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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001
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 51-0332317
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
105 WESTPARK DRIVE, SUITE 200 37027
BRENTWOOD, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 373-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 26, 2002 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $25,449,352. As of March 26, 2002, the registrant had
5,449,612 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 12, 2002 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"), EMSA Military Services, Inc. ("EMSA Military"),
Correctional Health Services, Inc. ("CHS") and Secure Pharmacy Plus, Inc.
("SPP"), contracts to provide managed healthcare services including the
distribution of pharmaceuticals to over 250 correctional facilities and military
installations throughout the United States. The Company is the leading provider
of healthcare services to county/municipal jails and detention centers. ASG was
incorporated in 1990 as a holding company for PHS. Unless the context otherwise
requires, the terms "ASG" or the "Company" refer to ASG and its direct and
indirect subsidiaries. ASG's executive offices are located at 105 Westpark
Drive, Suite 200, Brentwood, Tennessee 37027. Its telephone number is (615)
373-3100.
CORRECTIONAL HEALTHCARE SERVICES
The Company 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's revenues from correctional healthcare
services are generated primarily 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. The hospitalization and specialty
outpatient care is performed through subcontract arrangements with independent
doctors and local hospitals. For the year ended December 31, 2001, revenues from
correctional healthcare services accounted for 90% of the Company's total
revenues.
1
The following table sets forth information regarding ASG's correctional
contracts.
HISTORICAL
DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------ ------
Number of correctional contracts(1) ............... 145 130 106 35 32
Average number of inmates in all facilities covered
by correctional contracts(2) .................. 194,137 176,563 132,304 63,783 54,364
- ----------
(1) Indicates the number of contracts in force at the end of the period
specified and includes EMSA Military and SPP contracts since
acquisition.
(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 chronic 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 medical
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. Hospitalization is provided offsite at acute-care hospitals
under contract to the Company. 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. Necessary medications are
administered by nursing staff.
Medical services provided off-site include specialty outpatient
diagnostic testing and care, emergency room care, surgery and hospitalization.
In addition, ASG provides administrative support services on-site, at ASG's
headquarters and at regional offices. Administrative support services 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.
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.
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.
2
Contract Provisions. ASG's correctional contracts encompass a wide
range of compensation arrangements. Many contracts provide for a fixed annual
fee, payable monthly. Some of ASG's contracts provide for per diem price
adjustments based upon fluctuations in the size of inmate populations beyond a
specified range in addition to a fixed annual fee. Two healthcare service
contracts are cost plus fee arrangements, whereby the Company receives
reimbursement of allowable costs plus an agreed fee. Many contracts contain
risk-sharing arrangements, such as annual aggregate limits for off-site costs or
pharmaceutical costs and cost sharing of designated expenses. Most contracts
also provide for annual increases in the fixed fee based upon the regional
medical care component of the Consumer Price Index. In all other contracts that
extend beyond one year, ASG utilizes a projection of the future inflation rate
when bidding and negotiating the fixed fee for future years. ASG often bears the
risk of increased or unexpected costs, which could result in reduced profits or
cause it to sustain losses when costs are higher than projected and increased
profits when costs are lower than projected. Certain contracts also contain
financial penalties when performance or staffing criteria are not achieved.
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 through no fault of ASG.
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 system 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 system 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 doctors and nurses who are supported by
a medical director at the corporate level.
ASG has developed a variety of customized databases to facilitate and
improve operational review including (i) a claims management tracking system
that monitors current outpatient charges and inpatient stays, (ii) a
comprehensive cost review system that analyzes ASG's average costs per inmate at
each facility including pharmaceutical utilization and trend analysis available
from SPP and (iii) a daily operating report to manage 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, by the governmental agency,
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. The committees consider a number of factors, including the bid
price and the reputation of the bidder for providing quality care. The award of
a contract may be subject to formal or informal protest by unsuccessful bidders
through a governmental appeals process. If the committee does not award a
contract, the correctional agency will continue to provide healthcare services
to its inmates with its own personnel.
Many RFPs for significant contracts require the bidder to post a bid
bond. For those contracts that require performance bonds, the bonding
requirements may cover one year or up to the length of the contract and at
December 31, 2001, generally ranged between 25% and 100% of the 2001 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 confidential 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, monitors and analyzes relevant information on
potential jail and prison systems which meet predefined new business criteria.
Relevant factors considered include facility size, location, revenue and margin
potential and exposure to risk. ASG then devotes the necessary resources in
securing new business.
ASG is the leading provider of healthcare services to county/municipal
jails and detention centers. ASG will continue to focus its business
development efforts on these facilities where stabilization and treatment of
the population is the primary mission. ASG will also continue to monitor
opportunities at state prison systems, where in many cases, services are
provided to a larger system, with a more permanent population. Due to the more
permanent population at the state prison facilities, the primary mission shifts
to disease management and treatment.
3
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.
Management believes that the constitutional requirement to provide
healthcare to inmates, an increasing inmate population and medical Consumer
Price Index, along with the trend towards privatization of correctional
healthcare, present opportunities for revenue growth for the Company.
MILITARY HEALTHCARE 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 that period. During the
fiscal year ended December 31, 2001, EMSA Military provided services under seven
contracts. For the year ended December 31, 2001, revenues from military
contracts accounted for approximately 2% of the Company's total revenues.
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.
PHARMACEUTICAL DISTRIBUTION SERVICES
ASG, through its wholly-owned subsidiary SPP, contracts with federal,
state and local governments and certain private entities to distribute
pharmaceuticals and certain medical supplies to inmates of correctional
facilities. SPP utilizes three packaging and distribution centers to fill
prescriptions and ship pharmaceuticals to over 350 sites in 34 states covering
over 198,000 inmates.
SPP provides clinical pharmacy services in concert with their
systematic delivery process. SPP's clinical pharmacological management adds
therapeutic value to services as well as fiscal responsibility to its clients.
In addition, SPP's medical supply service creates additional value for its
clients, as the delivery mode on certain products is specific to the corrections
environment. SPP's contracts typically cover one year with renewals upon
agreement of both parties.
SPP is the largest provider of correctional pharmacy services in the
United States with 2001 revenues of approximately $91 million, $45 million of
which relates to services provided for ASG-contracted sites, which are
eliminated in consolidation. For the year ended December 31, 2001, revenues from
correctional pharmacy services, excluding revenues eliminated in consolidation,
accounted for approximately 8% of the Company's total revenues.
RISK MANAGEMENT
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
100% of ASG's exposure with respect to hospitalization for annual amounts in
excess of $500,000 per inmate up to an annual per inmate cap of $2.0 million.
ASG believes this insurance mitigates its exposure to unanticipated expenses of
catastrophic hospitalization.
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, 2001, ASG had approximately 7,200 employees,
including approximately 700 doctors and 3,400 nurses. ASG also had under
contract approximately 330 independent contractors, including physicians,
dentists, psychiatrists and psychologists. Of ASG's employees, approximately
1,300 are represented by labor unions. ASG believes that its employee relations
are good.
4
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. 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 primarily from contracts with federal, state, county and
local governmental agencies. The Company's Rikers Island, New York contract
accounted for approximately 15% of revenues in the year ended December 31, 2001.
No other contract accounted for 10% or more of revenues during the year ended
December 31, 2001.
ASG's correctional contracts often provide for a fixed annual fee
payable in monthly installments. Certain contracts, including some of ASG's
largest contracts, include provisions which mitigate a portion of the Company's
risk. Off-site utilization risk is mitigated in certain of the Company's
contracts through aggregate pools for off-site expenses, stop loss provisions,
cost plus fee arrangements or the entire exclusion of off-site service costs.
Pharmacy expense risk is similarly mitigated in certain of the Company's
contracts. Many contracts contain termination clause provisions which allow the
Company to terminate the contract under agreed upon notice periods. The ability
to terminate a contract serves to mitigate the Company's risk of increasing
cost of services being provided. Contracts accounting for approximately 88% of
revenues for the year ended December 31, 2001 contain one or more of the
risk-mitigating provisions.
Contracts accounting for approximately 40% of revenues for the year
ended December 31, 2001 contain no limits on ASG's exposure for treatment costs
related to catastrophic illnesses or injuries to inmates. Although the cost of
certain medicines are reimbursed in varying degrees under certain contracts,
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 100% of its
exposure with respect to catastrophic illnesses or injuries for annual amounts
in excess of $500,000 per inmate up to an annual per inmate cap of $2.0 million.
5
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 from
current expectations. Significant factors that could cause actual results to
differ materially are the following: losses from contracts that the Company
cannot terminate; changes in performance bonding requirements; the complexity of
and potential changes in government contracting procedures; the risk of
debarment or suspension from obtaining future contracts; and 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.
Dependence on Major Contracts. ASG's operating revenue is derived
almost 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
Company. 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 major contracts could have a
material adverse effect on ASG's business.
Privatization of Government Services, Competition and Correctional
Population. ASG's future revenue growth 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. Revenue growth could also be adversely affected
by material decreases in the inmate population of correctional facilities.
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. As the
private market for providing correctional healthcare matures, ASG's competitors
may gain additional experience in bidding and administering correctional
healthcare contracts. Competitors may use the additional experience to under bid
the Company. In addition, new competitors, some of whom may have extensive
experience in related fields or greater financial resources than ASG, may enter
the market.
Acquisitions. ASG's expansion strategy involves both internal growth
and, as opportunities become available, acquisitions. The Company took
significant steps toward implementing this strategy with the EMSA acquisition in
January 1999 and the acquisitions of CHS, SPP and certain assets of Correctional
Physician Services, Inc. ("CPS") during 2000. ASG previously had limited
experience acquiring businesses and integrating them into its operations;
however, the transitions of the recent acquisitions provide valuable frameworks
for future acquisition opportunities.
Exposure to Catastrophic Events. Contracts accounting for 40% of
revenues for the year ended December 31, 2001 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 100% of its exposure with respect to catastrophic
illnesses or injuries for annual amounts in excess of $500,000 per inmate up to
an annual per inmate cap of $2.0 million. ASG attempts to compensate for the
increased financial risk when pricing contracts that do not contain catastrophic
limits. The occurrence of severe individual cases without such limits could
render the contract unprofitable and could have a material adverse effect on
ASG's financial condition and results of operations.
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, Chairman, President and Chief
Executive Officer, Gerard F. Boyle, Executive Vice President and Chief
Development Officer, Bruce A. Teal, Executive Vice President and Chief Operating
Officer and Michael W. Taylor, Senior Vice President and Chief Financial
Officer, as well as certain other key personnel. ASG does not have an employment
contract with Richard D. Wright, Vice Chairman of Operations.
6
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 and more costly 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 vicariously liable, for the negligence of
healthcare professionals who are contracted to ASG. ASG mitigates its risk by
requiring its healthcare professionals to maintain professional liability
insurance policies. 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.
Dependence on Credit Facility. The Company's debt consists of a
revolving credit facility which was amended on March 15, 2002. The credit
facility requires the Company to meet certain financial covenants related to
minimum levels of net worth and earnings. The Company is dependent on the
availability of borrowings pursuant to this credit facility to meet its working
capital needs, capital expenditure requirements and other cash flow requirements
during 2002. Management believes the Company can remain in compliance with the
terms of the credit facility and meet its expected obligations throughout 2002.
