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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-23340
AMERICA SERVICE GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
105 WESTPARK DRIVE, SUITE 300
BRENTWOOD, TENNESSEE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
51-0332317
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
37027
(ZIP CODE)
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 20, 2000 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $52,208,002. As of March 20, 2000, the registrant had
3,729,143 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 5, 2000 are incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS
This Form 10-K contains statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements include statements regarding the intent, belief or current
expectations of America Service Group Inc. and members of its management team.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of 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
subsidiaries Prison Health Services, Inc. ("PHS"), EMSA Correctional Care, Inc.
("EMSA Correctional") and EMSA Military Services, 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 March 29, 2000, the Company, through PHS, purchased two contracts from
Correctional Physician Services, Inc. ("CPS"). The contracts with the
Commonwealth of Pennsylvania, Department of Corrections for the Eastern Region
and the State of New York, Department of Correctional Services in 1999 covered
approximately 21,000 inmates with annual revenue of approximately $41 million.
The purchase price of $14 million includes a $1.8 million escrow for
certain contingencies. The Company will account for the acquisition using the
purchase method of accounting.
In connection with the CPS acquisition, the Company obtained consent from
Bank of America, as required under its Credit Facility dated January 26, 1999
and received a separate $10 million working capital line of credit.
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.
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The following table sets forth information regarding ASG's correctional
contracts.
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of correctional contracts(1).......... 106 35 32 34 35
Average number of inmates in all facilities
covered by correctional contracts(2)....... 132,304 63,783 54,364 83,288 82,310
</TABLE>
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(1) Indicates the number of contracts in force at the end of the period
specified.
(2) Based on an average number of inmates during the last month of each period
specified.
ASG's target correctional market consists of state prisons and county and
local jails. A prison is a facility in which an inmate is incarcerated for an
extended period of time (typically one year or longer). A jail is a facility in
which the inmate is held for a shorter period of time, often while awaiting
trial or sentencing. The higher inmate turnover in jails requires that
healthcare be provided to a much larger number of individual inmates over time.
Conversely, the costs of long-term healthcare requirements are greater with
respect to state prison contracts. State prison contracts often cover a larger
number of facilities and often have longer terms than jail contracts.
Services Provided. Generally, ASG's obligation to provide services to a
particular inmate begins upon the inmate's admission into the correctional
facility and ends upon the inmate's release. Emphasis is placed upon early
identification of serious injuries or illnesses so that prompt and
cost-effective treatment is commenced.
Medical services provided on-site include physical and mental health
screening upon intake. Screening includes the compilation of the inmate's health
history and the identification of any current, chronic or acute healthcare
needs. After initial screening, services provided may include regular physical
and dental screening and care, psychiatric care, OB-GYN screening and care and
diagnostic testing. Sick call is held on a regular basis and infirmary bed care
is provided in some facilities. Nursing rounds are regularly conducted and
physicians, nurse practitioners, physicians' assistants and others are also
involved in the delivery of care on a regular basis. Appropriate medications are
administered by nursing staff, as needed.
Medical services provided off-site include specialty out-patient diagnostic
testing and care, emergency room care, surgery and hospitalization. In addition,
ASG provides administrative support services both on-site and at ASG's
headquarters and regional offices. Administrative programs include on-site
medical records and management and employee education and licensing. Central and
regional offices provide quality assurance, medical audits, credentialing,
continuing education and clinical program development activities. ASG maintains
a utilization review system to monitor the extent and duration of most
healthcare services required by inmates on an inpatient and outpatient basis.
See "-- Administrative Systems."
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. 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
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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.
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, 1999 -- contracts with the
Pennsylvania Department of Corrections Western Region, 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."
Contracts accounting for approximately 56% of revenues for the year ended
December 31, 1999, including ASG's contracts with the Indiana Department of
Correction (the "Indiana Contract"), Pennsylvania Department of Corrections for
the Western Region, 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. 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.
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.
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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, 1999, generally ranged between 4% and 60% (and in one case, 100%)
of the 1999 contract fee.
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. 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 incurred prior to December 1, 1997.
For contracts where ASG's exposure to the risk of inmates' catastrophic
illness or injury is not limited, ASG maintains stop loss insurance to cover 80%
of ASG's exposure with respect to hospitalization for amounts in excess of
$200,000 per inmate. ASG believes this insurance mitigates its exposure to
unanticipated expenses of catastrophic hospitalization.
There can be no assurance that third-party commercial insurance will
continue to be available in the future or will be available at reasonable
prices. ASG believes its insurance coverage is maintained at reasonable levels,
but there can be no assurance that it will cover all claims that may be asserted
against ASG and its employees and agents.
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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 United States Department of
Defense ("DOD") and the United States Veterans Administration ("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, 1999, EMSA Military provided services under nine 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 Military 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 contract.
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, 1999, ASG had approximately 3,100 full-time equivalent
employees, including 2,250 medical personnel. ASG also had under contract 186
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, York County 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 one
competitor 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. No one contract accounted for 10% of revenues during the
year ended December 31, 1999.
CAUTIONARY STATEMENTS
All statements made by ASG that are not historical facts are based on
current expectations. These statements are forward looking in nature and involve
a number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: dependence on major contracts; price competition in the prison
healthcare industry; ASG's ability to provide adequate staffing to meet its
contractual commitments; changes in performance bonding requirements;
substantial damage awards against ASG in connection with medical malpractice
claims; changes in laws or regulations or the application thereof; general
business and economic conditions; and the other risk factors described in ASG's
reports filed from time to time with the Securities and Exchange Commission.
Certain of these factors are described in greater detail below.
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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 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 one 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 in
January of 1999. ASG has limited experience acquiring businesses and integrating
them into its operations.
Catastrophic Limits. Contracts accounting for 56% of revenues for the year
ended December 31, 1999 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. 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, and Bruce A. Teal, Executive Vice President and Chief Financial
Officer.
