Attached files
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EX-32.2 - EX-32.2 - AMERICA SERVICE GROUP INC /DE | g25038exv32w2.htm |
EX-31.2 - EX-31.2 - AMERICA SERVICE GROUP INC /DE | g25038exv31w2.htm |
EX-32.1 - EX-32.1 - AMERICA SERVICE GROUP INC /DE | g25038exv32w1.htm |
EX-31.1 - EX-31.1 - AMERICA SERVICE GROUP INC /DE | g25038exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | 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: 0-19673
AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware | 51-0332317 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
105 Westpark Drive, Suite 200 | ||
Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) |
(615) 373-3100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one)
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There were 9,265,915 shares of common stock, par value $0.01 per share, outstanding as of November 1, 2010.
AMERICA SERVICE GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
INDEX
2
Table of Contents
PART I:
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(shown in 000s except share and per share amounts)
(UNAUDITED)
(shown in 000s except share and per share amounts)
(UNAUDITED)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,401 | $ | 37,655 | ||||
Accounts receivable, net of allowance for doubtful accounts of $377 and $358, respectively |
65,032 | 44,629 | ||||||
Inventories |
2,938 | 2,929 | ||||||
Prepaid expenses and other current assets |
12,929 | 16,754 | ||||||
Current deferred tax assets |
5,205 | 9,252 | ||||||
Total current assets |
101,505 | 111,219 | ||||||
Property and equipment, net |
10,859 | 9,447 | ||||||
Goodwill |
40,772 | 40,772 | ||||||
Contracts, net |
1,728 | 1,937 | ||||||
Other assets |
9,892 | 11,837 | ||||||
Total assets |
$ | 164,756 | $ | 175,212 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 19,317 | $ | 15,393 | ||||
Accrued medical claims liability |
22,389 | 22,358 | ||||||
Accrued expenses |
44,825 | 62,895 | ||||||
Deferred revenue |
4,149 | 13,385 | ||||||
Total current liabilities |
90,680 | 114,031 | ||||||
Noncurrent portion of accrued expenses |
19,547 | 15,481 | ||||||
Noncurrent deferred tax liabilities |
4,834 | 3,727 | ||||||
Total liabilities |
115,061 | 133,239 | ||||||
Commitments and contingencies (Note 18) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value, 2,000,000 shares authorized at September 30, 2010 and
December 31, 2009; no shares issued or outstanding |
| | ||||||
Common stock, $0.01 par value, 20,000,000 shares authorized at September 30, 2010 and
December 31, 2009; 8,947,415 and 8,947,370 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively |
89 | 89 | ||||||
Additional paid-in capital |
35,014 | 33,608 | ||||||
Retained earnings |
14,592 | 8,276 | ||||||
Total stockholders equity |
49,695 | 41,973 | ||||||
Total liabilities and equity |
$ | 164,756 | $ | 175,212 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part
of these condensed consolidated balance sheets. The condensed consolidated balance sheet at
December 31, 2009 is taken from the audited financial statements at that date.
of these condensed consolidated balance sheets. The condensed consolidated balance sheet at
December 31, 2009 is taken from the audited financial statements at that date.
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Table of Contents
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(shown in 000s except share and per share amounts)
(UNAUDITED)
(shown in 000s except share and per share amounts)
(UNAUDITED)
Quarter ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Healthcare revenues |
$ | 157,933 | $ | 153,586 | $ | 474,357 | $ | 428,449 | ||||||||
Healthcare expenses |
144,235 | 144,478 | 432,445 | 399,182 | ||||||||||||
Gross margin |
13,698 | 9,108 | 41,912 | 29,267 | ||||||||||||
Selling, general and administrative expenses |
7,865 | 6,591 | 24,910 | 21,251 | ||||||||||||
Corporate restructuring expenses |
(21 | ) | | 290 | | |||||||||||
Audit Committee investigation and related expenses |
31 | 973 | 387 | 1,106 | ||||||||||||
Depreciation and amortization |
894 | 646 | 2,491 | 1,906 | ||||||||||||
Income from operations |
4,929 | 898 | 13,834 | 5,004 | ||||||||||||
Interest expense (income) |
(26 | ) | 28 | (78 | ) | 148 | ||||||||||
Income from continuing operations before income tax provision |
4,955 | 870 | 13,912 | 4,856 | ||||||||||||
Income tax provision |
2,111 | 395 | 5,923 | 2,126 | ||||||||||||
Income from continuing operations |
2,844 | 475 | 7,989 | 2,730 | ||||||||||||
Income (loss) from discontinued operations, net of taxes |
(51 | ) | 241 | (60 | ) | 788 | ||||||||||
Net income |
$ | 2,793 | $ | 716 | $ | 7,929 | $ | 3,518 | ||||||||
Net income available to common shareholders (Note 19) |
$ | 2,767 | $ | 695 | $ | 7,754 | $ | 3,400 | ||||||||
Net income (loss) available to common shareholders per common share basic: |
||||||||||||||||
Continuing operations |
$ | 0.32 | $ | 0.05 | $ | 0.89 | $ | 0.29 | ||||||||
Discontinued operations, net of taxes |
(0.01 | ) | 0.03 | (0.01 | ) | 0.09 | ||||||||||
Net income available to common shareholders per common share (Note 19) |
$ | 0.31 | $ | 0.08 | $ | 0.88 | $ | 0.38 | ||||||||
Net income (loss) available to common shareholders per common share -
diluted: |
||||||||||||||||
Continuing operations |
$ | 0.32 | $ | 0.05 | $ | 0.89 | $ | 0.28 | ||||||||
Discontinued operations, net of taxes |
(0.01 | ) | 0.03 | (0.01 | ) | 0.09 | ||||||||||
Net income available to common shareholders per common share (Note 19) |
$ | 0.31 | $ | 0.08 | $ | 0.88 | $ | 0.37 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
8,871,307 | 8,998,512 | 8,772,845 | 8,964,710 | ||||||||||||
Diluted |
8,930,066 | 9,097,653 | 8,852,413 | 9,075,505 | ||||||||||||
Dividends declared per share |
$ | 0.06 | $ | 0.05 | $ | 0.18 | $ | 0.05 | ||||||||
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
integral part of these condensed consolidated statements.
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Table of Contents
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(shown in 000s)
(UNAUDITED)
(shown in 000s)
(UNAUDITED)
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,929 | $ | 3,518 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation and amortization |
2,498 | 1,967 | ||||||
Loss on retirement of fixed assets |
4 | 31 | ||||||
Finance cost amortization |
24 | 106 | ||||||
Deferred income taxes |
5,285 | 1,209 | ||||||
Share-based compensation expense |
1,774 | 1,378 | ||||||
Excess tax benefits from share-based compensation expense |
(131 | ) | (143 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(20,403 | ) | (9,931 | ) | ||||
Inventories |
(9 | ) | 85 | |||||
Prepaid expenses and other current assets |
3,825 | (6,061 | ) | |||||
Other assets |
1,920 | (2,699 | ) | |||||
Accounts payable |
3,924 | (2,095 | ) | |||||
Accrued medical claims liability |
31 | 9,574 | ||||||
Accrued expenses |
(14,004 | ) | 18,414 | |||||
Deferred revenue |
(9,236 | ) | 641 | |||||
Net cash provided by (used in) operating activities |
(16,569 | ) | 15,994 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(3,704 | ) | (3,216 | ) | ||||
Net cash used in investing activities |
(3,704 | ) | (3,216 | ) | ||||
Cash flows from financing activities: |
||||||||
Share repurchases |
(544 | ) | (3,570 | ) | ||||
Dividends on common stock |
(1,613 | ) | (465 | ) | ||||
Excess tax benefits from share-based compensation expense |
131 | 143 | ||||||
Restricted stock repurchased from employees for employees tax liability |
(958 | ) | (177 | ) | ||||
Issuance of common stock |
391 | 319 | ||||||
Exercise of stock options |
612 | 1,715 | ||||||
Net cash used in financing activities |
(1,981 | ) | (2,035 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(22,254 | ) | 10,743 | |||||
Cash and cash equivalents at beginning of period |
37,655 | 24,855 | ||||||
Cash and cash equivalents at end of period |
$ | 15,401 | $ | 35,598 | ||||
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
integral part of these condensed consolidated statements.