However, should the Company fail to meet its projected results, it may be forced
to seek additional sources of financing in order to fund its working capital
needs.
ITEM 2. PROPERTIES
The Company occupies approximately 22,600 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 Franklin, Tennessee; Hanover and
Jessup, Maryland; Alameda, California; Topeka, Kansas; Fort Lauderdale, Florida;
Verona, New Jersey; Boise, Idaho; Indianapolis, Indiana; Queens and
Williamsville, New York; and Camp Hill, 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, 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.
7
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 26, 2002, there were approximately
57 registered 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, 2000 through December 31, 2001 are shown below:
QUARTER ENDED HIGH LOW
------------- -------- --------
March 31, 2000 ................................... $ 15.00 $ 13.00
June 30, 2000 .................................... 20.50 14.13
September 30, 2000 ............................... 26.00 17.13
December 31, 2000 ................................ 28.00 21.00
March 31, 2001 ................................... 28.23 21.25
June 30, 2001 .................................... 27.65 21.11
September 30, 2001 ............................... 25.69 5.55
December 31, 2001 ................................ 7.63 2.19
The Company did not pay cash dividends on the Common Stock during the
years ended December 31, 2001 and 2000. 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.
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Healthcare revenues ................................... $ 552,471 $ 381,946 $ 272,926 $ 113,287 $ 129,211
Income (loss) before income taxes ..................... (46,695) 13,310 7,731 5,099 1,786
Net income (loss) ..................................... (44,843) 7,807 4,640 5,724 1,685
Net income (loss) attributable to common shares ....... (45,006) 7,159 2,328 5,724 1,742
Net income (loss) per common share-- basic ............ (8.50) 1.86 0.64 1.61 0.50
Net income (loss) per common share-- diluted .......... (8.50) 1.40 0.60 1.57 0.48
Weighted average common shares outstanding - basic .... 5,292 3,854 3,613 3,554 3,480
Weighted average common shares outstanding - diluted .. 5,292 5,587 3,877 3,653 3,657
Cash dividends per share .............................. -- -- -- -- --
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to Consolidated Financial Statements describing
the financial impact for 2001 of charges related to goodwill impairment and loss
contracts, for 2000 due to the CPS, CHS and SPP acquisitions and for 1999 due to
the EMSA acquisition.
AS OF DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit)..................................... $ (3,826) $ 15,573 $ 9,498 $ 10,515 $ 257
Total assets.................................................. 158,294 161,402 98,727 28,375 27,754
Long-term debt, including current portion..................... 58,100 56,800 25,500 -- --
Mandatory redeemable preferred stock.......................... -- 12,397 12,375 -- --
Mandatory redeemable common stock............................. -- -- 1,842 1,842 1,842
Common stock, additional paid-in capital, stockholders' notes
receivable, accumulated other comprehensive loss and
retained earnings (deficit)................................. (3,554) 28,965 16,723 10,949 4,799
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon the its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including, but not limited to, those related to:
- revenue and cost recognition,
- loss contracts,
- professional and general liability insurance,
- legal contingencies,
- impairment of intangible assets and goodwill,
- income taxes.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue and Cost Recognition
The Company's contracts with correctional institutions are principally
fixed price contracts 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. The Company estimates this
medical claims reserve using an actuarial analysis prepared by an independent
actuary taking into account historical claims experience (including the average
historical costs and billing lag time for such services) and other actuarial
data.
While management believes that its estimation methodology effectively
captures trends in medical claims costs, actual payments and future reserve
requirements could differ significantly from the Company's current estimates if
significant adverse fluctuations occur in the healthcare cost structure or the
Company's future claims experience. Changes in estimates of claims resulting
from such fluctuations and differences between actuarial estimates and actual
claims payments are recognized in the period in which the estimates are changed
or the payments are made.
9
During the second quarter of 2001, the Company recorded changes in
accounting estimate charges of approximately $6 million to strengthen medical
claims reserves due to adverse development of prior years' medical claims
primarily as a result of updated information that indicated actual utilization
and cost data for inpatient and outpatient services were higher than the
historical levels previously used to estimate the reserve.
Loss Contracts
The Company accrues losses under its fixed price contracts when it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company performs this loss accrual analysis on a
specific contract basis taking into consideration such factors as future
contractual revenue, projected future healthcare and maintenance costs,
projected future stop-loss insurance recoveries and each contract's specific
terms related to future revenue increases as compared to increased healthcare
costs. The projected future healthcare and maintenance costs are estimated
based on historical trends and management's estimate of future cost increases.
These estimates are subject to the same adverse fluctuations and future claims
experience as previously noted. As discussed above, 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, while others do not
contain such provisions.
The Company performs an annual comprehensive review of its
portfolio of 145 contracts for the purpose of identifying loss contracts and
developing a contract loss reserve for succeeding years. As a result of the
2001 review, the Company identified five non-cancelable contracts with combined
2001 annual revenues of $59.7 million and negative gross margin of $4.7
million. Based upon management's projections, these contracts are expected to
continue to incur negative gross margin over their remaining terms. In December
2001, the Company recorded a charge of $18.3 million to establish a reserve for
future losses under these non-cancelable contracts. The five contracts covered
by the charge have expiration dates ranging from June 30, 2002 through June 30,
2005. Ninety percent of the charge relates to the State of Kansas contract,
which expires June 30, 2005, and the City of Philadelphia contract, which
expires June 30, 2004. The remaining liability covers the State of Maine
contract, which expires June 30, 2002, and two county contracts, which expire
August 15, 2002 and June 30, 2005.
Professional and General Liability Insurance
As a healthcare provider, the Company may become subject to medical
malpractice claims or lawsuits. The most significant source of potential
liability in this regard is the risk of suits brought by inmates alleging lack
of timely or adequate healthcare services. The Company may also be liable, as
employer, for the negligence of healthcare professionals it employs or the
healthcare professionals it engages as independent contractors. The Company's
contracts generally require it to indemnify the governmental agency for losses
incurred related to healthcare provided by the Company or its agents.
To mitigate a portion of this risk, in 2001, the Company 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, during
2001, the Company maintained excess liability insurance of $15 million for each
claim and $15 million annual aggregate. The Company also requires the healthcare
professionals it employs and its independent contractors to maintain
professional liability insurance. The Company assumes liabilities in excess of
these third-party insurance limits.
The Company records a liability for its estimated uninsured exposure to
reported and unreported professional liability claims based upon an independent
actuarial estimate of the cost of settling losses and projected loss adjustment
expenses using historical claims data, demographic factors, severity factors and
other actuarial assumptions. Reserves for medical malpractice exposures are
subject to fluctuations in frequency and severity of claims experience. The
reserves can also be affected by changes in the financial health of the
third-party insurance carriers used by the Company. Changes in estimates of
losses resulting from such fluctuations and differences between actuarial
estimates and actual loss payments are recognized in the period in which the
estimates are changed or payments are made.
As discussed in Note 6, during 2001, the Company increased its legal
reserves for professional and general liability claims by $1.9 million
primarily as a result of liquidation by certain insurance carriers who provided
coverage to the Company from 1992-1997.
10
Legal Contingencies
In addition to professional and general liability claims, the Company
is also subject to other legal proceedings in the ordinary course of business.
Such proceedings generally relate to labor, employment or contract matters. The
Company accrues an estimate of the probable costs for the resolution of these
claims. This estimate has been developed in consultation with outside counsel
handling the Company's defense in these matters and is based upon an estimated
range of potential results, assuming a combination of litigation and settlement
strategies. The Company does not believe these proceedings will have a material
adverse effect on its consolidated financial position. However, it is possible
that future results of operations for any particular quarterly or annual period
could be materially affected by changes in assumptions, new developments or
changes in approach such as a change in settlement strategy in dealing with such
litigation.
Impairment of Intangible Assets and Goodwill
Goodwill associated with the excess purchase price over the fair value
of assets acquired and other identifiable intangible assets, such as customer
contracts acquired in acquisitions and covenants not to compete, are currently
amortized on the straight-line method over their estimated useful lives.
The Company assesses the impairment of its identifiable intangibles and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Important factors taken into
consideration when evaluating the need for an impairment review include the
following:
- significant underperformance or loss of key contracts acquired
in an acquisition relative to expected historical or projected
future operating results;
- significant changes in the manner of use of the Company's
acquired assets or in the Company's overall business strategy;
- significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles and
related goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, any impairment is measured using an
estimate of the asset's fair value based on the projected net cash flows
expected to result from that asset, including eventual disposition. Future
events could cause the Company to conclude that impairment indicators exist and
that goodwill associated with its acquired businesses is impaired. Any
resulting impairment loss could have a material adverse impact on the Company's
financial condition and results of operations.
During 2001, the Company was notified that another vendor had been
selected to negotiate a contract to provide healthcare services for the Eastern
Region of the Pennsylvania Department of Corrections upon the expiration of the
Company's contract on December 31, 2002. The Company also anticipates that it
will cease operations under the contract with the Yonkers Region of the New York
Department of Correctional Services upon the expiration of the Company's
contract on May 31, 2002 as the healthcare services are to be assumed by the
client. These contracts represent substantially all of the operations acquired
in the acquisition of certain assets of CPS. Given these factors, in accordance
with FAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", the Company recorded a non-cash impairment
charge of approximately $13.2 million representing the excess net goodwill
recorded in connection with the aforementioned acquisition of certain assets of
CPS over the fair value of the two contracts. The Company estimated the fair
value of the contracts by calculating the net present value of estimated cash
flows during the remaining term of the contracts adjusted for certain other
factors.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, the
Company will cease to amortize approximately $44.6 million of goodwill. In lieu
of amortization, the Company will be required to perform impairment reviews of
goodwill on an annual basis, or more frequently if impairment indicators, such
as those discussed above, arise. Amortization expense related to goodwill in
2001 was $3,842.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The Company regularly reviews its deferred tax assets for
recoverability taking into consideration such factors as historical losses,
projected future taxable income and the expected timing of the reversals of
existing temporary differences. SFAS 109 requires the
11
Company to record a valuation allowance when it is "more likely than not that
some portion or all of the deferred tax assets will not be realized." It further
states "forming a conclusion that a valuation allowance is not needed is
difficult when there is negative evidence such as cumulative losses in recent
years." At December 31, 2001, a 100% valuation allowance has been recorded equal
to the deferred tax assets after considering deferred tax assets that can be
realized through offsets to existing taxable temporary differences. Assuming the
Company achieves sufficient profitability in future years to realize the
deferred income tax assets, the valuation allowance will be reduced in future
years through a credit to income tax expense (increasing shareholders' equity).
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.
YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE OF TOTAL REVENUES 2001 2000 1999
- ---------------------------- ----- ----- -----
Healthcare revenues................................................................... 100.0% 100.0% 100.0%
Healthcare expenses................................................................... 96.4 90.3 90.0
----- ----- -----
Gross margin.......................................................................... 3.6 9.7 10.0
Selling, general and administrative expenses.......................................... 3.5 3.6 4.5
Depreciation and amortization......................................................... 1.4 1.6 1.3
Impairment of long-lived assets....................................................... 2.4 -- --
Strategic initiative and severance expenses........................................... .4 -- --
Charge for loss contracts............................................................. 3.3 -- --
----- ----- -----
Income (loss) from operations......................................................... (7.4) 4.5 4.2
Interest, net......................................................................... 1.0 1.1 1.4
----- ----- -----
Income (loss) before income taxes..................................................... (8.4) 3.4 2.8
Provision for income taxes (benefit).................................................. (.3) 1.4 1.1
------ ----- -----
Net income (loss)..................................................................... (8.1) 2.0 1.7
Preferred stock dividends............................................................. -- 0.1 0.8
----- ----- -----
Net income (loss) attributable to common shares....................................... (8.1)% 1.9% 0.9%
===== ===== =====
2001 Compared to 2000
Healthcare revenues increased $170.6 million from $381.9 million in
2000 to $552.5 million in 2001, representing a 45% increase. Approximately $54.2
million of this increase relates to a full year of activity of CPS contracts,
CHS and SPP, all of which were acquired during 2000. The Company experienced
$23.1 million of revenue growth resulting from the first full year of operations
on contracts added in 2000 through marketing activities. The addition of the
Riker's Island contract, effective January 1, 2001, added approximately $81.2
million in additional revenue. In addition to the Riker's Island contract, the
Company added eleven new contracts during 2001 generating partial year revenues
of $31.6 million. For contracts in place throughout both 2001 and 2000, the
Company experienced $25.6 million, or 11.1%, of revenue growth from
contract renegotiations and automatic price adjustments. During 2001, revenues
were negatively impacted by the loss of contracts, some of which the Company
elected not to renew, resulting in a decrease in revenues of approximately $45.1
million from 2000 to 2001.
Healthcare expenses increased $187.9 million from $344.8 million in
2000 to $532.7 million in 2001, due mainly to the new contracts from both
acquisition and marketing activity. Healthcare expenses as a percentage of
revenues increased by 6.1% primarily due to increased use of temporary labor due
to continued labor shortages in certain geographic areas and increased use of
off-site healthcare and diagnostic services. Pharmaceutical costs increased from
7.9% to 9.5% of revenues from 2000 to 2001. Also included in healthcare
expenses for 2001 was a charge of $6.0 million recorded in the second quarter to
increase the Company's reserve for medical claims. This charge was primarily the
result of updated information showing actual utilization and cost data for
inpatient and outpatient services were higher than the historical levels on
which the Company's reserve had previously been based.
Selling, general and administrative expenses were $19.1 million or 3.5%
of revenue in 2001 compared to $13.8 million or 3.6% of revenue in 2000.
Included in selling, general and administrative expenses for 2001 were charges
to increase the Company's legal reserves by $1.9 million. These charges were
primarily required to reflect the Company's increased exposure to certain
outstanding cases previously covered by insurance carriers that are now in
liquidation. The percentage of revenue decrease in selling, general and
administrative expenses excluding these charges reflects the Company's continued
ability to leverage its corporate support services to a broader revenue base as
new contracts are added through acquisitions or marketing activity.
12
Depreciation and amortization expenses increased to $7.5 million or
1.4% of revenue in 2001 from $6.0 million or 1.6% of revenue in 2000. The
increase is primarily related to the first full year of amortization of goodwill
and other intangibles recorded in the 2000 acquisitions of CPS, CHS and SPP.
During the second quarter of 2001, the Company was notified that
another vendor had been selected to negotiate a contract to provide healthcare
services for the Eastern Region of the Pennsylvania Department of Corrections
upon the expiration of the Company's contract on December 31, 2002. The Company
also anticipates that it will cease operations under the contract with the
Yonkers Region of the New York Department of Correctional Services upon the
expiration of the Company's contract on May 31, 2002 as the healthcare services
are to be assumed by the client. Each of these contracts was acquired in the
Company's acquisition of certain assets of CPS in 2000. In the second quarter of
2001, the Company recorded a non-cash impairment charge of $13.2 million
representing the amount by which goodwill related to these contracts exceeded
the contract's fair value.
During 2001, the Company incurred $2.6 million of expenses related to
severance and a terminated strategic initiative.
During the fourth quarter of 2001, the Company completed an annual
comprehensive review of its portfolio of 145 contracts for the purpose of
identifying loss contracts and developing a contract loss reserve for succeeding
years. As a result of this review the Company identified five non-cancelable
loss contracts with combined annual revenues of $59.7 million and negative gross
margins of $4.7 million. The Company recorded a charge of $18.3 million to
establish a reserve for future losses under these non-cancelable contracts as of
December 31, 2001. The five contracts covered by the charge have expiration
dates ranging from June 30, 2002 through June 30, 2005. Ninety percent of the
charge relates to the State of Kansas contract, which expires June 30, 2005, and
the City of Philadelphia contract, which expires June 30, 2004. The remaining
liability covers the State of Maine contract, which expires June 30, 2002, and
two county contracts, which expire August 15, 2002 and June 30, 2005.
Net interest expense increased to $5.7 million or 1.0% of revenue in
2001 from $4.1 million or 1.1% of revenue in 2000.
The provision for income taxes was a benefit of $1.9 million in 2001
for an effective tax rate of 4%, a decrease from the 2000 effective tax rate of
41%. The decrease in the effective tax rate is due to the establishment of a
full valuation allowance related to the Company's deferred tax asset of
approximately $16.1 million.
2000 Compared to 1999
Healthcare revenues increased $109.0 million from $272.9 million in
1999 to $381.9 million in 2000, representing a 40% increase. Approximately $56.6
million of this increase relates to the acquisitions of CHS, SPP and certain
assets of CPS during 2000. Additionally, the Company added fourteen new
contracts generating revenues of $24.7 million in 2000 and experienced $37.7
million of revenue growth from existing contracts through contract
renegotiations, automatic price adjustments and from certain contracts being in
effect for the full year. Revenues were negatively impacted by the loss of
twelve contracts during 2000 resulting in a decrease in revenues of
approximately $10.0 million from 1999 to 2000.
The cost of healthcare increased $99.3 million from 1999 to 2000 due
mainly to the new contracts. Healthcare expenses as a percentage of revenues
increased by .3% primarily due to increased pharmaceutical costs and increased
temporary labor utilization due to labor shortages in certain geographic areas.
Pharmaceutical costs increased from 8.9% to 10.4% of revenues (excluding net
pharmaceutical sales) from 1999 to 2000. Temporary labor costs increased from
6.0% to 7.6% of revenues (excluding net pharmaceutical sales) from 1999 to
2000.
Selling, general and administrative expenses were $13.8 million or 3.6%
of revenue in 2000 compared to $12.3 million or 4.5% of revenue in 1999. The
percentage decrease reflects the Company's ability to leverage its corporate
support services to a broader revenue base with the contract gains from 2000
acquisitions and net marketing activity.
Depreciation and amortization expenses increased to $6.0 million or
1.6% of revenue in 2000 from $3.5 million or 1.3% of revenue in 1999. The
increase is primarily related to the goodwill, contract and non-compete
amortization expense related to the CPS, CHS and SPP acquisitions during 2000 of
approximately $1.8 million. Net interest expense increased to $4.1 million or
1.1% of
13
revenue in 2000 from $3.7 million or 1.4% in 1999. The percentage decrease
during 2000 resulted from the Company's ability to manage the additional
leverage required to finance the 2000 acquisitions.
The provision for income taxes was $5.5 million in 2000 for an
effective tax rate of 41%, an increase from the 1999 effective tax rate of 40%.
The increase in the effective tax rate is due to the non-deductibility of
certain intangible assets related to the CHS acquisition for tax purposes. The
preferred stock dividends of $.6 million relate to the redeemable preferred
stock and have decreased by $1.7 million from 1999 due to 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 during
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss attributable to common shares of $45.0
million and net income attributable to common shares of $7.2 million and $2.3
million for the years ended December 31, 2001, 2000 and 1999, respectively. The
Company had a stockholders' deficit of $3.6 million at December 31, 2001. The
Company's cash and cash equivalents increased to $10.4 million at December 31,
2001, an increase of $10.1 million over the cash and cash equivalents at
December 31, 2000 of $256,000. Cash flows from operating activities during 2001
were $11.0 million, an increase of $2.8 million over the cash provided from
operating activities in 2000 of $8.2 million. The increase is primarily the
result of increased accounts payable and accrued expenses.
The Company's debt consists of a revolving credit facility (the "Credit
Facility"). At December 31, 2001, the Company had $58.1 million outstanding
under the Credit Facility and approximately $50,000 available for future
borrowings. The Credit Facility was executed with a syndicate of three banks
(the "Lenders") with Bank of America, N.A. acting as the lead bank and
administrative agent.
On March 15, 2002, the Company executed an amendment to the Credit
Facility (the "Amended Credit Facility"). Beginning March 15, 2002, the
Company's borrowings under the Amended Credit Facility are limited to the lesser
of (1) the sum of eligible accounts and other receivables (as defined) plus an
intangible advance of up to $11.0 million ("Intangible Advances") or (2) $57.0
million (the "Maximum Commitment"). Interest under the Amended Credit Facility
is payable monthly at the Bank of America, N.A. prime rate plus 3.0% (5.0% for
balances due under Intangible Advances). The Amended Credit Facility matures on
April 1, 2003 and all amounts outstanding will be due and payable on such date.
In addition, the Company is required to make scheduled reductions in the
Intangible Advances allowed and the Maximum Commitment prior to that date. The
following table presents the Maximum Commitment and the maximum allowed
Intangible Advances (included within the Maximum Commitment) as of March 15,
2002 and each scheduled reduction date.
Maximum Intangible
Date Commitment Advances
------------------------ -------------- ------------
March 15, 2002 $ 57 million $ 11 million
July 1, 2002 57 million 10 million
September 1, 2002 56 million 10 million
October 1, 2002 55 million 9 million
December 1, 2002 54 million 9 million
February 1, 2003 53 million 9 million
March 1, 2003 52 million 9 million
The Amended Credit Facility is secured by substantially all of the
assets of the Company and its operating subsidiaries.
At December 31, 2001, the Company had standby letters of credit
outstanding totaling $3.4 million. The letters of credit were issued pursuant to
the Amended Credit Facility. The amount available to the Company for borrowing
under the Amended Credit Facility is reduced by the amount of each outstanding
standby letter of credit. Under the terms of the Amended Credit Facility, the
Company may have up to $6.6 million of standby letters of credit outstanding.
At December 31, 2001, the Company was not in compliance with certain
financial covenant requirements of the Credit Facility. In connection with the
execution of the Amended Credit Facility in March 2002, the Company obtained
waivers of these financial covenants. Subsequent to March 15, 2002, the Amended
Credit Facility will require the Company to meet certain financial covenants
related to minimum levels of shareholders' equity (deficit) and earnings.