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
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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 18,700 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;
Burlington, Vermont and Concordville 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 20, 2000, there were approximately
67 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,
1998 through December 31, 1999 are shown below:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------ ------
<S> <C> <C>
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
March 31, 1999............................................. $13.75 $11.63
June 30, 1999.............................................. 15.25 9.50
September 30, 1999......................................... 17.50 13.25
December 31, 1999.......................................... 15.00 11.75
</TABLE>
The Company did not pay cash dividends on the Common Stock during the years
ended December 31, 1999 and December 31, 1998. The Company does not currently
intend to pay cash dividends on the Common Stock in the foreseeable future
because, under the terms of its Credit Facility, the Company is prohibited from
paying cash dividends on the Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Healthcare revenues......................... $272,926 $113,287 $129,211 $152,282 $115,238
Income (loss) before income taxes
(benefits)................................ 7,731 5,099 1,786 (9,933) 1,146
Net income (loss)........................... 4,640 5,724 1,685 (8,686) 687
Net income (loss) attributable to common
shares.................................... 2,328 5,724 1,742 (8,912) 687
Net income (loss) per common
shares -- basic........................... 0.64 1.61 0.50 (2.81) 0.23
Net income (loss) per common
shares -- diluted......................... 0.64 1.57 0.48 (2.81) 0.21
Weighted average common shares
outstanding............................... 3,613 3,554 3,480 3,171 3,027
Weighted average common shares outstanding
and common equivalent shares
outstanding............................... 3,613 3,653 3,657 3,171 3,221
Cash dividends per share.................... 0 0 0 0 0
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results
of Operations and Notes to Consolidated Financial Statements describing the
financial impact for 1999 due to the EMSA acquisition, 1998 due to the
MedPartners' Settlement Agreement and 1997 for the impact of the nonrenewal of
the contract with the Georgia Department of Corrections.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................ $ 9,498 $10,515 $ 257 $(2,434) $ 2,692
Total assets............................. 98,727 28,375 27,754 42,709 42,501
Mandatory redeemable preferred stock..... 12,375 -- -- -- --
Mandatory redeemable common stock........ 1,842 1,842 1,842 1,916 --
Common stock, additional paid-in capital,
retained earnings (deficit),
stockholders' notes receivable and
treasury stock......................... 16,723 10,949 4,799 2,468 8,667
</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 Income
Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PERCENTAGE OF TOTAL REVENUES 1999 1998 1997
- ---------------------------- ----- ----- -----
<S> <C> <C> <C>
Healthcare revenue.......................................... 100.0% 100.0% 100.0%
Healthcare expenses......................................... 89.9 89.9 91.8
----- ----- -----
Gross margin................................................ 10.1 10.1 8.2
Selling, general and administrative expenses................ 4.5 8.6 6.5
Depreciation and amortization............................... 1.3 1.1 0.9
MedPartners settlement gain................................. -- (3.6) --
----- ----- -----
Income from operations...................................... 4.3 4.0 0.8
Interest, net............................................... (1.5) 0.5 0.5
----- ----- -----
Income before taxes......................................... 2.8 4.5 1.3
Provision for income taxes (benefits)....................... 1.1 (0.6) 0.1
----- ----- -----
Net income.................................................. 1.7 5.1 1.2
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PERCENTAGE OF TOTAL REVENUES 1999 1998 1997
- ---------------------------- ----- ----- -----
<S> <C> <C> <C>
Redeemable preferred stock dividends........................ 0.8 -- --
----- ----- -----
Net income attributable to common stock..................... 0.9% 5.1% 1.2%
===== ===== =====
</TABLE>
1999 Compared to 1998
Healthcare revenues increased $159.6 million from $113.3 million in 1998 to
$272.9 million in 1999, representing a 141% increase. The increase in revenues
resulted primarily from the Company's acquisition of EMSA Correctional and EMSA
Military on January 26, 1999. EMSA Correctional and EMSA Military generated
revenues of $139.2 million in the year ended December 31, 1999. Apart from the
EMSA acquisition, the Company added sixteen new contracts in 1999, which
generated $12.6 million in new revenues, and experienced $8.1 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 two PHS contracts during 1999, which
generated $1.8 million of revenues in 1999, compared to $2.1 million of revenues
in 1998.
The cost of healthcare increased $143.6 million due mainly to the EMSA
acquisition. Healthcare expenses as a percentage of revenues were unchanged at
89.9% in both 1999 and 1998. Personnel costs and fringe benefits (including
subcontractors) related to inmate care were 61% of revenues in 1999 versus 57%
of revenues in 1998. The increase is attributable to the Company's focus on more
fully utilizing its on-site infirmaries. Costs related to outside services
(defined as hospitalization, emergency room and ambulance and outpatient
surgeries and visits) were 13% of revenues in 1999 and 15% in 1998. The Company
was also able to improve its pharmacy cost from 10% of revenue in 1998 to 9% in
1999.
Selling, general and administrative expenses were $12.3 million or 4.5% of
revenue in 1999 compared to $9.8 million in 1998. The dollar increase relates
primarily to the EMSA acquisition, but also demonstrates the ability to leverage
corporate support services.
Depreciation and amortization increased $2.5 million in 1999 to $3.7
million. The increase is directly related to the amortization expense related to
the EMSA acquisition of approximately $2.4 million between goodwill, noncompete
agreements and deferred finance costs.
The provision for income taxes was $3.1 million of expense in 1999 for an
effective tax rate of 40%, compared to $0.6 million of benefit in 1998, when the
Company recognized net operating loss carryforwards. As of December 31, 1999,
the Company had approximately $2.0 million in net operating loss carryforwards.
The preferred stock dividends of $2.3 million relate to the redeemable
preferred stock and include a $1.9 million noncash nonrecurring dividend,
related to a beneficial conversion feature at the date the stock was issued,
which increased additional paid-in capital.
With the inmate population increasing an average of approximately 6%
compounded annually, the medical Consumer Price Index increasing by an average
of 3%, the trend towards privatization of correctional healthcare and the
Company being the second largest provider of healthcare to incarcerated
individuals, management anticipates opportunities for revenue growth, medical
loss ratio improvement and leveraging of selling, general and administrative
costs.
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 existing contracts through population
increases, contract renegotiations, automatic price adjustments and from
contracts being in effect a full year. The Company did not lose any contracts in
1998.
9
<PAGE> 11
The cost of healthcare decreased $16.7 million or 14% to $101.9 million in
1998. Healthcare expenses as a percentage of revenues were 89.9% in 1998 versus
91.8% in 1997. Healthcare expenses exclusive of the Georgia Contract were 89% in
1997. Personnel costs and fringe benefits (including subcontractors) related to
inmate care were 57% of revenues in 1998 and 1997. 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 $9.7 million in 1998
compared to $8.3 million in 1997. The increase is due to $0.6 million and $0.7
million of costs associated with the UniSource disposal and employee stay
bonuses, respectively, both relating to the terminated MedPartners merger. In
connection with the anticipated, then terminated, merger, all of the UniSource
employees were informed of the Company's intent to cease UniSource operations
and sell or dispose of all of UniSource's operating assets. In addition, the
Company incurred corporate employee stay bonus and severance costs to either
retain the employees when the anticipated MedPartners merger was terminated or
honor severance agreements.