5
Table of Contents
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(unaudited)
September 30, 2010
(unaudited)
1. Basis of Presentation
The interim condensed consolidated financial statements of America Service Group Inc. and its
consolidated subsidiaries (collectively, the Company) as of September 30, 2010 and for the
quarters and nine months ended September 30, 2010 and 2009 are unaudited, but in the opinion of
management, have been prepared in conformity with United States generally accepted accounting
principles (U.S. GAAP) applied on a basis consistent with those of the Companys annual audited
consolidated financial statements. Such interim condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation
of the financial position and the results of operations for the periods presented. The results of
operations presented for the quarter and nine months ended September 30, 2010 are not necessarily
indicative of the results to be expected for the year ending December 31, 2010. The interim
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the related notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange
Commission (SEC).
The preparation of the condensed consolidated financial statements in conformity with U. S.
GAAP requires management to make estimates and assumptions that affect the amounts reported in the
condensed consolidated financial statements and accompanying notes. Actual results could differ
from those estimates. Some of the more significant areas requiring estimates in the financial
statements include the Companys accruals for unbilled medical services calculated based upon a
claims payment lag methodology, realization of goodwill, estimated amortizable life of contract
intangibles, reductions in revenue for contractual allowances, allowance for doubtful accounts,
legal contingencies and share-based compensation as well as accruals associated with employee
health, workers compensation and professional and general liability claims, for which the Company
is substantially self-insured. 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.
2. Description of Business
The Company provides and/or administers managed healthcare services to correctional facilities
under contracts with state and local governments. The health status of inmates impacts the results
of operations under such contractual arrangements. The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, Prison Health Services, Inc.
(PHS), Correctional Health Services, LLC (CHS) and Secure Pharmacy Plus, LLC (SPP). The
Company has one reportable segment: correctional healthcare services.
3. Audit Committee Investigation
On October 24, 2005, the Company announced that the Audit Committee had initiated an internal
investigation into certain matters related to SPP. As disclosed in further detail in the Companys
Annual Report on Form 10-K for the year ended December 31, 2005, on March 15, 2006 the Company
announced that the Audit Committee had concluded its investigation and reached certain conclusions
with respect to findings of the investigation that resulted in an accrual of $3.7 million of
aggregate refunds due to customers, including PHS, that were not charged by SPP in accordance with
the terms of the respective contracts. In circumstances where SPPs incorrect billings resulted in
PHS billing its clients incorrectly, PHS passed the applicable amount through to its clients. This
amount plus associated interest represented managements best estimate of the amounts due to
affected customers, based on the results of the Audit Committees investigation. As of September
30, 2010, the Company has paid all of these refunds plus associated interest to customers except
for $0.4 million which has been tendered for payment to the Delaware Department of Corrections,
which was serviced by a customer of SPP (see Note 18). The ultimate amounts paid could differ from
the Companys estimates; however, actual amounts to date have not differed materially from the
estimated amounts. There can be no assurance that the Company, a customer or a third-party,
including a governmental entity, will not assert that additional amounts, which may include
penalties and/or
6
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associated interest, are owed to these customers. During the nine months ended
September 30, 2010, the Company recognized additional expense totaling $0.4 million relative to
this matter which are primarily due to legal expenses incurred as part of the Company reaching a
settlement on February 19, 2010, regarding shareholder litigation filed against the Company and
certain individual defendants on April 6, 2006 and related litigation filed by the Company against
one of its insurance carriers (see Note 18).
4. Restructuring Charge
On June 16, 2010, the former Senior Vice President, Chief Administrative Officer and Chief
Compliance Officer of the Company, resigned his position, effective July 16, 2010. In connection
with his resignation and this restructuring, his duties and responsibilities were reassigned to
various members of management. The Company incurred a one-time termination charge related to the
restructuring of approximately $0.3 million, comprised of $0.2 million in accrued compensation and
benefits and a $0.1 million non-cash charge related to the accelerated vesting of remaining
unvested restricted shares. The accrued compensation and benefits, which will be fully paid by
July 16, 2011, are included in accrued expenses in the Companys condensed consolidated balance
sheet. The non-cash charge related to the stock based compensation is included in additional paid
in capital in the Companys condensed consolidated balance sheet.
A reconciliation of the related restructuring liability at September 30, 2010 is as follows
(in thousands):
One-time | ||||
Termination | ||||
Benefits | ||||
Balance at June 30, 2010 |
$ | 245 | ||
Plus: Costs incurred |
| |||
Less: Amounts paid |
(45 | ) | ||
Balance at September 30, 2010 |
$ | 200 | ||
5. Share-Based Compensation
The Company has issued equity incentive awards to eligible employees and outside directors
under the Amended and Restated Incentive Stock Plan, the Amended and Restated 1999 Incentive Stock
Plan and the 2009 Equity Incentive Plan (2009 Equity Plan). The Company currently has two types
of share-based awards outstanding under these plans: stock options and restricted stock.
Additionally, the Company instituted an Employee Stock Purchase Plan during 1996. The Company
accounts for share-based compensation in accordance with U.S. GAAP related to share-based payments.
For the quarters ended September 30, 2010 and 2009, the Company recognized total share-based
compensation costs of $0.3 million and $0.5 million, respectively. For the nine months ended
September 30, 2010 and 2009, the Company recognized total share-based compensation costs of $1.7
million and $1.4 million, respectively.
No options were issued during the quarters and nine months ended September 30, 2010 and 2009.
A summary of option activity and changes during the nine months ended September 30, 2010 is
presented below:
Weighted | Weighted Average | Aggregate Intrinsic | ||||||||||||||
Average | Remaining | Value (in | ||||||||||||||
Options | Exercise Price | Contractual Term | thousands) (1) | |||||||||||||
Outstanding, December 31, 2009 |
822,673 | $ | 17.16 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(87,240 | ) | 11.52 | |||||||||||||
Canceled |
(5,088 | ) | 15.32 | |||||||||||||
Outstanding, September 30, 2010 |
730,345 | $ | 17.85 | 4.73 | $ | 589 | ||||||||||
Exercisable, September 30, 2010 |
705,345 | $ | 18.13 | 4.62 | $ | 467 | ||||||||||
Expected to vest, September 30, 2010 (2) |
24,701 | $ | 10.01 | 7.97 | $ | 120 | ||||||||||
(1) | Based upon the difference between the closing market price of the Companys common stock on the last trading day of the quarter and the exercise price of in-the-money options. | |
(2) | Amount represents options expected to vest, net of estimated forfeitures. |
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A summary of the nonvested shares of restricted stock and activity during the nine
months ended September 30, 2010 is presented below:
Weighted | ||||||||
Restricted | Average Grant- | |||||||
Shares | Date Fair Value | |||||||
Nonvested, December 31, 2009 |
298,070 | $ | 12.83 | |||||
Granted |
| | ||||||
Vested |
(220,972 | ) | 12.66 | |||||
Forfeited |
| | ||||||
Nonvested, September 30, 2010 |
77,098 | $ | 13.32 | |||||
6. Discontinued Operations
Pursuant to U.S. GAAP
related to discontinued operations, each of the Companys correctional
healthcare services contracts is a component of an entity whose operations can be distinguished
from the rest of the Company. Therefore, when a correctional healthcare services contract
terminates, the contracts operations generally will be eliminated from the ongoing operations of
the Company and classified as discontinued operations. Accordingly, the operations of such
contracts, net of applicable income taxes, have been presented as discontinued operations and prior
period condensed consolidated statements of income have been reclassified.