Under the Amended Credit Facility, the Company will be required to
maintain minimum shareholders' equity (deficit) as of the end of any fiscal
quarter ending on or after the period specified below as follows:
Minimum Shareholders'
Period Equity (Deficit)
------ ---------------------
December 31, 2001 to March 30, 2002 $(4,000,000)
March 31, 2002 to June 29, 2002 (3,250,000)
June 30, 2002 to September 29, 2002 (2,500,000)
September 30, 2002 to December 30, 2002 (1,000,000)
December 31, 2002 to April 1, 2003 0
The Amended Credit Facility also requires the Company to achieve a
minimum level of cumulative EBITDA from January 1, 2002, through the end of
each month ending on each of the respective dates set forth below. The Amended
Credit Facility defines EBITDA to be the sum of consolidated net income, plus
interest expense, plus any provision for taxes based on income or profits that
was deducted in computing consolidated net income, plus depreciation,
amortization of intangible assets and other non-computing consolidated net
income, plus depreciation, amortization of intangible assets and other
non-recurring non-cash charges, which non-cash charges may not exceed $500,000
in any month or any fiscal quarter and $2 million in any Fiscal Year, less
amounts charged against the Company's reserve for loss contract.
Monthly Cumulative
Period Ending Minimum EBITDA
------------- --------------------
January 31, 2002 $ 350,000
February 28, 2002 1,500,000
March 31, 2002 1,800,000
April 30, 2002 2,450,000
May 31, 2002 2,775,000
June 30, 2002 3,600,000
July 31, 2002 4,275,000
August 31, 2002 5,300,000
September 30, 2002 6,800,000
October 31, 2002 7,950,000
November 30, 2002 9,200,000
December 31, 2002 10,000,000
After December 31, 2002, the Company will be required to achieve a
minimum monthly EBITDA of $500,000. The Amended Credit Facility also contains
restrictions on the Company with respect to certain types of transactions
including payment of dividends, capital expenditures, indebtedness and sales or
transfers of assets.
14
Under the terms of the Amended Credit Facility, if any Amended Credit
Facility obligations remain outstanding at December 31, 2002, the Company will
be required to issue the Lenders warrants to purchase common shares equal to a
5.0% interest in the Company's outstanding common stock. The number of warrants
required to be issued will be reduced to a 2.5% interest if the balance
outstanding under the Amended Credit Facility does not exceed $45 million, there
are no outstanding Intangible Advances and the Company is not in default with
the terms of the Amended Credit Facility. The exercise price of the warrants
will be $.01 per share.
The Company is dependent on the availability of borrowings pursuant to
the Amended Credit Facility to meet its working capital needs, capital
expenditure requirements and other cash flow requirements. Management believes
that the Company can remain in compliance with the terms of the Amended Credit
Facility and meet its expected obligations throughout 2002. However, should the
Company fail to meet its projected results, it may be forced to seek additional
sources of financing in order to fund its working capital needs.
On February 5, 2001, the Company completed the conversion of 12,500
shares of Series A Convertible Preferred Stock, having an aggregate liquidation
preference of $12.5 million, into 1,322,751 shares of common stock. The Company
registered the shares of common stock issued upon conversion of the preferred
stock and warrants to purchase an additional 135,000 shares of common stock.
INFLATION
Some of the Company's contracts provide for annual increases in the
fixed base fee based 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, the excess costs 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended in June 2000 by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which requires the
Company to recognize all derivatives as assets or liabilities measured at fair
value. Changes in fair value are recognized through either earnings or other
comprehensive income dependent on the effectiveness of the hedge instrument. The
Company currently maintains three interest collar agreements with three of its
syndicate banks for a notional amount of $24 million. The collar agreements
expire between October 2002 and May 2003.
On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting
in a charge to other comprehensive income of approximately $212,000 net of tax,
as the cumulative effect of a change in accounting principle representing the
fair value of the collar agreements on the date of adoption (see Note 11).
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.
The Company adopted the provisions of SFAS No. 141 on July 1, 2001.
Such adoption had no effect on the Company's financial position or results of
operations. The Company will be required to adopt the provisions of SFAS No. 142
effective January 1, 2002, at which time the amortization of the Company's
existing goodwill will cease. Other than the effect on net income of not
amortizing goodwill, management believes the adoption of SFAS No. 142 will not
have a significant effect on the Company's results of operations or financial
position. As of December 31, 2001, the Company has unamortized goodwill in the
amount of approximately $44.6 million which will be subject to the transition
provisions of SFAS 142. Amortization expense related to goodwill during 2001 was
approximately $3.8 million or $0.70 per share, net of tax using the Company's
effective tax rate for 2001 of 4%.
15
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective for fiscal years
beginning after December 15, 2001. SFAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Company does not believe
the 2002 adoption of SFAS 144 will have a material impact on its financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest expense represents 1.0% and 1.1% of the Company's revenues for
2001 and 2000, respectively. Long-term debt of $58.1 million at December 31,
2001 represents 36.7% of the Company's total liabilities and stockholders'
equity (deficit). The Credit Facility requires the Company to protect its
operating results from increases in interest rates. The Company, therefore,
hedged its interest risk related to $30 million of the total borrowing capacity
available under the Credit Facility by entering into four separate interest rate
collar agreements with three of its syndicate banks for notional amounts ranging
from $6 million to $9 million. One of these collar agreements expired on May 24,
2001, leaving notional amounts totaling $24 million outstanding on the remaining
agreements at December 31, 2001, which expire between October 2002 and March
2003. These collar agreements, establish floors and ceilings on the 90-day LIBO
rate in order to reduce the volatility of the Company's interest rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the
report thereon of Ernst & Young LLP, dated February 20, 2002, except for Note
10, as to the which the date is March 15, 2002, begin on page F-1 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no disagreements with accountants on accounting and financial
disclosure required to be reported in this annual report pursuant to Item 304 of
Regulation S-K.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the Directors and Executive Officers 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 2002 Annual Meeting of Stockholders to be held on June 12 ,
2002 (the "Company's 2002 Proxy Statement") and the accompanying text are
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 2002 Proxy Statement and the accompanying text 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 2002 Proxy Statement and
the accompanying text are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The heading "Certain Transactions" in the Company's 2002 Proxy
Statement and the accompanying text is incorporated hereby by reference.
17
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
EXHIBIT DESCRIPTION
- --------- -----------
2.1 -- 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).
2.2 -- 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).
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 -- 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 -- 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 Warrant, dated as of January 26,
1999 and amended and restated on July 2, 1999,
issued by the Company to Health Care Capital
Partners L.P. (incorporated herein by reference to
Exhibit 10.2.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
18
10.2 -- Amended and Restated Warrant, dated as of January 26,
1999 and amended and restated on July 2, 1999, issued
by the Company to Health Care Executive Partners
L.P. (incorporated herein by reference to
Exhibit 10.3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.3 -- 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).
10.4 -- 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).
10.5 -- 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).
10.6 -- Asset Purchase Agreement, dated as of March 29, 2000,
between the Company and Correctional Physician
Services, Inc., Kenan Umar and Emre Umar, Consent
and Agreement, as amended by Amendment One to Asset
Purchase Agreement, dated as of March 29, 2000.
(incorporated herein by reference to Exhibit 2.8 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.7 -- Stock Purchase Agreement, dated as of April 24, 2000,
between the Company and the Shareholders of
Correctional Health Services, Inc. (incorporated
herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on July 14, 2000).
10.8 -- Asset Purchase Agreement, dated September 20, 2000,
by and among Secure Pharmacy Plus, Inc.; Stadtlander
Operating Company L.L.C.; Stadtlander Licensing
Company, LLC; Stadtlander Drug of California, LP
and Stadtlander Drug of Hawaii, LP (incorporated
herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on October 4, 2000).
10.9 -- Amended and Restated Employment Agreement, dated
September 1, 1998, between Michael Catalano and the
Company (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
three month period ending September 31, 1998).
10.10 -- 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).
10.11 -- 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
10.15 -- Employment Agreement, dated October 10, 2000,
between S. Walker Choppin and the Company.
(incorporated herein by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- Amended and Restated Credit Agreement, dated as of
August 1, 2000, between the Company as Borrower,
the Company's subsidiaries as listed therein, as
Guarantors, the Lenders identified therein and Bank
of America, N.A., as Administrative Agent and as
Issuing Bank. (incorporated herein by reference to
Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
19
10.20 -- Overline Agreement, dated September 19, 2000, among
the Company, the Company's Subsidiaries, who are
parties to the Credit Agreement, the lenders who are
party to the Credit Agreement, and Bank of America,
N.A. (incorporated herein by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.21 -- Waiver No. 1, dated July 25, 2001, to Amended and
Restated Credit Agreement, as of August 1, 2000, by
and among the Company, the subsidiaries of the
Company who are parties to the Credit Agreement, the
several lenders who are now or hereafter become
parties to the Credit Agreement, and Bank of America,
N.A., a national banking association, individually
and as administrative agent of the lenders
(incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
three month period ended June 30, 2001).
10.22 -- Amendment No. 1 to Amended and Restated Credit
Agreement, dated August 27, 2001, by and among the
Company, the subsidiaries of the Company who are
parties to the Credit Agreement, the several lenders
who are now or hereafter become parties to the Credit
Agreement, and Bank of America, N.A., a national
banking association, individually and as
administrative agent of the lenders (incorporated
herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.23 -- Contract between the Company and healthprojects, LLC
dated September 17, 2001, to perform services as
directed by ASG management (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the three month period ended
September 30, 2001).
10.24 -- Employment Agreement, dated October 15, 2001, with
Michael W. Taylor as Senior Vice President and Chief
Financial Officer of the Company (incorporated herein
by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.25 -- Waiver and Second Amendment To Amended and Restated
Credit Agreement dated November 13, 2001, by and
among the Company, the subsidiaries of the Company
who are parties to the Credit Agreement, the several
lenders who are now or hereafter become parties to
the Credit Agreement, and Bank of America, N.A., a
national banking association, individually and as
administrative agent of the lenders (incorporated
herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.26 -- Amendment No. 3 to Amended and Restated Credit
Agreement, dated March 15, 2002, by and among the
Company, the subsidiaries of the Company who are
parties to the Credit Agreement, the several lenders
who are now or hereafter become parties to the Credit
Agreement, and Bank of America, N.A., a national
banking association, individually and as
administrative agent of the lenders.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
(b) Reports on Form 8-K
None.
20
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 28, 2002.
AMERICA SERVICE GROUP INC.
By: /s/ MICHAEL CATALANO
--------------------------------------
Michael Catalano
Chairman, 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 28, 2002.
SIGNATURES TITLE
- ---------- -----
/s/ MICHAEL CATALANO Chairman, President and Chief Executive Officer
- -----------------------------------------------------
Michael Catalano
/s/ MICHAEL W. TAYLOR Senior Vice President and Chief Financial Officer
- -----------------------------------------------------
Michael W. Taylor
/s/ WILLIAM D. EBERLE Director
- -----------------------------------------------------
William D. Eberle
/s/ BURTON C. EINSPRUCH Director
- -----------------------------------------------------
Burton C. Einspruch
/s/ DAVID A. FREEMAN Director
- -----------------------------------------------------
David A. Freeman
/s/ CAROL R. GOLDBERG Director
- -----------------------------------------------------
Carol R. Goldberg
/s/ RICHARD M. MASTALER Director
- -----------------------------------------------------
Richard M. Mastaler
/s/ JEFFREY L. MCWATERS Director
- -----------------------------------------------------
Jeffrey L. McWaters
/s/ RICHARD D. WRIGHT Vice Chairman of Operations
- -----------------------------------------------------
Richard D. Wright
21
AMERICA SERVICE GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................................ F-2
Consolidated Balance Sheets at December 31, 2001 and 2000................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999............................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31,
2001, 2000 and 1999..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999................................ 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,
2001, 2000 and 1999..................................................................................................... F-22
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
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, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2001. 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, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, 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.