The Company recorded a gain of $4.0 million related to the MedPartners
Settlement Agreement. Pursuant to the Settlement Agreement, MedPartners agreed
to pay the Company approximately $3.5 million in cash and to assume certain
other costs incurred by the Company in connection with the merger in the amount
of approximately $1.5 million. Of the amount received from MedPartners, $1.0
million reimbursed the Company for direct costs of the terminated merger that
were included in prepaid expenses and other current assets at December 1997.
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 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 during the fourth quarter of 1998, based on
the trend of future earnings, projected pre-tax income for 1999 and, other than
for 1996, the Company's history of taxable income. The allowance was eliminated
as it is more likely than not that the deferred tax assets will be realized over
the reversion period of existing taxable temporary differences and the carry
forward period of the Company's net operating losses. As of December 31, 1998,
the Company had approximately $5.7 million in net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased from $7.2 million at
December 31, 1998 to $0.4 million at December 31, 1999. The decrease is related
specifically to the EMSA acquisition and the Company's focus on repaying the
debt incurred to purchase EMSA. Between cash provided from operating activities
of $22.5 million and the cash at December 31, 1998, the Company was able to
repay $21.5 million of the Senior Revolving Credit Facility and $7.5 million of
the Convertible Subordinated Notes. In addition to the $29 million in debt
repayments, the remaining $7.5 million of Convertible Subordinated Notes was
converted to preferred stock, which is mandatorily redeemable on July 26, 2005
and carries a 5% coupon rate. The Company was able to reduce its total
outstanding debt by 47% in the first eleven months subsequent to the EMSA
acquisition through repayments and conversion and now maintains a debt to cash
flow ratio of less than 1.7:1.0. Interest was paid through December 25, 1999 and
preferred stock dividends were paid through December 31, 1999.
Accounts receivable including acquired EMSA receivables declined $13.5
million and reflects the impact of incorporating the same internal practices for
EMSA contracts as existed for PHS accounts, including weekly aging and
operational conference calls. Prepaids and other current assets increased $5.5
million due to an inventory build-up in contemplation of potential Year 2000
issues and prepaid insurance for malpractice insurance. Accounts payable and
accrued expenses increased $3.6 million, which is expected with the growth of
the Company from $111.6 million in cash operating expenses to $257.8 million.
10
<PAGE> 12
As part of the EMSA acquisition, the Company increased its $20 million line
of credit facility to a $52 million Credit Facility, which has been reduced to
$40 million as of December 31, 1999. Outstanding borrowings under such facility
are $25.5 million as of December 31, 1999. As part of 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, with which the Company was in compliance throughout 1999.
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 healthcare costs in 1999 over 1998 was 3.5%, compared to an
overall increase in the Consumer Price Index of 2.7% for all costs for the same
period.
Some of the Company's contracts provide for annual increases in the fixed
base fee upon changes in the regional medical care component of the Consumer
Price Index. In all other contracts that extend beyond one year, the Company
utilizes a projection of the future inflation rate when bidding and negotiating
the fixed fee for future years. If the rate of inflation exceeds the levels
projected, such excess will be absorbed by the Company. Conversely, the Company
will benefit should the actual rate of inflation fall below the estimate used in
the bidding and negotiation process.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expended approximately $0.1 million during 1999 in connection with remediating
its systems. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the Year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
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 11, 2000, 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.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the Directors of the Company, the heading
"Information as to Directors, Nominees and Executive Officers" and the
subsection "Compliance with Section 16(a) of the Securities Exchange Act" under
the heading "Additional Information" in the Company's Proxy Statement for its
2000 Annual Meeting of Stockholders (the "Company's Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The subsection under the heading "Additional Information" entitled
"Committees and Meetings" and the heading entitled "Executive Compensation" in
the Company's 2000 Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The headings "Information as to Directors, Nominees and Executive Officers"
and "Principal Stockholders" in the Company's 2000 Proxy Statement are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The heading "Certain Transactions" in the Company's 2000 Proxy Statement is
incorporated hereby by reference.
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> <C> <S>
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 -- First Amendment to Securities Purchase Agreement, dated as
of June 17, 1999, among the Company, Health Care Capital
Partners L.P. and Health Care Executive Partners L.P.
(incorporated herein by reference to Exhibit 2.4 to the
Company's Amended Annual Report on Form 10-K/A for the year
ended December 31, 1998, which Amended Annual Report was
filed on July 29, 1999).
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S>
2.5 -- 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).
2.6 -- 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).
2.7 -- 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 -- 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).
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).
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S>
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).
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).
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. (incorporated herein by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
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).
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S>
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).
10.30 America Service Group Inc. 1999 Incentive Stock Plan
(incorporated by reference to Annex B to the Company's
definitive Proxy Statement for its Annual Meeting of
Stockholders held on August 30, 1999, which definitive Proxy
Statement was filed on July 28, 1999).
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule for the year ended December 31, 1999
(for SEC use only).
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1999.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registration has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized, on March 30, 2000.