The components of income (loss) from discontinued operations, net of taxes, are as follows (in
thousands):
Quarter ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Healthcare revenues |
$ | 770 | $ | 6,200 | $ | 5,497 | $ | 20,934 | ||||||||
Healthcare expenses |
854 | 5,777 | 5,591 | 19,543 | ||||||||||||
Gross margin |
(84 | ) | 423 | (94 | ) | 1,391 | ||||||||||
Depreciation and amortization |
2 | 16 | 7 | 61 | ||||||||||||
Income (loss) from discontinued operations before taxes |
(86 | ) | 407 | (101 | ) | 1,330 | ||||||||||
Income tax provision (benefit) |
(35 | ) | 166 | (41 | ) | 542 | ||||||||||
Income (loss) from discontinued operations, net of taxes |
$ | (51 | ) | $ | 241 | $ | (60 | ) | $ | 788 | ||||||
7. Fair Value of Financial Instruments
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the assumptions that market participants would
use in pricing the asset or liability. As a basis for considering market participant assumptions
in fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that
distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entitys own assumption about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
The Company has available-for-sale securities and money market accounts totaling $8.0 million
and $15.0 million at September 30, 2010 and December 31, 2009, respectively, that are classified as
cash equivalents on the accompanying condensed consolidated balance sheet. These financial assets
are recorded at fair value in accordance with the U.S. GAAP fair value hierarchy, classified as a
Level 1 measurement. Inputs used to measure fair value in accordance with Level 1 are quoted
market prices in active markets for identical assets or liabilities.
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8. Accounts Receivable
Accounts receivable consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Billed accounts receivable |
$ | 39,995 | $ | 20,762 | ||||
Unbilled accounts receivable |
26,680 | 25,485 | ||||||
Other accounts receivable |
628 | 648 | ||||||
67,303 | 46,895 | |||||||
Less: Allowances |
(377 | ) | (358 | ) | ||||
66,926 | 46,537 | |||||||
Less: Receivables reclassified as noncurrent |
(1,894 | ) | (1,908 | ) | ||||
$ | 65,032 | $ | 44,629 | |||||
Unbilled accounts receivable generally represent additional revenue earned under
shared-risk contracting models that remain unbilled at each balance sheet date, due to provisions
within the contracts governing the timing for billing such amounts.
The Company and its clients will, from time to time, have disputes over amounts billed under
the Companys contracts. The Company records a reserve for contractual allowances in
circumstances where it concludes that a loss from such disputes is probable.
As discussed more fully in Note 18, PHS is currently involved in a lawsuit with its former
client, Baltimore County, Maryland (the County) involving the Countys lack of payment for
services rendered. PHS has approximately $1.7 million of receivables due from the County,
primarily related to services rendered between April 1, 2006 and September 14, 2006, the date the
Companys relationship with the County was terminated. The County has refused to pay PHS for these
amounts and therefore, on October 27, 2006, PHS filed suit against the County in the Circuit Court
for Baltimore County, Maryland seeking collection of the outstanding receivables balance, damages
for breach of contract, quantum meruit, and unjust enrichment as well as prejudgment interest. As
discussed more fully in Note 18, PHS believes, in the case of this lawsuit, that it has a valid and
meritorious cause of action and, as a result, has concluded that the outstanding receivables, which
represent services performed under the contractual relationship between the parties, are probable
of collection. Although PHS believes it has valid contractual and legal arguments, an adverse
result in this lawsuit could have a negative impact on the results of this matter and/or PHS
ability to collect the outstanding receivables amount. These receivables are classified as other
noncurrent assets in the Companys condensed consolidated balance sheet (see Note 11).
As stated above, the Company believes the recorded amount represents valid receivables which
are contractually due from the County and expects full collection. However, due to the factors
discussed above and more fully in Note 18, there is a heightened risk of uncollectibility of these
receivables which may result in future losses. Nevertheless, the Company intends to take all
necessary and available measures in order to collect these receivables.
Changes in circumstances related to the matter discussed above, or any other receivables,
could result in a change in the allowance for doubtful accounts or the estimate of contractual
adjustments in future periods. Such change, if it were to occur, could have a material adverse
affect on the Companys results of operations and financial position in the period in which the
change occurs.
9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are stated at amortized cost and comprised of the
following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Prepaid insurance |
$ | 3,834 | $ | 6,824 | ||||
Prepaid cash deposits for professional liability claims losses |
7,088 | 8,501 | ||||||
Prepaid performance bonds |
17 | 80 | ||||||
Prepaid other |
1,990 | 1,349 | ||||||
$ | 12,929 | $ | 16,754 | |||||
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10. Property and Equipment
Property and equipment are stated at cost and comprised of the following (in thousands):
September 30, | December 31, | Estimated | ||||||||||
2010 | 2009 | Useful Lives | ||||||||||
Leasehold improvements |
$ | 1,006 | $ | 1,006 | 7 years | |||||||
Equipment and furniture |
11,426 | 9,843 | 5 years | |||||||||
Computer software |
9,073 | 7,095 | 3-5 years | |||||||||
Medical equipment |
1,238 | 1,180 | 5 years | |||||||||
Automobiles |
62 | 62 | 5 years | |||||||||
Management information systems under development |
153 | 176 | | |||||||||
22,958 | 19,362 | |||||||||||
Less: Accumulated depreciation |
(12,099 | ) | (9,915 | ) | ||||||||
$ | 10,859 | $ | 9,447 | |||||||||
Depreciation expense for the quarters ended September 30, 2010 and 2009 was approximately
$0.8 million and $0.6 million, respectively. Depreciation expense for the nine months ended
September 30, 2010 and 2009 was approximately $2.3 million and $1.6 million, respectively.
The Company capitalizes costs associated with internally developed software systems that have
reached the application development stage. Capitalized costs include external direct costs of
materials and services utilized in developing or obtaining internal-use software and payroll and
payroll-related expenses for employees who are directly associated with and devote time to the
internal-use software project. Capitalization of such costs begins when the preliminary project
stage is complete and ceases no later than the point at which the project is substantially
complete and ready for its intended purpose.
11. Other Assets
Other assets are stated at amortized cost or net realizable value and are comprised of the
following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Deferred financing costs |
$ | 68 | $ | 68 | ||||
Less: Accumulated amortization |
(34 | ) | (10 | ) | ||||
34 | 58 | |||||||
Prepaid cash deposits for
professional liability claims losses |
3,310 | 5,217 | ||||||
Prepaid insurance deposits |
4,540 | 4,540 | ||||||
Noncurrent receivables |
1,894 | 1,908 | ||||||
Other refundable deposits |
114 | 114 | ||||||
$ | 9,892 | $ | 11,837 | |||||
12. Contract Intangibles
The gross and net values of contract intangibles consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Gross contracts value |
$ | 4,000 | $ | 4,000 | ||||
Less: Accumulated amortization |
(2,272 | ) | (2,063 | ) | ||||
$ | 1,728 | $ | 1,937 | |||||
The Company amortizes its contract intangibles on a straight-line basis over their
estimated useful life. The Company evaluates the estimated remaining useful life of its contract
intangibles on at least a quarterly basis, taking into account new facts and circumstances,
including its retention rate for acquired contracts. If such facts and circumstances indicate the
current estimated useful life is no longer reasonable, the Company adjusts the estimated useful
life on a prospective basis.
