SERVICE GROUP, INC.
By: /s/ BRUCE A. TEAL
------------------------------------
Bruce A. Teal
Senior Vice President and
Chief Financial Officer
Date: July 28, 1999