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 30, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<C> <S>
/s/ MICHAEL CATALANO Director, President and Chief Executive
- ----------------------------------------------------- Officer
Michael Catalano
/s/ BRUCE A. TEAL Executive Vice President and Chief Financial
- ----------------------------------------------------- Officer
Bruce A. Teal
/s/ SCOTT L. MERCY Director, Chairman of the Board
- -----------------------------------------------------
Scott L. Mercy
/s/ RICHARD M. MASTALER Director
- -----------------------------------------------------
Richard M. Mastaler
/s/ JEFFREY L. MCWATERS Director
- -----------------------------------------------------
Jeffrey L. McWaters
/s/ WILLIAM D. EBERLE Director
- -----------------------------------------------------
William D. Eberle
/s/ DAVID A. FREEMAN Director
- -----------------------------------------------------
David A. Freeman
/s/ JOHN W. GILDEA Director
- -----------------------------------------------------
John W. Gildea
/s/ CAROL R. GOLDBERG Director
- -----------------------------------------------------
Carol R. Goldberg
/s/ RICHARD D. WRIGHT Director
- -----------------------------------------------------
Richard D. Wright
</TABLE>
16
<PAGE> 18
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, 1999 and 1998... F-3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 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, 1999, 1998 and 1997...... F-22
</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> 19
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, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 11, 2000
F-2
<PAGE> 20
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 444,000 $ 7,211,000
Accounts receivable: Healthcare and other less allowance
for doubtful accounts of $420,000 and $20,000 at
December 31, 1999 and 1998............................. 39,738,000 13,760,000
Prepaid expenses and other current assets................. 7,440,000 1,098,000
Current deferred taxes.................................... 1,289,000 2,730,000
----------- -----------
Total current assets........................................ 48,911,000 24,799,000
Property and equipment, net................................. 3,932,000 1,886,000
Deferred taxes.............................................. 562,000 1,341,000
Cost in excess of net assets acquired, net.................. 44,548,000 --
Other assets................................................ 774,000 349,000
----------- -----------
Total assets................................................ $98,727,000 $28,375,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $11,531,000 $ 2,438,000
Accrued expenses.......................................... 26,991,000 11,846,000
Deferred revenue.......................................... 891,000 --
----------- -----------
Total current liabilities................................... 39,413,000 14,284,000
Noncurrent portion of accrued expenses...................... 2,874,000 1,300,000
Long-term debt.............................................. 25,500,000 --
Commitments and contingencies
Mandatory redeemable preferred stock, 500,000 shares
authorized;
125,000 shares issued and outstanding at December 31,
1999...................................................... 12,375,000 --
Mandatory redeemable common stock, 186,000 shares issued and
outstanding at December 31, 1999 and 1998................. 1,842,000 1,842,000
Preferred stock, $.01 par value, 1,500,000 shares
authorized................................................ -- --
Common stock, $.01 par value, 10,000,000 shares authorized;
3,729,000 and 3,573,000 shares issued and outstanding at
December 31, 1999 and 1998, respectively.................. 37,000 36,000
Additional paid-in capital.................................. 12,856,000 8,351,000
Stockholders' notes receivable.............................. (1,060,000) --
Retained earnings........................................... 4,890,000 2,562,000
----------- -----------
Total liabilities and stockholders' equity.................. $98,727,000 $28,375,000
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 21
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Healthcare revenue............................... $272,926,000 $113,287,000 $129,211,000
Healthcare expenses.............................. 245,485,000 101,884,000 118,631,000
------------ ------------ ------------
Gross margin..................................... 27,441,000 11,403,000 10,580,000
Selling, general, and administrative expenses.... 12,335,000 9,752,000 8,347,000
Depreciation and amortization.................... 3,666,000 1,199,000 1,114,000
MedPartners settlement gain...................... -- (4,047,000) --
------------ ------------ ------------
Income from operations........................... 11,440,000 4,499,000 1,119,000
Interest, net.................................... (3,709,000) 600,000 667,000
------------ ------------ ------------
Income before income taxes (benefits)............ 7,731,000 5,099,000 1,786,000
Provision for income taxes (benefits)............ 3,091,000 (625,000) 101,000
------------ ------------ ------------
Net income....................................... 4,640,000 5,724,000 1,685,000
Preferred stock dividends........................ 2,312,000 -- --
Decrease in redeemable common stock.............. -- -- 57,000
------------ ------------ ------------
Net income attributable to common shares......... $ 2,328,000 $ 5,724,000 $ 1,742,000
============ ============ ============
Net income per common share:
Basic.......................................... $ 0.64 $ 1.61 $ .50
============ ============ ============
Diluted........................................ $ 0.60 $ 1.57 $ .48
============ ============ ============
Weighted average common shares outstanding:
Basic.......................................... 3,613,000 3,554,000 3,480,000
============ ============ ============
Diluted........................................ 3,877,000 3,653,000 3,657,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 22
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' RETAINED
-------------------- PAID-IN NOTES EARNINGS TREASURY
SHARES AMOUNT CAPITAL RECEIVABLES (DEFICIT) STOCK
--------- ------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997........... 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 and related tax
benefits........................... 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 and related tax
benefits........................... 31,000 1,000 287,000 -- -- --
Net income........................... -- -- -- -- 5,724,000 --
--------- ------- ----------- ----------- ----------- ---------
BALANCE AT DECEMBER 31, 1998......... 3,573,000 36,000 8,351,000 -- 2,562,000 --
Issuance of common stock under
employee stock plan................ 26,000 -- 310,000 -- -- --
Exercise of options and related tax
benefits........................... 55,000 -- 519,000 -- -- --
Issuance of common stock under
incentive stock plan............... 75,000 1,000 1,075,000 (1,039,000) -- --
Issuance of common stock warrants.... -- -- 659,000 -- -- --
Noncash, nonrecurring dividend on
redeemable preferred
stock -- beneficial conversion
feature............................ -- -- 1,942,000 -- (1,942,000) --
Dividends on redeemable preferred
stock.............................. -- -- -- -- (370,000) --
Interest income on stockholders'
notes receivable................... -- -- -- (21,000) -- --
Net income........................... -- -- -- -- 4,640,000 --
--------- ------- ----------- ----------- ----------- ---------
3,729,000 $37,000 $12,856,000 $(1,060,000) $ 4,890,000 $ --
========= ======= =========== =========== =========== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 23
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,640,000 $ 5,724,000 $ 1,685,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 3,666,000 1,199,000 1,114,000
Accretion of subordinated notes........................... 534,000 -- --
Interest on stockholders' notes receivable................ (21,000) -- --
Noncash change in redeemable common stock................. -- -- (17,000)
Provision for doubtful accounts........................... 544,000 -- 841,000
Deferred income tax provision............................. 2,220,000 (762,000) (101,000)
Loss on asset disposals................................... -- -- 457,000
Changes in operating assets and liabilities, net effects
of acquisition:
Accounts receivable..................................... 12,931,000 (5,518,000) 63,000
Prepaid expenses and other current assets............... (5,544,000) 1,286,000 1,304,000
Other assets............................................ 216,000 (52,000) (132,000)
Accounts payable........................................ 9,093,000 (805,000) (4,413,000)
Accrued expenses........................................ (5,525,000) (3,314,000) (9,209,000)