Estimated aggregate amortization expense related to the above contract intangibles for the
remainder of 2010 is $0.1 million and for each of the next four years is $0.3 million.
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13. Accrued Expenses
Accrued expenses consist of the following (in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Salaries and employee benefits |
$ | 23,779 | $ | 21,528 | ||||
Professional liability claims |
21,604 | 25,236 | ||||||
Accrued workers compensation claims |
7,609 | 7,130 | ||||||
Accrued loss contingency related to shareholder
litigation (see Note 18) |
4,536 | 15,126 | ||||||
Other |
6,844 | 9,356 | ||||||
64,372 | 78,376 | |||||||
Less: Noncurrent portion of deferred lease liability |
(875 | ) | (958 | ) | ||||
Less: Noncurrent portion of professional liability
and workers compensation claims |
(18,672 | ) | (14,523 | ) | ||||
$ | 44,825 | $ | 62,895 | |||||
14. Reserve for Loss Contracts
On a quarterly basis, the Company performs a review of its portfolio of contracts for the
purpose of identifying potential loss contracts and developing a loss contract reserve for
succeeding periods if any loss contracts are identified. 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 the Companys ability to terminate the
contracts, future contractual revenue, projected future healthcare and maintenance costs, projected
future stop-loss insurance recoveries and each contracts 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 managements estimate of future cost
increases. These estimates are subject to the same adverse fluctuations and future claims
experience as previously noted.
There are no loss contracts identified as of September 30, 2010.
In the course of performing its reviews in future periods, the Company might identify
contracts which have become loss contracts due to a change in circumstances. Circumstances that
might change and result in the identification of a contract as a loss contract in a future period
include interpretations regarding contract termination or expiration provisions, unanticipated
adverse changes in the healthcare cost structure, inmate population or the utilization of outside
medical services in a contract, where such changes are not offset by increased healthcare revenues.
Should a contract be identified as a loss contract in a future period, the Company would record,
in the period in which such identification is made, a reserve for the estimated future losses that
would be incurred under the contract. The identification of a loss contract in the future could
have a material adverse effect on the Companys results of operations in the period in which the
reserve is recorded.
15. Banking Arrangements
On July 28, 2009, the Company entered into a Revolving Credit and Security Agreement which was
subsequently amended on March 2, 2010 (the Credit Agreement) with CapitalSource Bank
(CapitalSource). The Credit Agreement is set to mature on October 31, 2011 and includes a $40.0
million revolving credit facility, with a current facility cap of $20.0 million, under which the
Company has available standby letters of credit up to $15.0 million. The Company may request an
increase in the current facility cap of up to an additional $20.0 million subject to lender
approval. The amount available to the Company for borrowings under the Credit Agreement is based
on the Companys collateral base, as determined under the Credit Agreement, and is reduced by the
amount of each outstanding standby letter of credit. The Credit Agreement is secured by
substantially all assets of the Company and its operating subsidiaries. At September 30, 2010, the
Company had no borrowings outstanding under the Credit Agreement and $20.0 million available for
borrowing, based on the current facility cap and the Companys collateral base on that date.
Borrowings under the Credit Agreement are limited to the lesser of (1) 85% of eligible
receivables or (2) $20.0 million (the Borrowing Capacity). Interest under the Credit Agreement
is payable monthly at an annual rate of one-month LIBOR plus 2%, subject to a minimum LIBOR rate of
3.14%. The Company is also required to pay a
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monthly collateral management fee equal to 0.042% on average borrowings outstanding under the
Credit Agreement.
Under the terms of the Credit Agreement, the Company is required to pay a monthly unused line
fee equal to 0.0375% on the Borrowing Capacity less the actual average borrowings outstanding under
the Credit Agreement for the month and the balance of any outstanding letters of credit.
All amounts outstanding under the Credit Agreement will be due and payable on October 31,
2011. If the Credit Agreement is extinguished prior to July 31, 2011, the Company will be required
to pay an early termination fee equal to $0.4 million.
The Credit Agreement requires the Company to maintain a minimum level of EBITDA of $8.0
million on a trailing twelve-month basis to be measured at the end of each calendar quarter. The
Credit Agreement defines EBITDA as net income plus interest expense, income taxes, depreciation
expense, amortization expense, any other non-cash non-recurring expense, loss from asset sales
outside of the normal course of business and charges and cash expenses arising out of the Audit
Committee investigation into matters at SPP including any expenses or charges incurred in the
associated shareholder securities suit provided such amounts, net of insurance recoveries, do not
exceed $4.5 million in the aggregate, minus gains on asset sales outside the normal course of
business or other non-recurring gains. The Company was in compliance with the minimum level of
EBITDA covenant requirement at September 30, 2010.
The Credit Agreement permits the Company to declare and pay cash dividends, but requires the
Company to maintain both a pre-distribution fixed charge coverage ratio and a post-distribution
fixed charge coverage ratio both calculated on a trailing twelve-month basis to be measured at the
end of each calendar quarter. The Credit Agreement defines the pre-distribution fixed charge
coverage ratio as EBITDA, as defined above, divided by the sum of principal payments on outstanding
debt, cash interest expense on outstanding debt, capital expenditures and cash income taxes paid or
accrued. The Credit Agreement requires that the Company maintain a minimum pre-distribution fixed
charge coverage ratio of 1.75. The Credit Agreement defines the post-distribution fixed charge
coverage ratio as EBITDA, as defined above, divided by the sum of principal payments on outstanding
debt, cash interest expense on outstanding debt, capital expenditures, cash income taxes paid or
accrued, and cash dividends paid or accrued or declared. The Credit Agreement requires a minimum
post-distribution fixed charge coverage ratio of 1.25 if the Companys average net cash (cash less
outstanding debt) plus the average amount available for borrowing under the Credit Agreement is
greater than or equal to $20.0 million for the most recent calendar quarter; or, a minimum
post-distribution fixed charge coverage ratio of 1.50 if the Companys average net cash (cash less
outstanding debt) plus the average amount available for borrowing under the Credit Agreement is
less than $20.0 million for the most recent calendar quarter. At September 30, 2010, the Company
was in compliance with both the pre-distribution fixed charge coverage ratio and the
post-distribution fixed charge coverage ratio.
16. Income Taxes
The Company accounts for income taxes under the provisions of U.S. GAAP related to income
taxes. Under the asset and liability method of U.S. GAAP related to income taxes, 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. U.S. GAAP 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. At September 30, 2010, the Companys valuation
allowance of approximately $0.2 million represents managements estimate of state net operating
loss carryforwards which will expire unused.
The Companys estimated effective tax rate is based on expected pre-tax income, expected
permanent book/tax differences, statutory tax rates and tax planning opportunities available in the
various jurisdictions in which it operates. On an interim basis, management estimates the annual
tax rate based on projected taxable income for the full year and records a quarterly income tax
provision in accordance with the anticipated annual rate. As the year progresses, management
refines the estimate of the years taxable income as new information becomes available, including
year-to-date financial results. This continual estimation process often results in a change to the
Companys
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expected effective tax rate for the year. When this occurs, management adjusts the income tax
provision during the quarter in which the change in estimate occurs so that the year-to-date
provision reflects the expected annual tax rate. The Companys effective income tax rate on income
from continuing operations before taxes for each of the quarter and nine months ended September 30,
2010 is 42.6%.