As described in Note 2 to the consolidated financial statements, America
Service Group Inc. changed its method of accounting for derivative financial
instruments.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 20, 2002, except for Note 10,
as to which the date is March 15, 2002.
F-2
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2001 2000
------------ ------------
(SHOWN IN 000'S EXCEPT SHARE AND
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 10,382 $ 256
Accounts receivable: healthcare and other less allowances of $344
and $205 at December 31, 2001 and 2000, respectively................................. 64,691 64,053
Inventories............................................................................ 7,747 7,497
Prepaid expenses and other current assets.............................................. 6,984 1,427
Current deferred taxes................................................................. -- 1,143
------------ ------------
Total current assets..................................................................... 89,804 74,376
Property and equipment, net.............................................................. 7,827 8,651
Goodwill, net............................................................................ 44,566 61,358
Contracts, net........................................................................... 13,242 14,002
Other intangibles, net................................................................... 1,683 1,925
Other assets............................................................................. 1,172 1,090
------------ ------------
Total assets............................................................................. $ 158,294 $ 161,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................................... $ 31,159 $ 21,664
Medical claims liability............................................................... 15,238 11,285
Accrued expenses....................................................................... 28,062 24,213
Deferred revenue....................................................................... 4,161 1,641
Current portion of loss contract reserve............................................... 4,310 --
Current portion of long-term debt...................................................... 10,700 --
------------ ------------
Total current liabilities................................................................ 93,630 58,803
Noncurrent portion of accrued expenses................................................... 6,810 3,680
Noncurrent portion of loss contract reserve.............................................. 14,008 --
Deferred taxes........................................................................... -- 757
Long-term debt, net of current portion................................................... 47,400 56,800
------------ ------------
Total liabilities........................................................................ 161,848 120,040
Commitments and contingencies
Mandatory redeemable preferred stock, 500,000 shares authorized;
125,000 shares issued and outstanding at December 31, 2000............................. -- 12,397
Common stock, $.01 par value, 10,000,000 shares authorized; 5,437,000 and
4,057,000 shares issued and outstanding at December 31, 2001 and 2000,
respectively.......................................................................... 54 41
Additional paid-in capital............................................................... 31,377 18,259
Stockholders' notes receivable........................................................... (1,383) (1,384)
Accumulated other comprehensive loss..................................................... (645) --
Retained earnings (deficit).............................................................. (32,957) 12,049
------------ ------------
Total liabilities and stockholders' equity (deficit)..................................... $ 158,294 $ 161,402
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
F-3
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
(SHOWN IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
2001 2000 1999
------------ ------------ ------------
Healthcare revenues............................................ $ 552,471 $ 381,946 $ 272,926
Healthcare expenses............................................ 532,739 344,759 245,485
------------ ------------ ------------
Gross margin................................................. 19,732 37,187 27,441
Selling, general, and administrative expenses.................. 19,063 13,838 12,335
Depreciation and amortization.................................. 7,535 5,962 3,545
Impairment of long-lived assets................................ 13,236 -- --
Strategic initiative and severance expenses.................... 2,562 -- --
Charge for loss contracts...................................... 18,318 -- --
------------ ------------ ------------
Income (loss) from operations................................ (40,982) 17,387 11,561
Interest, net.................................................. 5,713 4,077 3,830
------------ ------------ ------------
Income (loss) before income taxes............................ (46,695) 13,310 7,731
Income tax provision (benefit)................................. (1,852) 5,503 3,091
------------- ------------ ------------
Net income (loss)............................................ (44,843) 7,807 4,640
Preferred stock dividends...................................... 163 648 2,312
------------- ------------- -------------
Net income (loss) attributable to common shares................ $ (45,006) $ 7,159 $ 2,328
============ ============ ============
Net income (loss) per common share:
Basic........................................................ $ (8.50) $ 1.86 $ 0.64
============ ============ ============
Diluted...................................................... $ (8.50) $ 1.40 $ 0.60
============ ============ ============
Weighted average common shares outstanding:
Basic........................................................ 5,292,000 3,854,000 3,613,000
============ ============ ============
Diluted...................................................... 5,292,000 5,587,000 3,877,000
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(SHOWN IN 000'S EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------------- PAID-IN NOTES
SHARES AMOUNT CAPITAL RECEIVABLES
------------ ------------ ------------ -------------
BALANCE AT JANUARY 1, 1999................. 3,573,000 $ 36 $ 8,351 --
Issuance of common stock under employee
stock plan............................... 26,000 -- 310 --
Exercise of options and related
tax benefits............................. 55,000 -- 519 --
Issuance of common stock under incentive
stock plan............................... 75,000 1 1,075 (1,039)
Issuance of common stock warrants.......... -- -- 659 --
Noncash, nonrecurring dividend on
redeemable preferred stock -- beneficial
conversion feature....................... -- -- 1,942 --
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable................................ -- -- -- (21)
Net income................................. -- -- -- --
---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1999............... 3,729,000 $ 37 $ 12,856 $ (1,060)
Issuance of common stock under employee
stock plan............................... 38,000 1 615 --
Exercise of options and related
tax benefits............................. 274,000 3 2,646 --
Issuance of common stock under incentive
stock plan............................... 16,000 -- 300 (263)
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable............................... -- -- -- (61)
Expiration of redemption feature of
redeemable common stock.................... -- -- 1,842 --
Net income................................. -- -- -- --
---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 2000............... 4,057,000 $ 41 $ 18,259 $ (1,384)
Unrealized loss on interest rate collar
agreements............................... -- -- -- --
Net loss................................... -- -- -- --
Total comprehensive loss .............
Cumulative effect of change in accounting
principle................................ -- -- -- --
Issuance of common stock under employee
stock plan................................ 9,000 -- 35 --
Exercise of options and related tax benefits 42,000 -- 509 --
Issue of common stock under incentive stock
plan..................................... 6,000 -- 87 --
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable................................ -- -- -- (80)
Proceeds from stockholders' notes receivable -- -- -- 81
Conversion of mandatory redeemable preferred
stock.................................... 1,323,000 13 12,487 --
---------- ---------- ----------- ------------
BALANCE AT DECEMBER 31, 2001............... 5,437,000 $ 54 $ 31,377 $ (1,383)
========== ========== =========== ============
RETAINED OTHER
EARNINGS COMPREHENSIVE
(DEFICIT) LOSS TOTAL
------------ -------------- -----------
BALANCE AT JANUARY 1, 1999................. $ 2,562 -- $ 10,949
Issuance of common stock under employee
stock plan............................... -- -- 310
Exercise of options and related
tax benefits............................. -- -- 519
Issuance of common stock under incentive
stock plan............................... -- -- 37
Issuance of common stock warrants.......... -- -- 659
Noncash, nonrecurring dividend on
redeemable preferred stock -- beneficial
conversion feature....................... (1,942) -- --
Dividends on redeemable preferred stock.... (370) -- (370)
Interest income on stockholders' notes -- -- (21)
receivable...............................
Net income................................. 4,640 -- 4,640
----------- ----------- ----------
BALANCE AT DECEMBER 31, 1999............... $ 4,890 -- $ 16,723
Issuance of common stock under employee
stock plan............................... -- -- 616
Exercise of options and related
tax benefits............................. -- -- 2,649
Issuance of common stock under incentive
stock plan............................... -- -- 37
Dividends on redeemable preferred stock.... (648) -- (648)
Interest income on stockholders' notes
receivable............................... -- -- (61)
Expiration of redemption feature of
redeemable common stock.................. -- -- 1,842
Net income................................. 7,807 -- 7,807
----------- ----------- ----------
BALANCE AT DECEMBER 31, 2000............... $ 12,049 -- $ 28,965
Unrealized loss on interest rate collar
agreements............................... -- (433) (433)
Net loss................................... (44,843) -- (44,843)
----------
Total comprehensive loss ............. (45,276)
Cumulative effect of change in accounting
principle................................ -- (212) (212)
Issuance of common stock under employee
stock plan................................ -- -- 35
Exercise of options and related tax benefits -- -- 509
Issue of common stock under incentive stock
plan..................................... -- -- 87
Dividends on redeemable preferred stock.... (163) -- (163)
Interest income on stockholders' notes
receivable................................ -- -- (80)
Proceeds from stockholders' notes receivable -- -- 81
Conversion of mandatory redeemable preferred
stock.................................... -- -- 12,500
----------- ------------ -----------
BALANCE AT DECEMBER 31, 2001............... $ (32,957) $ (645) $ (3,554)
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------- ------------- ------------
(AMOUNTS SHOWN IN 000'S)
OPERATING ACTIVITIES
Net income (loss)........................................................... $ (44,843) $ 7,807 $ 4,640
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................. 7,535 5,962 3,545
Finance cost amortization................................................. 952 232 121
Accretion of subordinated notes........................................... -- -- 534
Impairment of long-lived assets........................................... 13,236 -- --
Charge for loss contracts................................................. 18,318 -- --
Interest on stockholders' notes receivable................................ (80) (61) (21)
Deferred income tax provision............................................. 817 1,464 2,220
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable..................................................... (638) (22,397) 13,475
Prepaid expenses and other current assets............................... (5,807) 2,533 (5,544)
Other assets............................................................ (27) 4 216
Accounts payable........................................................ 9,495 9,481 9,093
Accrued expenses........................................................ 9,570 2,412 (5,525)
Deferred revenue........................................................ 2,520 750 891
------------- ------------- -------------
Net cash provided by operating activities......................... 11,048 8,187 23,645
------------- ------------- -------------
INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired............................ -- (38,669) (66,077)
Capital expenditures........................................................ (1,867) (3,089) (1,910)
Other....................................................................... -- -- (400)
------------- ------------- ------------
Net cash used in investing activities............................. (1,867) (41,758) (68,387)
------------- ------------- ------------
FINANCING ACTIVITIES
Net borrowings on line of credit............................................ 1,300 31,300 25,500
Proceeds from subordinated notes............................................ -- -- 15,000
Finance costs............................................................... (1,006) (751) (520)
Proceeds from mandatory redeemable preferred stock.......................... -- -- 5,000
Payment of mandatory redeemable preferred stock dividends................... (61) (468) (370)
Payment on subordinated notes............................................... -- -- (7,500)
Proceeds from stockholder note receivable................................... 81 -- --
Issuance of common stock.................................................... 35 653 346
Exercise of stock options................................................... 596 2,649 519
------------ ------------ ------------
Net cash provided by financing activities......................... 945 33,383 37,975
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........................ 10,126 (188) (6,767)
Cash and cash equivalents at beginning of year.............................. 256 444 7,211
------------ ------------ ------------
Cash and cash equivalents at end of year.................................... $ 10,382 $ 256 $ 444
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................................... $ 5,194 $ 3,423 $ 3,355
============ ============ ============
Cash paid for income taxes.................................................. $ 1,948 $ 4,870 $ 639
============ ============ ============
NONCASH TRANSACTIONS
Conversion of subordinated notes to mandatory redeemable
preferred stock........................................................... $ -- $ -- $ 7,370
=========== ============ ===========
Conversion of mandatory redeemable preferred stock to common stock.......... $ 12,500 $ -- $ --
=========== ============ ===========
Discount on subordinated notes for stock warrants issued.................... $ -- $ -- $ 659
=========== ============ ===========
Non-recurring dividend on mandatory redeemable preferred stock.............. $ -- $ -- $ 1,942
=========== ============ ===========
Issuance of common stock under Incentive Plan for stockholders'
notes receivable.......................................................... $ -- $ 263 $ 1,039
=========== ============ ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(SHOWN IN 000'S EXCEPT INMATE, SHARE AND PER SHARE AMOUNTS)
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, certain private entities 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., EMSA
Correctional Care, Inc. and EMSA Military Services, Inc., Correctional Health
Services, Inc. and Secure Pharmacy Plus, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted 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, loss contract reserves 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 (see Note 6).