Deferred revenue........................................ 891,000 (1,410,000) (3,590,000)
Assets held for sale.................................... -- -- 2,900,000
------------ ----------- -----------
Net cash provided by (used in) operating activities......... 23,645,000 (3,652,000) (9,098,000)
INVESTING ACTIVITIES
Cash paid for acquisition, net of cash acquired............. (66,077,000) -- --
Capital expenditures........................................ (1,910,000) (739,000) (961,000)
Proceeds of short-term investments.......................... -- 1,559,000 546,000
Proceeds from maturity or sale of restricted investments.... -- 7,191,000 625,000
Purchases of restricted investments......................... -- (1,552,000) (806,000)
Proceeds from sale of property and equipment................ -- 533,000 --
Other....................................................... (400,000) -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities......... (68,387,000) 6,992,000 (596,000)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 47,000,000 -- --
Proceeds from subordinated notes............................ 15,000,000 -- --
Proceeds from mandatory redeemable preferred stock.......... 5,000,000 -- --
Payments on long-term debt.................................. (21,500,000) -- --
Payment of mandatory redeemable preferred stock dividends... (370,000) -- --
Payment on subordinated notes............................... (7,500,000) -- --
Deferred financing costs.................................... (520,000) -- --
Issuance of common stock.................................... 346,000 138,000 68,000
Exercise of stock options................................... 519,000 288,000 521,000
------------ ----------- -----------
Net cash provided by financing activities................... 37,975,000 426,000 589,000
Net increase (decrease) in cash and cash equivalents........ (6,767,000) 3,766,000 (9,105,000)
Cash and cash equivalents at beginning of year.............. 7,211,000 3,445,000 12,550,000
------------ ----------- -----------
Cash and cash equivalents at end of year.................... $ 444,000 $ 7,211,000 $ 3,445,000
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................... $ 3,355,000 $ -- $ 12,000
============ =========== ===========
Cash paid for income taxes.................................. $ 639,000 $ 58,000 $ --
============ =========== ===========
NONCASH TRANSACTIONS
Conversion of subordinated notes to mandatory redeemable
preferred stock........................................... $ 7,370,000 $ -- $ --
============ =========== ===========
Discount on subordinated notes for stock warrants issued.... $ 659,000 $ -- $ --
============ =========== ===========
Non-recurring dividend on mandatory redeemable preferred
stock..................................................... $ 1,942,000 $ -- $ --
============ =========== ===========
Issuance of common stock under Incentive Plan for
stockholders' receivables................................. $ 1,039,000 $ -- $ --
============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 24
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 and medical facilities operated by the Department of Defense and
Veterans Administration. 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), EMSA
Correctional Care, Inc. and EMSA Military Services, Inc. (EMSA), 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 in the United States 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 calculated based upon a claims
payment lag methodology and professional and general liability claims. The
claims payment lag methodology utilized for recording amounts for unbilled
medical claims is based upon historical payment patterns using actual
utilization data including hospitalization, one day surgeries, physician visits
and emergency room and ambulance visits and their corresponding costs. Estimates
change as new events occur, more experience is acquired, or additional
information is obtained. A change in an estimate is accounted for in the period
of change.
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, accounts
receivable, accounts payable and long-term debt 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.
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 based upon a claims payment
lag methodology. Additionally, reserves have been recorded for certain reported
and unreported professional and general liability claims associated with the
delivery of medical services.
F-7
<PAGE> 25
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accrues losses under its fixed price contracts when it is
probable that a loss has been incurred (i.e., expected future healthcare costs
and maintenance costs will exceed anticipated future revenue and stop-loss
insurance recoveries if material) and the amount of the loss can be reasonably
estimated. The Company performs this loss accrual analysis on a specific
contract basis.
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.
Inventory
Pharmacy and medical supplies inventory is stated at the lower of cost
(first-in, first-out method) or market.
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 $2.2 million, $14,000 and $42,000 for
1999, 1998 and 1997, respectively, was computed using the straight-line method
over 20 years relating to the EMSA acquisition and over 15 years relating to the
UniSource acquisition. Accumulated amortization as of December 31, 1999 was $2.2
million. The Company wrote off the unamortized portion of cost in excess of net
assets acquired of $0.4 million in June 1998 with the sale of UniSource.
The carrying value of costs in excess of net assets acquired is reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that cost in excess of net assets acquired will not be recoverable
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the cost in excess of net
assets acquired will be reduced to estimated fair value.
Other Assets
Other assets include $0.5 million of deferred financing costs related to
the $52 million Credit Facility (see Note 3) and a $0.4 million noncompete
agreement relating to the EMSA acquisition. Amortization expense of $0.3 million
related to the deferred finance costs and noncompete agreement was computed
using the straight-line method over the corresponding lives of the agreements.
Accumulated amortization as of December 31, 1999 was $0.3 million.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and cost in excess of net
assets acquired and considers events,
F-8
<PAGE> 26
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
circumstances and operating results, including consideration of contract
performance at the fixed price contract level.
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, which 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. During 1999, the Company authorized 500,000 shares of
mandatory redeemable convertible preferred stock, with a $100 per share
liquidation value and a 5% coupon. During 1999, a total of 125,000 of such
shares were issued as part of the EMSA acquisition discussed in Note 3.
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.
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.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) which was required to be
adopted in years beginning after June 15, 1999. In July 1999, SFAS No. 137 was
issued as Accounting for Derivative Investments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133 which defers for one
year the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Accordingly, the Company plans to adopt
SFAS No. 133 effective January 1, 2001. The Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on the financial
position or the results of operations of the Company.
Reclassifications
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
F-9
<PAGE> 27
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 was
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 accounted 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 & 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 "Convertible 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. As of December 31, 1999, the Company has repaid $29
million of borrowings under the Credit Facility and the Notes and converted the
remaining $7.5 million of the Notes to mandatory redeemable Preferred Stock.
The Company obtained an independent valuation computation of the fair
values of the Warrants ($4.88 per Warrant). Significant assumptions used in the
fair value calculation include: risk-free interest rate (4.79%); expiration
period (7 years); volatility (49%); and dividend per share (zero). The proceeds
from the sale of the Notes and Warrants were allocated based on the relative
fair values of the Warrants and Notes,
F-10
<PAGE> 28
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the fair value of the Warrants being accounted for as an addition to
paid-in capital. The resulting discount on the Notes is accounted for as such
and is being accreted and accounted for accordingly.