The Company accounts for tax contingency accruals under the provisions of U.S. GAAP related to
accounting for uncertainty in income taxes. The Companys tax contingency accruals are reviewed
quarterly and can be adjusted in light of changing facts and circumstances, such as the progress of
tax audits, case law and emerging legislation. Adjustments to the tax contingency accruals are
recorded in the period in which the new facts or circumstances become known, therefore the accruals
are subject to change in future periods and such change, if it were to occur, could have a material
adverse effect on the Companys results of operations.
It is the Companys policy to recognize accrued interest and penalties related to its tax
contingencies as income tax expense. The Company has no tax contingencies at September 30, 2010,
and there is no accrued interest and penalties included in income tax expense for the quarters and
nine months ended September 30, 2010 and 2009.
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company may be subject to examination by the Internal Revenue Service (IRS)
for calendar years 2007 through 2009. The Company is currently under audit for the 2008 tax year.
Additionally, open tax years related to state jurisdictions remain subject to examination.
17. Professional and General Liability Self-Insurance Retention
The Company maintains a primary professional liability insurance program, principally on a
claims-made basis. For 2002 through 2006 and 2008 through 2010 with respect to the majority of its
patients, the Company purchased commercial insurance coverage, but is effectively self-insured due
to the terms of the coverage which include adjustable premiums. For 2002 through 2006 and 2008
through 2010, the Company is covered by separate policies, each of which contains a premium that is
retroactively adjusted, with adjustment based on actual losses. The Companys ultimate premium for
its 2002 through 2006 and 2008 through 2010 policies will depend on the final incurred losses
related to each of these separate policy periods. For 2007, the Company is insured through claims
made policies subject to per event and aggregate coverage limits. In addition to the coverage
described above, effective January 1, 2010, the Company has purchased an excess liability policy
which provides coverage on a claims made basis for indemnity losses in excess of $4.0 million up to
a maximum coverage of $10 million per loss and in the aggregate. Any amounts ultimately incurred
above these coverage limits would be the responsibility of the Company.
The Company records a liability for reported as well as unreported professional and general
liability claims made against it, its directors and employees, and others who are indemnified by
the Company. Amounts accrued were $21.6 million and $25.2 million at September 30, 2010 and
December 31, 2009, respectively, and are included in accrued expenses and the non-current portion
of accrued expenses in the condensed consolidated balance sheets. 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. For the
nine months ended September 30, 2010 and 2009, the Company recorded increases of approximately
$6.4 million and $5.6 million, respectively, related to its prior years known claims reserves as a
result of adverse developments on individual claims or matters. After considering the impact of
earnings that would have been allocated to participating securities in calculating net income per
common share (see Note 19), the Companys net income available to common shareholders and basic
and diluted earnings per common share were negatively impacted as a result of this adverse
development by amounts totaling $3.8 million, or $0.42 per basic and diluted common share, for the
nine months ended September 30, 2010 and $3.3 million, or $0.36 per basic common share and $0.35
per diluted common share, for the nine months ended September 30, 2009. Reserves for professional
and general liability exposures are subject to fluctuations in frequency and severity and can
fluctuate as a result of court decisions or as new facts become available. Given the inherent
degree of variability in any such estimates, the reserves reported at September 30, 2010 represent
managements best estimate of the amounts necessary to discharge the Companys self-insured
professional and general liabilities. Any adverse developments on individual claims or matters in
the future could have a material adverse effect on the Companys financial position and its
results of operations in the period in which the reserve for any adverse development is recorded.
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18. Commitments and Contingencies
The Company is subject to legal proceedings in the ordinary course of business. A discussion
is provided below of significant outstanding matters for which there have been updates during
2010. For a discussion of all other significant outstanding matters, please refer to Note 21 of
the Companys 2009 Annual Report on Form 10-K filed on March 8, 2010.
Litigation and Claims
DeSantis Professional Liability Suit. On August 26, 2010, Theresa DeSantis and Julie
Giangiolini, as guardians of the estate of Anthony DeSantis, Jr., filed a complaint in the Court of
the Sixteenth Judicial Circuit in Kane County, Illinois alleging that PHS, by and through the
actions of its medical staff committed medical negligence which caused Anthony DeSantis Jr. to suffer
from significant injuries. Plaintiffs seek damages to recoup past and future pain and suffering,
loss of income, medical bills incurred and for the cost of future medical treatment. This matter
is currently in the discovery phase, therefore, at this time,
the Company is unable to determine the significance of this matter, however, the outcome of this
lawsuit could have a material adverse effect on the Companys result of operations or financial
position in future periods once additional information becomes available.
Matters involving PHS and Baltimore County, Maryland. PHS is currently involved in a lawsuit
with its former client, Baltimore County, Maryland (the County) in the Circuit Court for
Baltimore County, Maryland seeking collection of outstanding receivable balances, damages for
breach of contract, quantum meruit, and unjust enrichment as well as prejudgment interest (the
Collection Matter). The outstanding receivable balances total approximately $1.7 million at
September 30, 2010 and are primarily related to services performed by PHS between April 1, 2006 and
September 14, 2006 while PHS and the County were jointly seeking a judicial interpretation of a
contract dispute regarding whether the County had timely exercised its first renewal option under
its contract with PHS.
PHS contended that the original term of its contract with the County expired on June 30, 2005,
without the County exercising the first of three, two-year renewal options. On July 1, 2005, PHS
sent a letter to the County stating its position that PHS contract to provide services expired on
June 30, 2005 due to the Countys failure to provide such extension notice. The County disputed
PHS contention asserting that it properly exercised the first renewal option and that the term of
the contract therefore was through June 30, 2007, with extension options through June 30, 2011. In
July 2005, the County and PHS agreed to have a judicial authority interpret the contract through
formal judicial proceedings (the Contract Matter). At the written request of the County, PHS
continued to provide healthcare services to the County from July 1, 2005 to September 14, 2006,
under the terms and conditions of the contested contract, pending the judicial resolution of the
Contract Matter, while reserving all of its rights. Finally, during September 2006, amid
reciprocal claims of default, both PHS and the County took individual steps to terminate the
relationship between the parties. PHS contends that it terminated the relationship effective
September 14, 2006, due to various breaches by the County, including failure to remit payment of
approximately $1.7 million primarily related to services rendered between April 1, 2006 and
September 14, 2006. On October 27, 2006, PHS initiated the Collection Matter lawsuit against the
County.
The Collection Matter, although filed, was initially dormant, pending the resolution of the
Contract Matter. As discussed in more detail below, the Contract Matter was resolved in favor of
PHS on August 26, 2008, when the Maryland Court of Appeals (the States highest appellate court)
denied the Countys request for a review of a Maryland Court of Special Appeals decision in favor
of PHS. After the resolution of the Contract Matter, the parties, during 2009, commenced the
discovery process on the Collection Matter. On March 30, 2010, the court held a scheduling
conference in which the judge set February 8, 2011 as the trial date for the Collection Matter.
PHS believes, in the case of the Collection Matter, that it has a valid and meritorious cause of
action and, as a result, has concluded that the outstanding receivables, which represent services
performed under the relationship between the parties, continues to be probable of collection.
However, although PHS believes it has valid contractual and legal arguments, an adverse result in
the Collection Matter could have a negative impact on PHS ability to collect the outstanding
receivable amount and result in losses in future periods.