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments reported in
the Consolidated Balance Sheets, consisting of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt, 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 and included in accrued expenses and noncurrent portion of
accrued expenses on the accompanying Consolidated Balance Sheets.
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 (see Note 5).
F-7
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
when purchased. The Company maintains its cash and cash equivalent balances
primarily with one high credit quality financial institution. The Company
manages its credit exposure by placing its investments in high quality
securities and by periodically evaluating the relative credit standing of the
financial institution.
Accounts Receivable
Accounts receivable represent amounts due from state and local
governments and certain private entities for healthcare services provided by
the Company and pharmaceutical sales of the Company.
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 the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Intangible Assets
The unamortized excess of the costs of acquisitions over the fair value
of the net tangible assets received at the date of acquisition include
contracts, non-compete agreements and goodwill. Goodwill amortization expense of
$3,842, $3,387 and $1,654 for 2001, 2000, 1999, respectively, was computed using
the straight-line method over periods from 10 to 20 years. Contract amortization
expense of $760, $676 and $522 for 2001, 2000 and 1999, respectively, was
computed using the straight-line method over 20 years as determined by an
independent appraisal. Amortization of the non-compete agreements is calculated
over the term of the related agreements (2 to 10 years) and approximates $242,
$317 and $158 for the years ended December 31, 2001, 2000 and 1999,
respectively. As of December 31, 2001, accumulated amortization of goodwill,
contracts and non-compete agreements are $6,808, $1,958 and $717, respectively.
As of December 31, 2000, accumulated amortization of goodwill, contracts and
non-compete agreements are $5,041, $1,198 and $475, respectively.
Other Assets
Other assets include $2,276 of deferred financing costs related to the
$65 million syndicated credit facility and previous versions thereof (see Note
10). Amortization of $952, $232 and $121, for the years ended December 31, 2001,
2000 and 1999, respectively, related to the deferred financing costs is computed
using the straight-line method over the remaining life of the syndicated credit
facility and is included in interest expense on the accompanying Consolidated
Statements of Operations. Accumulated amortization as of December 31, 2001 and
2000 was $1,302 and $353, respectively.
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and intangible assets and
considers events, circumstances and operating results, including consideration
of contract performance at the fixed price contract level, to determine if
impairment exists. If long-lived assets are deemed impaired, management adjusts
the asset value to fair value (see Note 4).
F-8
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
(See also Note 13).
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the fiscal years
in which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on the deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Strategic Initiative and Severance Expenses
During 2001, the Company incurred certain strategic initiative
expenses. This initiative was discontinued in the third quarter of 2001.
Additionally, during the third quarter of 2001, the Company incurred severance
expenses related to staffing reductions.
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 Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended in June 2000 by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which requires the
Company to recognize all derivatives as assets or liabilities measured at fair
value. Changes in fair value are recognized through either earnings or other
comprehensive income dependent on the effectiveness of the hedge instrument. The
Company currently maintains three interest collar agreements with three of its
syndicate banks for a notional amount of $24,000. The collar agreements expire
between October 2002 and May 2003.
On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting
in a charge to other comprehensive income of approximately $212, net of tax, as
the cumulative effect of a change in accounting principle representing the fair
value of the collar agreements on the date of adoption (see Note 11).
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.
The Company adopted the provisions of SFAS No. 141 on July 1, 2001.
Such adoption had no effect on the Company's financial position or results of
operations. The Company will be required to adopt the provisions of SFAS No. 142
effective January 1, 2002, at which time the amortization of the Company's
existing goodwill will cease. Other than the effect on net income of not
amortizing goodwill, management believes the adoption of SFAS No. 142 will not
have a significant effect on the Company's results of
F-9
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operations or financial position. As of December 31, 2001, the Company has
unamortized goodwill in the amount of $44,566 which will be subject to the
transition provisions of SFAS 142. Amortization expense related to goodwill
during 2001 was $3,842.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective for fiscal years
beginning after December 15, 2001. SFAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. Management does not believe
the adoption of SFAS 144 will have a material impact on the Company's financial
position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified in order to conform
to current period presentation.
3. ACQUISITIONS
2000 Acquisitions
On September 20, 2000, the Company acquired certain assets of
Stadtlanders Corrections Division, a subsidiary of Bergen Brunswig, Inc. and a
pharmacy company, for $7,900 in cash. The pharmacy division is operated as a
subsidiary of ASG under the name Secure Pharmacy Plus, Inc. ("SPP"). As of the
acquisition date, SPP serviced over 300,000 inmates in 41 states. SPP's sales to
PHS are eliminated in consolidation.
Effective June 1, 2000, the Company acquired the stock of Correctional
Health Services, Inc. ("CHS") for $16,662 in cash, net of $338 of cash received.
The purchase price was financed by advances pursuant to the Company's then
existing Senior Credit Facility, which was increased in connection with the
acquisition. As of the acquisition date, CHS serviced nineteen contracts and
provided healthcare services to approximately 12,000 inmates.
On March 29, 2000, the Company acquired the Pennsylvania and New York
assets of Correctional Physician Services, Inc. ("CPS") for $14,000 in cash. CPS
assigned its contracts for the Eastern Region of the Pennsylvania Department of
Corrections and the Yonkers Region of the New York Department of Correctional
Services to PHS. CPS is a privately held company with headquarters in Blue Bell,
Pennsylvania. Combined, the Pennsylvania and New York operations of CPS provided
services to approximately 21,000 inmates and had approximately $41,000 in
revenue during 1999. Approximately $1,800 of the cash purchase price was placed
in escrow for payment of a portion of the seller's liability under a contract
cost sharing provision. In 2001, the liability was paid using the escrowed cash.
The 2000 acquisitions were financed under the Company's then existing
credit facilities or expansions thereof (see Note 10). The acquisitions were
accounted for using the purchase method of accounting and results of operations
of the acquired entities or contracts have been included in the accompanying
Consolidated Statements of Operations from the respective acquisition dates.
1999 Acquisitions
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 $63,400 in cash, net of a $3,600 working capital
payment from InPhyNet. InPhyNet was a wholly owned subsidiary of MedPartners,
Inc. ("MedPartners"). As of the acquisition date, EMSA and its subsidiaries
provided comprehensive managed healthcare solutions to approximately 70,000
inmates housed in state and local correctional facilities and provided emergency
medicine and primary healthcare services to active and retired military
personnel and their dependents at medical facilities operated by the U.S.
Department of Defense and the Veterans Administration.
The EMSA acquisition was financed using funds available under the
Company's credit facilities and the issuance of subordinated convertible bridge
notes and mandatory redeemable preferred stock. The EMSA acquisition was
accounted for using the purchase method of accounting and results of operations
of the acquired entity have been included in the accompanying Consolidated
Statements of Operations from the acquisition date.
F-10
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The 2000 and 1999 acquisitions are summarized as follows:
EMSA CPS CHS SPP TOTAL
---------- ---------- --------- ------------- ---------
Fair value of net operating assets acquired
(liabilities assumed).......................... $ 19,000 $ (2,200) $ (600) $ 4,500 $ 20,700
Fair value of contracts acquired................ 11,200 -- 4,000 -- 15,200
Non-compete agreements.......................... 400 -- 2,000 -- 2,400
Goodwill........................................ 35,500 16,200 11,300 3,400 66,400
---------- ---------- --------- ------------- ---------
Cost of acquisitions (net of cash acquired).... $ 66,100 $ 14,000 $ 16,700 $ 7,900 $ 104,700
========== ========== ========= ============= =========
The following unaudited pro forma results of operations give effect to
the operations of EMSA, CHS, CPS and SPP as if the acquisitions had occurred at
the beginning of the year of acquisition and the beginning of the immediately
preceding year.
2000 1999
------------ -------------
Healthcare revenue......................................................... $ 421,049 $ 335,927
Net income attributable to common shares................................... $ 6,303 $ 1,593
Net income per common share:
Basic.................................................................... $ 1.64 $ 0.44
Diluted.................................................................. $ 1.24 $ 0.41
4. IMPAIRMENT OF LONG-LIVED ASSETS
During 2001, the Company was notified that another vendor had been
selected to negotiate a contract to provide healthcare services for the Eastern
Region of the Pennsylvania Department of Corrections upon the expiration of the
Company's contract on December 31, 2002. The Company also anticipates that it
will cease operations under the contract with the Yonkers Region of the New York
Department of Correctional Services upon the expiration of the Company's
contract on May 31, 2002 as the healthcare services are to be assumed by the
client. These contracts represent substantially all of the operations acquired
in the acquisition of CPS. Given these factors, and in accordance with SFAS 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company recorded a non-cash impairment charge of $13,236
during the second quarter of 2001 representing the excess net goodwill recorded
in connection with the aforementioned acquisition of CPS over the fair value of
the two contracts. The Company estimated the fair value of the contracts by
calculating the net present value of estimated cash flows during the remaining
term of the contracts adjusted for certain other factors.
5. CHARGE FOR LOSS CONTRACTS
The Company performs an annual comprehensive review of its portfolio of
145 contracts for the purpose of identifying loss contracts and developing a
contract loss reserve for succeeding years. As a result of the 2001 review, the
Company identified five non-cancelable contracts with combined 2001 annual
revenues of $59,700 and negative gross margin of $4,700. Based upon management's
projections, these contracts are expected to continue to incur negative gross
margin over their remaining terms. In December 2001, the Company recorded a
charge of $18.3 million to establish a reserve for future losses under these
non-cancelable contracts. The five contracts covered by the charge have
expiration dates ranging from June 30, 2002 through June 30, 2005. Ninety
percent of the charge relates to the State of Kansas contract, which expires
June 30, 2005, and the City of Philadelphia contract, which expires June 30,
2004. The remaining liability covers the State of Maine contract, which expires
June 30, 2002, and two county contracts, which expire August 15, 2002 and June
30, 2005.
6. CHANGES IN ACCOUNTING ESTIMATES
During the second quarter of 2001, the Company recorded changes in
accounting estimate charges of approximately $6,000 to strengthen medical claims
reserves due to adverse development of prior years' medical claims, $1,300 for
certain legal costs and $400 for various other charges.
During the fourth quarter of 2001, the Company increased its legal
reserves $600, related to further development of malpractice cases previously
covered by certain insurance carriers presently in liquidation.