At a meeting of the Emerging Issues Task Force (the "EITF"), the Securities
and Exchange Commission (the "SEC") recommended an accounting treatment for
securities similar to the Convertible Preferred Stock that have a "beneficial
conversion" feature. Although the EITF issued clarifying guidance, effective for
transactions consummated after May 20, 1999, indicating that whether a
beneficial conversion feature exists with respect to a convertible security
should be determined at the date the issuer enters into a commitment to issue
the security and that, if a beneficial conversion feature exists, it should be
recorded upon the issuance of the security, the Company is required to follow
the accounting guidance existing for transactions prior to May 21, 1999. The
Company recorded $1.9 million, which increases paid-in capital, representing the
beneficial conversion feature of $3.68 non-cash, nonrecurring dividend on each
outstanding share of Convertible Preferred Stock. The dividend equals the
increase in the fair market value of a share of the Company's Common Stock from
the date the Company entered into a commitment to issue the Convertible
Preferred Stock ($9.45 per share) to the Company's issuance of the Convertible
Preferred Stock on January 26, 1999 ($13.125 per share). If the acquisition of
EMSA had occurred subsequent to May 20, 1999, the Company would not have
recorded the beneficial conversion feature dividend.
The following unaudited pro forma results of operations give effect to the
operations of EMSA as if the transaction had occurred at the beginning of the
year presented.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Healthcare revenue.............................. $282,654,000 $274,067,000
Net income attributable to common shares........ 2,326,000 6,229,000
Net income per common share:
Basic......................................... 0.64 1.75
Diluted....................................... 0.60 1.55
</TABLE>
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 assume certain other base and employee
healthcare benefit costs incurred by the Company of approximately $1.5 million.
Approximately $1.0 million of these payments reimbursed the Company for costs
directly associated with the terminated merger that were included in prepaid
expenses and other current assets at December 31, 1997. The resulting $4.0
million is reported in 1998 as the MedPartners settlement gain.
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. Costs of approximately $0.6 million
associated with the disposal of UniSource, including $0.4 million of unamortized
cost in excess of net assets acquired, severance and other miscellaneous
expenses are included in selling, general and administrative expenses in 1998.
Also in connection with the MedPartners transaction, the Company incurred
employee stay bonuses and severance costs of $0.7 million, which is included in
selling, general and administrative expenses in 1998.
F-11
<PAGE> 29
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are stated at cost and comprised
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Pharmacy and medical supplies inventory............. $2,838,000 $ 329,000
Prepaid pharmacy expenses........................... 1,626,000 --
Prepaid insurance................................... 2,517,000 288,000
Prepaid performance bonds........................... 180,000 105,000
Prepaid other....................................... 279,000 376,000
---------- ----------
$7,440,000 $1,098,000
========== ==========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- ESTIMATED
1999 1998 USEFUL LIVES
----------- ----------- ------------
<S> <C> <C> <C>
Building and improvements.................... $ 52,000 $ 41,000 10 years
Equipment and furniture...................... 5,753,000 3,004,000 7 years
Computer software............................ 723,000 322,000 3 years
Medical equipment............................ 456,000 366,000 5-7 years
Automobile................................... 12,000 12,000 5 years
----------- -----------
6,996,000 3,745,000
Less: Accumulated depreciation............... (3,064,000) (1,859,000)
----------- -----------
$ 3,932,000 $ 1,886,000
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $1.2 million, $0.8 million and $1.1 million, respectively.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Salaries and employee benefits.................... $13,048,000 $ 5,956,000
Medical claims.................................... 10,436,000 4,243,000
Liability claims.................................. 4,091,000 2,408,000
Accrued workers' compensation..................... 856,000 92,000
Accrual for impaired contract..................... 855,000 --
Legal............................................. 220,000 190,000
Other............................................. 359,000 257,000
----------- -----------
29,865,000 13,146,000
Less: Noncurrent portion of liability claims...... (2,874,000) (1,300,000)
----------- -----------
$26,991,000 $11,846,000
=========== ===========
</TABLE>
F-12
<PAGE> 30
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. BANKING ARRANGEMENTS
In connection with the EMSA acquisition, the Company entered into the
aforementioned $52 million Credit Facility expiring September 30, 2002, which
replaced the Company's $20 million Credit Facility dated March 28, 1997. The
Credit Facility includes a $10 million sub-limit for working capital and
issuance of letters of credit for performance bonds. The interest rate is based
on LIBOR or prime rates subject to the quarterly operating performance of the
Company, as defined in such facility. The Credit Facility is collateralized by
all assets of the Company and its operating subsidiaries and is also subject to
certain quarterly financial covenants, with which the Company was in compliance
throughout 1999. No borrowings were outstanding under the working capital
portion of the Credit Facility at December 31, 1999 and 1998.
Under the Credit Facility's step-down schedule of availability, amounts
outstanding under the Credit Facility as of December 31, 1999 mature in January
and September 2002.
The Company did not have open letters of credit as of December 31, 1999 and
had $0.5 million at December 31, 1998.
9. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Current income taxes:
Federal........................................ $ 503,000 $ 50,000 $ --
State.......................................... 368,000 87,000 --
---------- --------- --------
871,000 137,000 --
Deferred taxes:
Federal........................................ 1,942,000 (682,000) --
State.......................................... 278,000 (80,000) 101,000
---------- --------- --------
2,220,000 (762,000) 101,000
---------- --------- --------
Income taxes (benefits).......................... $3,091,000 $(625,000) $101,000
========== ========= ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Amortization....................................... $(1,722,000) $ --
Self-insurance reserves............................ 1,539,000 733,000
Net operating loss carryforwards................... 816,000 2,161,000
Executive stock options............................ 814,000 773,000
State taxes........................................ (286,000) (271,000)
Accrued vacation................................... 573,000 421,000
Allowance for doubtful accounts.................... 168,000 59,000
Depreciation....................................... 28,000 48,000
Accrued legal...................................... -- (134,000)
Other.............................................. (79,000) 281,000
----------- ----------
$ 1,851,000 $4,071,000
=========== ==========
</TABLE>
F-13
<PAGE> 31
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A valuation allowance for deferred tax assets of $2.7 million was
eliminated at December 31, 1998 as it was 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, 1999, the Company had federal and state net operating loss
carryforwards of $2.0 million 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,
-------------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Federal tax................................................. 35.0% 34.0% 34.0%
State income taxes.......................................... 4.8 4.0 5.7
Alternative minimum tax..................................... -- 1.0 --
Other....................................................... 0.2 1.0 1.0
Decrease in valuation allowance............................. -- (52.3) (35.0)
---- ----- -----
40.0% (12.3)% 5.7%
==== ===== =====
</TABLE>
10. MANDATORY REDEEMABLE PREFERRED STOCK
Mandatory redeemable preferred stock (Convertible Preferred Stock) consists
of 50,000 shares issued on January 26, 1999 and 75,000 shares issued on August
30, 1999 to Health Care Capital Partners L.P. and Health Care Executive Partners
L.P. as part of the EMSA acquisition. The Preferred Stock contains a 5% coupon
rate and is mandatorily redeemable on July 26, 2005. Dividends have been paid
through December 31, 1999. Each share of Preferred Stock is convertible into
such number of fully paid and nonassessable shares of common stock as is
determined by dividing $100.00 by the Conversion Price ($9.45) at the option of
the holder at any time after the issue date and prior to the close of business
on the day prior to a date which the Company has set to redeem such shares of
Preferred Stock. If the Company elects to redeem any shares of Preferred Stock,
the rights of the holders of the Preferred Stock to convert such shares of
Preferred Stock will terminate the close of business on the business day
preceding the date fixed for redemption. The Company shall pay to each holder of
shares of Preferred Stock an amount equal to any accrued and unpaid dividends on
the shares of Preferred Stock surrendered for conversion to the date of such
conversion.