During 2009, the Contract Matter, mentioned above, was resolved in the following manner. In
November 2005, the Circuit Court for Baltimore County, Maryland ruled in favor of the County, with
respect to the Contract Matter, ruling that the County properly exercised its first, two-year
renewal option by sending a faxed written renewal amendment to PHS on July 1, 2005. PHS appealed
this ruling. On December 6, 2006, the Maryland Court of Special Appeals (i) reversed this
judgment; (ii) ruled that the County did not timely exercise its renewal option by
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its actions of July 1, 2005; and (iii) remanded the case to the Circuit Court to determine
whether the County properly exercised the option by its conduct prior to June 30, 2005 an issue
not originally decided by the Circuit Court. On May 15, 2007, the Circuit Court, upon remand, held
a hearing on the parties pending cross motions for summary judgment. The Court issued an oral
opinion at the end of the hearing indicating its intention to rule in favor of the Countys motion
for summary judgment and against PHS motion for summary judgment. On June 6, 2007, the Court
filed its order memorializing the aforementioned ruling. In its order, the Court ruled that, by
its actions, the County properly and timely exercised the first two-year renewal option. The
Company filed a Notice of Appeal and on May 14, 2008, the Maryland Court of Special Appeals issued
its ruling that the actions the County claimed constituted an exercise of renewal were ineffective.
Accordingly, the Court of Special Appeals reversed the Circuit Courts ruling and directed it to
grant the Companys motion for summary judgment in the lawsuit. On June 27, 2008, the County
petitioned the Maryland Court of Appeals (the States highest appellate court) to review the May
14, 2008 Court of Special Appeals decision. By order dated August 26, 2008, the Court of Appeals
denied the Countys request to review the decision, resulting in the ruling of the Court of Special
Appeals in favor of the Company becoming final, thereby bringing closure to the Contract Matter.
Matters Related to the Audit Committee Investigation and Shareholder Litigation
On March 15, 2006 the Company announced that its Audit Committee had concluded its
investigation and reached certain conclusions with respect to findings of the investigation that
resulted in the recording of amounts due to SPPs customers that were not charged in accordance
with the terms of their respective contracts.
Shareholder Litigation. On April 6, 2006, plaintiffs filed the first of four similar
securities class action lawsuits in the United States District Court for the Middle District of
Tennessee against the Company and the Companys Chief Executive Officer, at that time, and Chief
Financial Officer. Plaintiffs allegations in these class action lawsuits were substantially
identical and generally alleged on behalf of a putative class of individuals who purchased the
Companys common stock between September 24, 2003 and March 16, 2006 that, prior to the Companys
announcement of the Audit Committee investigation, the Company and/or the Companys Chief Executive
Officer, at that time, and Chief Financial Officer violated Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and SEC Rule 10b-5 by making false and misleading statements,
or concealing information about the Companys business, forecasts and financial performance. The
complaints sought certification as a class action, unspecified compensatory damages, attorneys
fees and costs, and other relief. By order dated August 3, 2006, the district court consolidated
the lawsuits into one consolidated action and on October 31, 2006, plaintiff filed an amended
complaint adding SPP, Enoch E. Hartman III and Grant J. Bryson as defendants. Enoch E. Hartman III
is a former employee of the Company and SPP and Grant J. Bryson is a former employee of SPP. The
amended complaint also generally alleged that defendants made false and misleading statements
concerning the Companys business which caused the Companys securities to trade at inflated prices
during the class period. Plaintiff sought an unspecified amount of damages in the form of (i)
restitution; (ii) compensatory damages, including interest; and (iii) reasonable costs and
expenses. Defendants moved to dismiss the amended complaint on January 19, 2007, and the parties
completed the briefs on the motion in May 2007. On March 31, 2009, the Court ruled on the
defendants motion to dismiss, granting it in part and denying it in part. While the Courts
ruling dismissed significant portions of plaintiffs amended complaint and, as a result, narrowed
the scope of plaintiffs claims, none of the defendants were dismissed from the case and several of
plaintiffs claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
SEC Rule 10b-5 remained. The parties were not in agreement as to the scope of the Courts order
and defendants filed a motion to confirm which claims the Court dismissed in its March 31, 2009
ruling. The Court granted defendants motion to confirm the scope of the dismissal order on July
20, 2009, ruling that certain of Plaintiffs claims had been in fact dismissed. The Court also
confirmed, however, that certain other claims remained viable.
On July 22, 2009, the Court administratively closed the shareholder litigation case, while the
parties pursued mediation of this matter. On February 19, 2010, the parties agreed to the terms of
a mediators proposal to settle all of the claims in this lawsuit. At a hearing on October 15,
2010, the Court approved the settlement, entering a final judgment and dismissing with prejudice
all claims against all defendant in the litigation. The settlement provided for payment by the
Company of $10.5 million and issuance by the Company of 300,000 shares of common stock. The total
value of the settlement, based upon the Companys closing share price for its common stock of
$15.12 per share on October 15, 2010, is approximately $15.0 million. During the second quarter of
2010, the $10.5 million cash component of the settlement was paid by the Company to the escrow
agent appointed by the Court. As such, at September 30, 2010 the Company has a remaining reserve
of $4.5 million, which represents the final value of the stock component of the settlement and was
included in accrued expenses in the Companys condensed consolidated
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balance sheet as of September 30, 2010. On October 18, 2010, the Company issued 300,000
shares of its common stock to the escrow agent appointed by the Court thereby fulfilling all terms
of the approved settlement. The Company now considers this matter closed.
In September 2009, the Company and its primary directors and officers liability (D&O)
carrier reached an agreement under which the Company and the primary D&O carrier mutually released
each other from future claims related to this matter and the primary D&O carrier remitted insurance
proceeds to the Company totaling $8.0 million, less approximately $0.4 million in legal fees paid
by the primary D&O carrier as of the settlement date.
In addition to its primary D&O carrier, with which the Company has settled all claims, the
Company also maintains D&O insurance with an excess D&O carrier that provides for additional
insurance coverage of up to $5.0 million for losses in excess of $10.0 million. The excess D&O
carrier has denied coverage of this matter. After failing to reach agreement with the excess D&O
carrier concerning the amount of their contribution to the settlement, the Company filed suit
against the excess D&O carrier in the second quarter of 2010.
Delaware Department of Justice Inquiry. On April 4, 2006, the Company received a letter
notifying it that the Office of the Attorney General, Delaware Department of Justice is conducting
an inquiry into the indirect payment of claims by the Delaware Department of Correction to SPP
beginning in July 2002 and ending in the spring of 2005 for pharmaceutical services. There can be
no assurance that the Delaware Department of Justice inquiry will not result in the Company
incurring additional investigation and related expenses; being required to make additional refunds;
incurring criminal, or civil penalties, including the imposition of fines; or being debarred from
pursuing future business in certain jurisdictions. Management of the Company is unable to predict
the effect that any such actions may have on its business, financial condition, results of
operations or stock price. During the second quarter of 2010, the Company received a written offer
from the Delaware Department of Justice to settle the inquiry in exchange for a cash payment. The
Company has reserves totaling $0.4 million related to this matter which is the Companys estimate
of refund and associated interest due to the Delaware Department of Corrections, which was serviced
by a customer of SPP (see Note 3). This amount is recorded in accrued expenses in the Companys
condensed consolidated balance sheet. The Company is continuing to cooperate with the Delaware
Department of Justice during its inquiry.
Other Matters
The Companys business results from time to time in labor and employment related claims and
matters, actions for professional liability and related allegations of deliberate indifference in
the provision of healthcare and other causes of action related to its provision of healthcare
services. Therefore, in addition to the matters discussed above, the Company is a party to filed
or pending legal and other proceedings incidental to its business. An estimate of the amounts
payable on existing claims for which the liability of the Company is probable and estimable is
included in accrued expenses. The Company is not aware of any unasserted claims that would have a
material adverse effect on its consolidated financial position, results of operations or cash
flows.