F-11
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The charge for strengthening medical claims reserve was primarily the
result of updated information that indicated actual utilization and cost data
for inpatient and outpatient services were higher than the historical levels
previously used to estimate the reserve. The charges for legal and malpractice
insurance exposures primarily relate to management's estimate of liquidity
issues of certain insurance carriers who provided coverage to the Company from
1992-1997.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are stated at cost and
comprised of the following:
DECEMBER 31,
---------------------------
2001 2000
----------- -----------
Prepaid insurance...................................................... $ 6,403 $ 898
Prepaid performance bonds.............................................. 281 163
Prepaid other.......................................................... 300 366
----------- ----------
$ 6,984 $ 1,427
=========== ==========
8. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and comprised of the
following:
DECEMBER 31,
------------------------------- ESTIMATED
2001 2000 USEFUL LIVES
------------ ------------ ------------
Leasehold improvements...................................... $ 1,158 $ 1,153 5 years
Equipment and furniture..................................... 10,469 9,156 5 years
Computer software........................................... 1,317 1,122 3 years
Medical equipment........................................... 2,155 1,833 5 years
Automobile.................................................. 14 14 5 years
----------- -----------
15,113 13,278
Less: Accumulated depreciation.............................. (7,286) (4,627)
----------- -----------
$ 7,827 $ 8,651
=========== ===========
Depreciation expense for the years ended December 31, 2001, 2000 and
1999 was $2,691, $1,563 and $1,200, respectively.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------------------
2001 2000
------------- ------------
Salaries and employee benefits......................................... $ 18,474 $ 12,413
Professional liability claims.......................................... 7,810 4,786
Accrued workers' compensation.......................................... 434 1,148
CPS cost sharing liability and other acquisition costs................. 1,281 3,570
Other.................................................................. 6,873 5,976
------------ ------------
34,872 27,893
Less: Noncurrent portion of liability claims........................... (6,810) (3,680)
------------- ------------
$ 28,062 $ 24,213
============ ============
F-12
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. BANKING ARRANGEMENTS
The Company's debt consists of a revolving credit facility (the "Credit
Facility"). At December 31, 2001, the Company had $58,100 outstanding under the
Credit Facility and $50 available for future borrowings. The Credit Facility was
executed with a syndicate of three banks (the "Lenders") with Bank of America,
N.A. acting as the lead bank and administrative agent.
On March 15, 2002, the Company executed an amendment to the Credit
Facility (the "Amended Credit Facility"). Beginning March 15, 2002, the
Company's borrowings under the Amended Credit Facility are limited to the lesser
of 1) the sum of eligible accounts and receivables (as defined) plus an
intangible advance of up to $11,000 ("Intangible Advances") or 2) $57,000 (the
"Maximum Commitment"). Interest under the Amended Credit Facility is payable
monthly at the Bank of America, N.A. prime rate plus 3.0% (5.0% for balances due
under Intangible Advances). The Amended Credit Facility matures on April 1, 2003
and all amounts outstanding will be due and payable on such date. In addition,
the Company is required to make scheduled reductions in the Intangible Advances
allowed and the Maximum Commitment prior to that date. The following table
presents the Maximum Commitment and the maximum allowed Intangible Advances
(included within the Maximum Commitment) as of March 15, 2002 and each scheduled
reduction date.
Maximum Intangible
Date Commitment Advances
------------------------------- ----------- --------------
March 15, 2002 $ 57,000 $ 11,000
July 1, 2002 57,000 10,000
September 1, 2002 56,000 10,000
October 1, 2002 55,000 9,000
December 1, 2002 54,000 9,000
February 1, 2003 53,000 9,000
March 1, 2003 52,000 9,000
At December 31, 2001, the Company has classified $10,700 of the amount
outstanding under the Credit Facility as current based on the Maximum Commitment
reductions which will occur in 2002, as outlined above, and management's
estimates of principle reductions that will be required to allow for increases
in standby letters of credit anticipated in 2002.
At December 31, 2001, the Company had standby letters of credit outstanding
totaling $3,350. The letters of credit were issued pursuant to the Amended
Credit Facility. The amount available to the Company for borrowing under the
Amended Credit Facility is reduced by the amount of each outstanding standby
letter of credit. Under the terms of the Amended Credit Facility, the Company
may have up to $6,600 of standby letters of credit outstanding.
Under the terms of the Amended Credit Facility, the Company will be required to
pay an annual commitment fee equal to 0.5% of the unused Maximum Commitment and
an annual standby letter of credit commitment fee equal to 4.5% of the average
standby letters of credit outstanding during the year.
At December 31, 2001, the Company was not in compliance with certain financial
covenant requirements of the Credit Facility. In connection with the execution
of the Amended Credit Facility in March 2002, the Company obtained waivers of
these financial covenants. Subsequent to March 15, 2002, the Amended Credit
Facility will require the Company to meet certain financial covenants related to
minimum levels of net worth and earnings. The Amended Credit Facility also
contains restrictions on the Company with respect to certain types of
transactions including payment of dividends, capital expenditures, indebtedness
and sales or transfers of assets.
The Company is dependent on the availability of borrowings pursuant to the
Amended Credit Facility to meet its working capital needs, capital expenditure
requirements and other cash flow requirements during 2002. Management believes
the Company can remain in compliance with the terms of the Amended Credit
Facility and meet its expected obligations throughout 2002. However, should the
Company fail to meet its projected results, it may be forced to seek additional
sources of financing in order to fund its working capital needs.
F-13
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Amended Credit Facility, if any Amended Credit
Facility obligations remain outstanding at December 31, 2002, the Company will
be required to issue the Lenders warrants to purchase common shares equal to a
5.0% interest in the Company's outstanding common stock. The number of warrants
required to be issued will be reduced to a 2.5% interest, if the balance
outstanding under the Amended Credit Facility does not exceed $45,000, there are
no outstanding Intangible Advances and the Company is not in default with the
terms of the Amended Credit Facility. The exercise price of the warrants will be
$.01 per share.
11. DERIVATIVE FINANCIAL INSTRUMENTS
In order to protect the Company from interest rate volatility and as
required by the aforementioned Credit Facility, the Company entered into four
interest rate collar agreements ("the derivatives") during 2000 and 1999 with
three of its syndicated banks ("the hedging banks") for a notional amount of
$30,000. One of these derivatives expired May 24, 2001, leaving notional amounts
totaling $24 million outstanding on the remaining three derivatives at December
31, 2001. The remaining three derivatives expire between October 2002 and March
2003. The derivatives have 90-day settlement periods at which time the Company
is required to make payments to the hedging banks for instances in which the
90-day LIBO rate drops below the designated rate floors (generally ranging from
4.95% to 6.375%) or is entitled to receive payments from the hedging banks for
instances in which the 90-day LIBO rate exceeds the designated rate ceilings
(generally ranging from 7.25% to 7.75%). In accordance with the provisions of
SFAS 133 related to cash flow hedges, on January 1, 2001, the Company recorded
a liability for the derivatives of approximately $212, net of tax, which
represents the fair market value of the derivatives as of the date of adoption
of SFAS 133. As these cash flow hedges were deemed to be effective, the
adjustment to record the derivatives at fair value was charged to other
comprehensive loss as the cumulative effect of a change in accounting principle.
During the year ended December 31, 2001, the decrease in fair value of
the collar agreements of approximately $433, net of tax, was recognized through
other comprehensive loss as the intrinsic change in fair market value during the
period. At December 31, 2001, the fair value of the interest rate collar
agreements was a liability of $1,068, which is included in accrued expenses in
the accompanying consolidated balance sheets. Subsequent changes to the fair
value of the derivatives will be charged to earnings to the extent of the
derivatives' ineffectiveness, with the remainder of the change in fair value
charged to other comprehensive income. As a result of amendments to the Credit
Facility, the Company estimates that $603 of hedging activity losses included in
other comprehensive loss in 2001 will be charged to earnings during the next
twelve months.
F-14
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. INCOME TAXES
Significant components of the provision (benefit) for income taxes
included in the accompanying statements of operations are as follows:
2001 2000 1999
----------------------- -------------------- -------------------
Current income taxes:
Federal (3,055) 3,534 503
State 386 505 368
----------------------- -------------------- -------------------
(2,669) 4,039 871
----------------------- -------------------- -------------------
Deferred income taxes:
Federal 769 1,281 1,942
State 48 183 278
----------------------- -------------------- -------------------
817 1,464 2,220
----------------------- -------------------- -------------------
Income tax provision (benefit) (1,852) 5,503 3,091
======================= ==================== ===================
In addition to the provision (benefit) for income taxes included in the
accompanying statements of operations, a deferred tax benefit of $431 is
included in other comprehensive income (loss) for the year ended December 31,
2001.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:
2001 2000
------------------------ -------------------
DEFERRED TAX ASSET/(LIABILITIES):
Self Insurance Reserves 3,169 1,845
Accrued Vacation 759 1,158
Bad Debt Allowance 138 82
Interest rate swap agreements 431 ---
Prepaid Insurance (1,135) (359)
Depreciation 293 (204)
Amortization 2,821 (2,043)
Loss Contract Charge 7,327 ---
Net Operating Loss Carryforwards 1,833 ---
Other 461 (93)
----------------------- --------------------
Net Deferred Tax Asset 16,097 386
Valuation Allowance (16,097) ---
------------------------ --------------------
Net Deferred Tax Asset(Liability) --- 386
======================== ====================
SFAS 109 requires the Company to record a valuation allowance when it
is "more likely than not that some portion or all of the deferred tax assets
will not be realized." It further states that "forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years." At December 31, 2001 a 100%
valuation allowance has been recorded equal to the deferred tax assets after
considering deferred tax assets that can be realized through offsets to existing
taxable temporary differences. Assuming the Company achieves sufficient
profitability in future years to realize the deferred income tax assets, the
valuation allowance will be reduced in future years through a credit to income
tax expense (increasing shareholders' equity).
At December 31, 2001, the Company has federal and state net operating
loss carryforwards of $1,951 and $22,997, respectively, which expire at various
dates through 2021.
F-15
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the federal statutory tax rate to the effective tax
rate is as follows:
2001 2000 1999
-------------------- ------------------ ----------------
Federal Tax (35.0)% 35.0% 35.0%
State Income Taxes (4.9)% 5.2% 4.8%
Nondeductible Goodwill 0.6% 1.2% --
Other 0.9% -- 0.2%
Increase in Valuation Allowance 34.5% -- --
-------------------- ------------------ ----------------
Effective Rate (3.9)% 41.4% 40.0%
==================== ================== ================
13. MANDATORY REDEEMABLE PREFERRED STOCK
Mandatory Redeemable Preferred Stock (the "Preferred Stock") consisted
of 50,000 shares issued on January 26, 1999 and 75,000 shares issued on August
30, 1999 as part of the EMSA acquisition. The Preferred Stock contained a 5%
coupon rate and was mandatorily redeemable on July 26, 2005. Each share of
Preferred Stock was 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 and, upon the occurrence of certain
events, at the option of the Company. On January 4, 2001, the market price of
the Company's Common Stock exceeded 225% of the initial conversion price ($9.45
per share) for 45 consecutive Trading Days triggering the Company's ability to
force conversion of the Preferred Stock into a number of shares of Common Stock
as is determined by dividing $100,000 by the conversion price ($9.45). The
holders of the Preferred Stock converted all 125,000 shares of Preferred Stock
into 1,322,751 shares of the Company's Common Stock on February 5, 2001.