Beginning on June 30, 2000 and ending on June 30, 2001, if the Current
Market Price of Common Stock per share does not exceed 225% of the Initial
Conversion Price for 45 consecutive Trading Days, the Conversion Price shall be
reduced to $8.00 for all outstanding shares of the Preferred Stock. If (i) the
Conversion Price exceeds $8.00 per share and (ii) during the period between June
30, 2000 and June 30, 2001, the Current Market Price of Common Stock per share
is more than 225% but less than 250% of the Initial Conversion Price for 45
consecutive Trading Days, the Conversion Price shall be reduced to an amount
equal to the product of the Conversion Price multiplied by a quotient, the
numerator of which shall equal the sum of the Initial Conversion Price and $8.00
and the denominator of which shall be 2.
The 75,000 shares issued on August 30, 1999 related to conversion of the
remaining $7.5 million of subordinated notes which had been issued at a
discount. Accordingly, the remaining $125,000 discount is being recognized
through the mandatory redemption date of July 26, 2006 through additional
noncash dividends.
11. MANDATORY REDEEMABLE COMMON STOCK
During 1996, the Company sold 146,000 shares of mandatory redeemable common
stock (purchased shares) and awarded 40,000 shares (awarded shares) of mandatory
redeemable 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
F-14
<PAGE> 32
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The impact on basic earnings per share for the purchased and
awarded shares was an increase of $0.02 per share and $0.00 per share,
respectively, for 1997. At December 31, 1999, the Company or the former Chief
Executive Officer is permitted to redeem the common stock at $9.90 per share.
12. STOCKHOLDERS' NOTES RECEIVABLE
On August 30, 1999, stockholders of the Company approved the America
Service Group Inc. 1999 Incentive Stock Plan (the "1999 Plan") to allow for the
issuance of stock options, restricted stock, stock appreciation rights and for
the purchase of shares of Common Stock and the extension of recourse loans to
certain of the Company's key employees and outside directors to permit them to
purchase such shares of Common Stock. There are 786,000 shares of Common Stock
available under the 1999 Plan and the ability for the Company to have
outstanding $1.3 million in loans.
During 1999, a total of $1,039,000 of loans bearing market interest rates
and payable five years from the date of issuance were extended in order for
certain Company employees and directors to purchase 72,895 shares of Common
Stock. In connection with the purchase of the Common Stock, 225,657
non-incentive stock options and 63,171 incentive stock options were issued at
fair market value on the date of grant.
Both the non-incentive and incentive stock options issued expire ten years
from date of grant, with the non-incentive stock options vesting pro rata over
four years and the incentive stock options having a four-year cliff vesting.
13. STOCK OPTION PLANS
In addition to the 1999 Incentive Stock Plan discussed in Note 12, 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-15
<PAGE> 33
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option activity under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
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.................................. 321,000 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............. 818,000 4.50 - 14.44 10.12
Granted.................................. 587,000 13.00 - 14.81 13.99
Exercised................................ (54,000) 4.50 - 13.13 6.84
Canceled................................. (86,000) 9.69 - 14.44 13.06
--------- -------------- ------
Outstanding, December 31, 1999............. 1,265,000 $4.50 - $14.81 $11.85
========= ============== ======
</TABLE>
Total options available for future grants at December 31, 1999 and 1998,
were 566,000 and 280,000, respectively.
As of December 31, 1999, 535,000 options were exercisable under all plans.
The Company has reserved 2,543,000 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 NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIVE EXERCISE PRICE 12/31/99 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.50 - 6.50 21,000 4.75 $ 5.80 21,000 $ 5.80
8.69 - 11.19 549,000 8.48 9.48 364,000 9.45
13.13 - 14.44 695,000 9.65 13.91 150,000 12.20
- -------------- --------- -------
$ 4.50 - 14.44 1,265,000 535,000
============== ========= =======
</TABLE>
Options exercisable at December 31, 1999 had a weighted average exercise of
$10.62.
Pro forma information regarding net income 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,
------------
1999 1998
---- ----
<S> <C> <C>
Volatility.................................................. 0.5 0.6
Interest rate............................................... 5-6% 5.0%
Expected life (years)....................................... 3 3
Dividend yields............................................. 0.0% 0.0%
</TABLE>
F-16
<PAGE> 34
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1999, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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 attributable to common
shares........................... $2,328 $1,572 $5,724 $5,231 $1,742 $1,029
Income per common share:
Basic............................ $ 0.64 $ 0.44 $ 1.61 $ 1.47 $ .50 $ .30
Diluted.......................... $ 0.60 $ 0.41 $ 1.57 $ 1.44 $ .48 $ .28
</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 1999, 1998 and 1997 is $5.43, $4.26, and $5.41, respectively.