Performance Bonds
The Company is required under certain contracts to provide a performance bond and may also be
required to post performance bonds for other business reasons. At September 30, 2010, the Company
had outstanding performance bonds totaling $5.3 million. The performance bonds are renewed on an
annual basis. The Company has no letters of credit at September 30, 2010 collateralizing these
performance bonds. The Company is dependent on the financial health of the surety companies that
it relies on to issue its performance bonds. An inability to obtain new or renew existing
performance bonds could result in limitations on the Companys ability to bid for new or renew
existing contracts which could have a material adverse effect on the Companys financial condition
and results of operations.
19. Net Income (Loss) Per Common Share
Net income (loss) per common share is measured at two levels: basic income (loss) per common
share and diluted income (loss) per common share. Basic income (loss) per common share is computed
by dividing net income (loss) available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per common share is computed by
dividing net income (loss) available to common shareholders by the weighted average number of
common shares outstanding after considering the additional
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dilution related to other dilutive non-participating securities. The Companys other
dilutive non-participating securities outstanding consist of options to purchase shares of the
Companys common stock. Unvested restricted shares of common stock are not considered outstanding
common shares for purposes of calculating earnings per share available to common shareholders.
In June 2008, the FASB issued guidance which clarifies that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are participating securities and should be included in the computation of earnings per
share under the two class method. In periods where the Company has income from continuing
operations, the two class method allocates undistributed earnings between common shares and
participating securities. In periods in which the Company has incurred a loss from continuing
operations, the two-class method does not result in an allocation of such loss between the
Companys common shares and participating securities. Based on this clarification, the Company has
determined that its unvested restricted stock awards are considered participating securities. The
modified guidance became effective for the Company on January 1, 2009 and the Company is required
to retrospectively apply the modified guidance to any prior periods presented.
The Company has prepared its current period earnings per share calculations and
retrospectively revised its prior period calculations to exclude net income allocated to these
unvested restricted stock awards. Basic and diluted income from continuing operations per share
was not impacted for the quarter ended September 30, 2009. Basic and diluted net income available
to common shareholders per share decreased by $0.01 for the nine months ended September 30, 2009.
The following table presents information necessary to calculate basic and diluted earnings per
common share (in thousands except for share and per share data):
Quarter ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Income from continuing operations |
$ | 2,844 | $ | 475 | $ | 7,989 | $ | 2,730 | ||||||||
Income (loss) from discontinued operations, net of taxes |
(51 | ) | 241 | (60 | ) | 788 | ||||||||||
Net income |
2,793 | 716 | 7,929 | 3,518 | ||||||||||||
Less: Income allocated to participating securities (unvested
restricted shares) |
(26 | ) | (21 | ) | (175 | ) | (118 | ) | ||||||||
Net income allocated to common shareholders |
$ | 2,767 | $ | 695 | $ | 7,754 | $ | 3,400 | ||||||||
Components of income allocated to participating securities
(unvested restricted shares): |
||||||||||||||||
Income from continuing operations |
$ | 27 | $ | 13 | $ | 176 | $ | 90 | ||||||||
Income (loss) from discontinued operations, net of taxes |
(1 | ) | 8 | (1 | ) | 28 | ||||||||||
Income allocated to participating securities |
$ | 26 | $ | 21 | $ | 175 | $ | 118 | ||||||||
Components of net income allocated to common shareholders
numerator for calculating net income (loss) available to common
shareholders per common share: |
||||||||||||||||
Income from continuing operations |
$ | 2,817 | $ | 462 | $ | 7,813 | $ | 2,640 | ||||||||
Income (loss) from discontinued operations, net of taxes |
(50 | ) | 233 | (59 | ) | 760 | ||||||||||
Net income allocated to common shareholders |
$ | 2,767 | $ | 695 | $ | 7,754 | $ | 3,400 | ||||||||
Denominator: |
||||||||||||||||
Denominator for basic net income loss) available to common
shareholders per common share weighted average shares |
8,871,307 | 8,998,512 | 8,772,845 | 8,964,710 | ||||||||||||
Effect of dilutive non-participating securities: |
||||||||||||||||
Employee stock options |
58,759 | 99,141 | 79,568 | 110,795 | ||||||||||||
Denominator for diluted net income (loss) available to common
shareholders per common share adjusted weighted average
shares and assumed conversions |
8,930,066 | 9,097,653 | 8,852,413 | 9,075,505 | ||||||||||||
Net income (loss) available to common shareholders per common
share basic: |
||||||||||||||||
Continuing operations |
$ | 0.32 | $ | 0.05 | $ | 0.89 | $ | 0.29 | ||||||||
Discontinued operations, net of taxes |
(0.01 | ) | 0.03 | (0.01 | ) | 0.09 | ||||||||||
Net income available to common shareholders per common share |
$ | 0.31 | $ | 0.08 | $ | 0.88 | $ | 0.38 | ||||||||
Net income (loss) available to common shareholders per common
share diluted: |
||||||||||||||||
Continuing operations |
$ | 0.32 | $ | 0.05 | $ | 0.89 | $ | 0.28 | ||||||||
Discontinued operations, net of taxes |
(0.01 | ) | 0.03 | (0.01 | ) | 0.09 | ||||||||||
Net income available to common shareholders per common share |
$ | 0.31 | $ | 0.08 | $ | 0.88 | $ | 0.37 | ||||||||
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The table below sets forth information regarding options that have been excluded from
the computation of diluted net income (loss) per common share because the average market price of
the common shares for the periods shown and, therefore, the effect would be anti-dilutive.
Quarter ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Options excluded from computation of diluted net
income per common share as effect would be
anti-dilutive |
420,520 | 584,000 | 395,385 | 859,005 | ||||||||||||
Weighted average exercise price of excluded options |
$ | 21.44 | $ | 22.02 | $ | 21.82 | $ | 19.55 | ||||||||
20. Comprehensive Income
For the quarters and nine months ended September 30, 2010 and 2009, the Companys
comprehensive income was equal to net income.
21. Share Repurchases
On February 27, 2008, the Companys Board of Directors approved a stock repurchase program to
repurchase up to $15 million of the Companys common stock through the end of 2009. On July 28,
2009, the Companys Board of Directors authorized the extension of this program by two years
through the end of 2011, while maintaining the total $15 million limit. This program is intended
to be implemented through purchases made from time to time in either the open market or through
private transactions, in accordance with SEC requirements. The Company may elect to terminate or
modify the program at any time. Under the stock repurchase program, no shares will be purchased
directly from officers or directors of the Company. The timing, prices and sizes of purchases will
depend upon prevailing stock prices, general economic and market conditions and other
considerations. Funds for the repurchase of shares are expected to come primarily from cash
provided by operating activities and also from funds on hand, including amounts available under the
Companys credit facility. During the nine months ended September 30, 2010, the Company
repurchased and retired a total of 33,500 common shares at an aggregate cost of approximately $0.5
million. As of September 30, 2010, the Company has repurchased and retired a total of 891,850
shares of common stock under the stock repurchase program at an aggregate cost of approximately
$11.2 million.
22. Subsequent Event
On October 27, 2010, the Companys Board of Directors declared a quarterly cash dividend of
$0.06 per share on the Companys common stock for the quarter ended December 31, 2010. The
dividend will be paid on December 9, 2010, to shareholders of record on November 18, 2010.