The former holders of the Preferred Stock also hold warrants to
purchase 135,000 shares of the Company's common stock with an exercise price of
$.01 per share for 67,500 of the warrants and an exercise price of $9.45 per
share for the remainder of the warrants. The warrants expire in January 2006.
All of the warrants remain outstanding and unexercised at December 31, 2001.
14. 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 compensation charge of $8.75 per share was recorded
representing the fair market value of the shares on the date of issuance. During
1997, the redemption price was fixed at $9.90 per share, through an amendment to
the employment agreement.
On July 15, 2000, the outstanding shares of mandatory redeemable common
stock were transferred to an independent third party resulting in the expiration
of the stock's redemption provision. The shares, accordingly, have been
reflected as additional paid-in capital since July 15, 2000.
15. STOCK OPTION PLANS
The Company has an Incentive Stock Plan (the "Incentive 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 cannot be less than the fair market value of the
Company's common stock 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-16
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 the Company's 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 the Company's common stock available under the 1999 Plan. The Company is
permitted to make up to $1,300 in loans to fund the purchase of common stock
pursuant to the 1999 Plan. The exercise price of the options cannot be less than
the fair market value of the Company's common stock 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.
In addition to the Incentive Plan and the 1999 Plan, the Company has
also granted options to certain members of executive management to purchase
235,000 shares of the Company's common stock (the "Executive Plans"). The
exercise price of these options equals the fair market value of the Company's
common stock at the date of grant. The options expire ten years from the date of
grant.
The following summary presents combined stock option activity under the
Incentive Plan, 1999 Plan and Executive Plans for each of the three years in the
period ended December 31, 2001:
WEIGHTED
AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- ------------- --------------
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
Granted................................................................... 449,000 13.81-- 20.00 17.15
Exercised................................................................. (274,000) 4.50-- 14.81 9.66
Canceled.................................................................. (16,000) 9.50-- 15.63 12.37
--------- ------------ -------
Outstanding, December 31, 2000.............................................. 1,424,000 4.50-- 20.00 13.98
Granted................................................................... 253,000 3.10-- 24.63 12.65
Exercised................................................................. (48,000) 4.50-- 15.63 12.38
Canceled.................................................................. (117,000) 9.69-- 23.35 16.50
--------- ------------ -------
Outstanding, December 31, 2001.............................................. 1,512,000 $3.10--$24.63 $ 13.62
========= ============= =======
At December 31, 2001, there were no options available for future grants
under the above plans.
As of December 31, 2001, 780,000 options were exercisable under all
plans.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ --------------------------------
WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/01 CONTRACTUAL LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE
------------------ --------------- ------------------ ----------------- --------------- ----------------
$ 3.10 -- 6.50 155,000 6.8 $ 5.26 5,000 $ 5.35
8.69 -- 11.19 290,000 5.6 9.56 290,000 9.56
13.00 -- 14.81 594,000 7.4 13.96 292,000 13.77
15.00 -- 24.63 473,000 9.4 18.43 193,000 18.32
--------------- --------- --- ------ ------- -------
$ 3.1 -- 24.63 1,512,000 7.6 $13.62 780,000 $ 13.28
=============== ========= === ====== ======= =======
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:
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
------- ------- ------
Volatility.............................................................. 0.8 0.5 0.5
Interest rate........................................................... 3-4% 6-7% 5-6%
Expected life (years)................................................... 3 3 3
Dividend yields......................................................... 0.0% 0.0% 0.0%
F-17
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, 2001, 2000 and 1999 are
as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- ------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
--------- -------- ---------- -------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) attributable to common shares................ $(45,006) $(46,264) $ 7,159 $ 5,989 $ 2,328 $ 1,572
Income (loss) per common share:
Basic........................................................ $ (8.50) $ (8.74) $ 1.86 $ 1.49 $ 0.64 $ 0.44
Diluted...................................................... $ (8.50) $ (8.74) $ 1.40 $ 1.03 $ 0.60 $ 0.41
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 2001, 2000 and 1999 is $3.74, $6.88 and $5.43, respectively.
16. STOCKHOLDERS' NOTES RECEIVABLE
Under the 1999 Plan the Company is allowed to extend recourse loans to
certain of its key employees and outside directors to permit them to purchase
shares of the Company's Common Stock. During 2001, 2000 and 1999, loans totaling
$0, $263 and $1,039, respectively, were extended bearing market interest rates
and payable five years from the date of issuance. As of December 31, 2001, the
outstanding loans total $1,383, including accrued interest of $156, and
represent purchase commitments for 83,681 shares of Common Stock and are
included in the accompanying Consolidated Statement of Stockholders' Equity
(Deficit) as a reduction of equity.
17. NET INCOME PER SHARE
The table below sets forth the computation of basic and diluted
earnings per share as required by SFAS No. 128 for the three years in the period
ended December 31, 2001.
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
------------ ---------- ---------
NUMERATOR:
Net Income (loss)............................................................... $ (44,843) $ 7,807 $ 4,640
Redeemable Preferred Stock dividends............................................ (163) (648) (2,312)
---------- ---------- ----------
Numerator for basic earnings per share--
income (loss) available to common stockholders................................ $ (45,006) $ 7,159 $ 2,328
========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share--
weighted average shares....................................................... 5,292,000 3,854,000 3,613,000
Effect of dilutive securities:
Mandatory Redeemable Preferred Stock.......................................... -- 1,323,000 --
Warrants...................................................................... -- 99,000 58,000
Employee stock options........................................................ -- 311,000 206,000
----------- ---------- ----------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions................................................................... 5,292,000 5,587,000 3,877,000
========== ========== ==========
Basic income (loss) per share................................................... $ (8.50) $ 1.86 $ 0.64
========== ========== ==========
Diluted income (loss) per share................................................. $ (8.50) $ 1.40 $ 0.60
========== ========== ==========
Due to the net loss for the year ended December 31, 2001, the effect of
the Company's potential dilutive securities (primarily stock options) on diluted
loss per share during this period was anti-dilutive. For the years ended
December 31, 2000 and 1999, there were no more than 398,000 and 4,000 options,
respectively, to purchase common stock with weighted average exercise prices of
$14.97 and $14.38, 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. For the year ended
F-18
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1999, the effect of converting 125,000 shares of preferred stock
into 1,322,751 shares of common stock is not included in the computation of
diluted earnings per share because the effect would be antidilutive.
Under SFAS 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 2001 and 1999.
18. 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 may, at the Board's discretion,
match 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, $889 and $700 for the years ended December 31, 2001,
2000, 1999, respectively, related to the matching contributions of the Plan.
The Company instituted an Employee Stock Purchase Plan during 1996. The
Employee Stock Purchase Plan allows eligible 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 at any time.
19. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
During the years ended December 31, 2001, 2000 and 1999, the Company
maintained third party commercial insurance on a claims-made basis with primary
limits of $1,000 each occurrence and $3,000 in the aggregate. In addition, the
Company maintained excess liability insurance of $15,000 for each claim and
$15,000 annual aggregate. The Company assumes any liabilities in excess of the
third-party insurance limits.
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
$7,810 and $4,786 at December 31, 2001 and 2000, 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, 2001 represent management's best estimate of the amounts necessary
to discharge the Company's obligations.
As discussed in Note 6, during 2001, the Company increased its legal
reserves for professional and general liability claims $1,900 primarily as a
result of liquidity issues of certain insurance carriers who provided coverage
to the Company from 1992-1997.
F-19
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment under certain
noncancelable operating leases. 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, 2001 are as
follows:
YEAR ENDING DECEMBER 31:
2002.............................................................................. $ 962
2003.............................................................................. 637
2004.............................................................................. 237
2005.............................................................................. 217
2006.............................................................................. 224
Thereafter........................................................................ 407
-----------
$ 2,684
===========
Rental expense under operating leases was $2,020, $1,612 and $1,200 for
the years ended December 2001, 2000 and 1999, respectively.
Catastrophic Limits
Many of the Company's contracts require the Company's customers to
reimburse 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. For contracts that do not contain catastrophic
protection, the Company maintains insurance from an unaffiliated insurer for
annual hospitalization amounts in excess of $500 per inmate up to an annual per
inmate cap of $2,000. The Company believes this insurance significantly
mitigates its exposure to unanticipated expenses of catastrophic
hospitalization. Catastrophic insurance premiums and recoveries, neither of
which is 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, 2001 and 2000. 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.
21. RELATED PARTY TRANSACTION
During 2001, the Company entered into a consulting arrangement with an
entity affiliated with a member of its board of directors. The Company paid
consulting fees totaling $164 in 2001 under this arrangement.
F-20
AMERICA SERVICE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
22. MAJOR CUSTOMERS
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 the following
enterprise-wide disclosures relating to major customers, reportable segment
information is not applicable. The following is a summary of revenues from major
customers:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ ---------------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
------------ ---------- ------------ ---------- ---------- ---------
Riker's Island........................................ $ 81,246 14.7% $ - - % $ - - %
State of Pennsylvania................................. 53,504 9.7 45,478 11.9 20,036 7.3
Estimated credit losses associated with the receivables are provided
for in the consolidated financial statements.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly statements of operations data for 2001
and 2000 is as follows:
2001
----------------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
Healthcare revenues $ 137,941 $ 140,779 $ 140,145 $ 133,606
Gross margin 11,343 (5,932) 7,060 7,261
Net income (loss) 2,338 (18,379) (996) (27,806)
Net income (loss) attributable to
common shares 2,175 (18,379) (996) (27,806)
Net income (loss) per share:
Basic 0.44 (3.39) (0.18) (5.12)
Diluted 0.40 (3.39) (0.18) (5.12)
Included in the 2001 fourth quarter loss are a provision for loss
contracts of $18,318 and a deferred tax valuation allowance of $16,097.
2000
----------------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
Healthcare revenues $ 76,169 $ 89,449 $ 102,842 $ 113,486
Gross margin 7,543 8,485 10,592 10,567
Net income (loss) 1,695 1,815 2,102 2,195
Net income (loss) attributable to
common shares 1,532 1,654 1,937 2,036
Net income (loss) per share:
Basic 0.41 0.44 0.49 0.51
Diluted 0.32 0.33 0.37 0.38
F-21
SCHEDULE II
AMERICA SERVICE GROUP INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ------------- ----------
DECEMBER 31, 2001 $ 205 $ 855 $ (716) $ 344
Allowance for doubtful accounts.................................. - 16,097 - 16,097
---------- ---------- ----------- ---------
Deferred tax asset valuation allowance........................... 205 16,952 (716) 16,441
---------- ---------- ----------- ---------
DECEMBER 31, 2000
Allowance for doubtful accounts.................................. $ 420 $ 142 $ 357 $ 205
---------- --------- ----------- ---------
DECEMBER 31, 1999
Allowance for doubtful accounts.................................. $ 20 $ 544 $ 144 $ 420
---------- --------- ----------- --------
F-22