14. NET INCOME 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, 1999.
F-17
<PAGE> 35
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR:
Net Income..................................... $4,640,000 $5,724,000 $1,685,000
Preferred stock dividends...................... (2,312,000) -- --
Redeemable Common Stock........................ -- -- 57,000
---------- ---------- ----------
Numerator for basic and diluted earnings per
share -- income (loss) available to common
stockholders................................. $2,328,000 $5,724,000 $1,742,000
========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share --
weighted average shares...................... 3,613,000 3,554,000 3,480,000
Effect of dilutive securities:
Warrants..................................... 58,000 -- --
Employee stock options....................... 206,000 99,000 177,000
---------- ---------- ----------
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions.................................. 3,877,000 3,653,000 3,657,000
========== ========== ==========
Basic earnings per share....................... $ 0.64 $ 1.61 $ .50
========== ========== ==========
Diluted earnings per share..................... $ 0.60 $ 1.57 $ .48
========== ========== ==========
</TABLE>
During any given quarter for the years ended December 31, 1999, 1998, and
1997 there were no more than 414,000, 388,000 and 175,000 options, respectively,
to purchase common stock with weighted average exercise prices of $14.38, $12.04
and $12.84, 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 and, therefore, the effect
would be antidilutive. The effect of converting 125,000 shares of preferred
stock into 1,322,751 shares of common stock is not included in the compution of
diluted earnings per share because the effect would be antidilutive.
In addition, during any given quarter for the year ended December 31, 1999
and 1998 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 and, therefore, the effect would be antidilutive.
Under Financial Accounting Standards Board Statement No. 128, Earnings Per
Share, when one or more quarters has a loss available to common stockholders,
the treasury stock method of computing earnings per share may yield diluted
earnings per share amounts for annual periods that do not equal the sum of the
individual quarter's diluted earnings per share amounts, as is the case for the
Company in 1999.
15. 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% of eligible compensation, depending on his or
her years of participation. The Company recorded an expense of $0.7 million,
$0.3 million and $0.3 million for the years ended December 31, 1999, 1998 and
1997, respectively, related to the matching contributions of the Plan.
F-18
<PAGE> 36
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company instituted an Employee Stock Purchase Plan during 1996. The
Employee Stock Purchase Plan allows full-time employees to elect to purchase
shares of Common Stock through voluntary automatic payroll deductions of up to
10% of his or her annual salary. Purchases of stock under the plan are made at
the end of two six month offering periods each year, one beginning on January 1
and one beginning on July 1. At the end of each six-month period, the employee's
contributions during that six-month period are used to purchase shares of Common
Stock from the Company at 85% of the fair market value of the Common Stock on
the first day of that six-month period. The employee may elect to discontinue
participation in the plan for future periods at the end of any six-month period.
16. 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 million
each occurrence and $3 million in the aggregate. In addition, the Company has
maintained excess liability insurance of $15 million for each claim and $15
million 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 million per claim and various aggregate limits
per policy year. The aggregate limit for policy years ended 1997 and 1996 was
$3.5 million and $3.3 million, respectively.
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. Amounts accrued were $4.1 million
and $2.4 million at December 31, 1999 and 1998, 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, 1999, represent management's best estimate of the amounts necessary
to discharge the Company's obligations.
In exchange for a one time premium to a third party insurance company, all
of the liabilities and obligations associated with the insurance policies
written by Harbour Insurance, a wholly owned captive insurance company of the
Company, open as of August 31, 1998 and relating to the periods as of December
1, 1997, were transferred to a third party insurance company. Harbour ceased
writing policies as of December 1, 1997. The Company has no continuing liability
for open cases disclosed on the loss run of Harbour as of August 31, 1998. The
Company's dissolution of Harbour resulted in no significant gain or loss to the
Company.
17. 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.
F-19
<PAGE> 37
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Future minimum annual lease payments at December 31, 1999 are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31:
2000........................................... $ 739,000
2001........................................... 675,000
2002........................................... 604,000
2003........................................... 468,000
2004........................................... 19,000
Thereafter..................................... --
----------
$2,505,000
==========
</TABLE>
Rental expense under operating leases was $1.2 million, $0.4 million and
$0.5 million for the years ended December 1999, 1998 and 1997, 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.
Catastrophic insurance premiums and recoveries, neither of which are
significant, are included in healthcare expenses. Receivables for insurance
recoveries, which are not significant, are included in accounts receivable.
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, 1999 and 1998. 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.
18. MAJOR CUSTOMERS AND GEOGRAPHICAL CONCENTRATIONS
The Company generally views its operating segments on a managed healthcare
contract basis. The Company considers its managed healthcare services contract
business to be one reportable segment under Financial Accounting Standards Board
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, as the economic characteristics, the nature of the services, and
type and class of customers for the services and the methods used to provide the
services are similar. Consequently, other than
F-20
<PAGE> 38
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
----------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
State of Indiana.......... $24,804,000 9.1% $23,968,00 21.2% $7,688,000 5.9%
State of Kansas........... 20,450,000 7.5 19,223,000 17.0 18,095,000 14.0
City of Philadelphia...... 10,174,000 3.7 17,966,000 15.9 17,865,000 13.8
County of Alameda......... 12,499,000 4.9 12,122,000 10.7 11,601,000 9.0
State of Georgia.......... -- -- 291,000 0.2 30,854,000 23.9
</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.
19. 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, which was
based on facts and circumstances obtained or occurring during the fourth quarter
of 1997, resulted from improvements in the Company's utilization management
processes, reducing the Company's claims exposure, favorable 1997 claim payment
experience, and a significant reduction in the total inmate population primarily
as a result of the termination of the Georgia Department of Corrections contract
at June 30, 1997. 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 $0.8 million increased basic and diluted earnings per share by
$.21.
F-21
<PAGE> 39
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, 1999
Allowance for doubtful accounts............ $ 20,000 $544,000 $ 144,000 $ 420,000
---------- -------- ---------- ----------
$ 20,000 $544,000 $ 144,000 $ 420,000
========== ======== ========== ==========
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
========== ======== ========== ==========
</TABLE>
F-22
<PAGE> 1
Exhibit 21.1
America Service Group Inc.
Prison Health Services, Inc.
EMSA Government Services, Inc.
EMSA Correctional Care, Inc.
EMSA Military Services, Inc.
EMSA Limited Partnership
Prison Health Services of Indiana, LLC
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the America Service Group Inc.
Registration Statements on Form S-8 (Registration Nos. 333-88649, 33-48231,
333-03010, 333-04903, 333-04895, 333-26903, 333-26905), of our report dated
February 11, 2000, which respect to the consolidated financial statements and
schedule of America Service Group Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1999.
Ernst & Young LLP
Nashville, Tennessee
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 444,000
<SECURITIES> 0
<RECEIVABLES> 40,158,000
<ALLOWANCES> (420,000)
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12,375,000
0
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</TABLE>