In accordance with U.S. GAAP related to subsequent events, the Company evaluated all material
events occurring subsequent to the balance sheet date of September 30, 2010, through the date the
condensed consolidated financial statements were issued, for events requiring disclosure or
recognition in the condensed consolidated financial statements.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
America Service Group Inc. (ASG or the Company) is a leading non-governmental provider
and/or administrator of managed correctional healthcare services in the United States. The Company
is a provider and/or administrator of managed healthcare services to county/municipal jails and
detention centers and state correctional facilities. As of October 1, 2010, the Company provided
and/or administered managed healthcare services under 57 contracts to approximately 166,000 inmates
at over 150 sites in 20 states.
The Company operates through its subsidiaries, Prison Health Services, Inc. (PHS),
Correctional Health Services, LLC (CHS) and Secure Pharmacy Plus, LLC (SPP). 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. ASGs
executive offices are located at 105 Westpark Drive, Suite 200, Brentwood, Tennessee 37027. Its
telephone number is (615) 373-3100.
The following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and accompanying notes included herein.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements represent managements current expectations regarding future events. All statements
other than statements of current or historical fact contained in this quarterly report, including
statements regarding the Companys future financial position, business strategy, budgets, projected
costs, and plans and objectives of management for future operations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms such as may,
will, should, plan, expect, anticipate, estimate, believe, continue, intend,
project and similar words, although some forward-looking statements are expressed differently.
These statements are based on the Companys current plans and anticipated future activities, and
its actual results of operations may be materially different from those expressed or implied by the
forward-looking statements. Some of the factors that may cause the Companys actual results of
operations or financial position to differ materially from those expressed or implied by the
forward-looking statements include, among other things:
| the Companys ability to retain existing client contracts and obtain new contracts at acceptable pricing levels; | ||
| whether or not government agencies continue to privatize correctional healthcare services; | ||
| risks arising from governmental budgetary pressures and funding; | ||
| the possible effect of adverse publicity on the Companys business; | ||
| increased competition for new contracts and renewals of existing contracts; | ||
| risks arising from the possibility that the Company may be unable to collect accounts receivable or that accounts receivable collection may be delayed; | ||
| the Companys ability to limit its exposure for inmate medical costs, catastrophic illnesses, injuries and medical malpractice claims in excess of amounts covered under contracts or insurance coverage; | ||
| the Companys ability to maintain and continually develop information technology and clinical systems; | ||
| the outcome or adverse development of pending litigation, including professional liability litigation; | ||
| the Companys determination whether to continue the payment of quarterly cash dividends, and if so, at the current amount; |
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| the Companys determination whether to repurchase shares under its stock repurchase program; | ||
| the Companys dependence on key management and clinical personnel; | ||
| risks arising from potential weaknesses or deficiencies in the Companys internal control over financial reporting; | ||
| risks associated with the possibility that the Company may be unable to satisfy covenants under its credit facility; | ||
| the risk that government or municipal entities (including the Companys government and municipal customers) may bring enforcement actions against, seek additional refunds from, or impose penalties on, the Company or its subsidiaries as a result of the matters investigated by the Audit Committee in prior years; and | ||
| the Companys ability to expand its business beyond its traditional correctional health client base. |
In addition to the factors referenced above and the other cautionary statements discussed in
this report, you should also consider the risks included in Item 1A, Risk Factors contained in
this Form 10-Q and Item 1A, Risk Factors contained in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009 and in other documents that the Company files from time to
time with the Securities and Exchange Commission. Because these risk factors could cause actual
results or outcomes to differ materially from those expressed or implied in any forward-looking
statements made by the Company or on the Companys behalf, stockholders should not place undue
reliance on any forward-looking statements. Further, any forward-looking statement speaks only as
of the date on which it is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for the Company to predict which factors will arise. In addition, the
Company cannot assess the impact of each factor on its business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in or
implied by any forward-looking statements.
Critical Accounting Policies And Estimates
General
The Companys discussion and analysis of its financial condition and results of operations are
based upon its condensed consolidated financial statements, which have been prepared in accordance
with United States generally accepted accounting principles. 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 (net of contractual allowances) and cost recognition (including the estimated cost of off-site medical claims); | ||
| allowance for doubtful accounts; | ||
| loss contracts; | ||
| professional and general liability self-insurance retention; | ||
| other self-funded insurance reserves; | ||
| legal contingencies; | ||
| impairment of intangible assets and goodwill; | ||
| amortizable life of contract intangibles; | ||
| income taxes; and | ||
| share-based compensation. |
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
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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 are affected by its more
significant judgments and estimates used in the preparation of its condensed consolidated financial
statements.
Revenue and Cost Recognition
The Companys contracts to provide healthcare services to correctional institutions are
principally fixed price contracts with revenue adjustments for census fluctuations and risk sharing
arrangements, such as stop-loss provisions and aggregate limits for off-site or pharmaceutical
costs. Such contracts typically have a term of one to three years with subsequent renewal options
and generally may be terminated by either party without cause upon proper notice. Revenues earned
under contracts with correctional institutions are recognized in the period that services are
rendered. Cash received in advance for future services is recorded as deferred revenue and
recognized as income when the service is performed.
Revenues are calculated based on the specific contract terms and fall into one of three
general categories: fixed fee, population based, or cost plus a fee.
For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in
the service contract irrespective of inmate population. Revenues for population-based contracts
are calculated either on a fixed fee that is subsequently adjusted using a per diem rate for
variances in the inmate population from predetermined population levels or by a per diem rate
multiplied by the average inmate population for the period of service. For cost plus a fee
contracts, revenues are calculated based on actual expenses incurred during the service period plus
a contractual fee.
Generally, the Companys contracts will also include additional provisions which mitigate a
portion of the Companys risk related to cost increases. Off-site utilization risk is mitigated in
the majority of the Companys contracts through aggregate pools or caps for off-site expenses,
stop-loss provisions, cost plus a fee arrangements or, in some cases, the entire exclusion of
certain or all off-site service costs. Pharmacy expense risk is similarly mitigated in certain of
the Companys contracts. Typically, under the terms of such provisions, the Companys revenue
under the contract increases to offset increases in specified cost categories such as off-site
expenses or pharmaceutical costs. For contracts that include such provisions, the Company
recognizes the additional revenues due from clients based on its estimates of applicable contract
to date costs incurred as compared to the corresponding pro rata contractual limit for such costs.
Because such provisions typically specify how often such additional revenue may be invoiced and
require all such additional revenue to be ultimately settled based on actual expenses, the
additional revenues are initially recorded as unbilled receivables until the time period for
billing has been met and actual costs are known. Any differences between the Companys estimates
of incurred costs and the actual costs are recorded in the period in which such differences become
known along with the corresponding adjustment to the amount of recorded additional revenues.
Under all contracts, the Company records revenues net of any estimated contractual allowances
for potential adjustments resulting from a failure to meet performance or staffing related
criteria. If necessary, the Company revises its estimates for such adjustments in future periods
when the actual amount of the adjustment is determined.
The table below illustrates these revenue categories as a percentage of total revenues from
continuing operations for the nine months ended September 30, 2010 and 2009.
Percentage of Revenue from | ||||||||
Continuing Operations | ||||||||
Nine Months Ended | Nine Months Ended | |||||||
Contract Category | September 30, 2010 | September 30, 2009 | ||||||
Fixed Fee |
12.7 | % | 13.2 | % | ||||
Population Based |
67.5 | % | 64.5 | % | ||||
Cost Plus a Fee |
19.8 | % | 22.3 | % |
Contracts under the population based and fixed fee categories generally have similar
margins which are higher than margins for contracts under the cost plus a fee category. Cost plus
a fee contracts generally have lower margins but with much less potential for variability due to
the limited risk involved. The Companys profitability under each of
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the three general contract categories discussed above varies based on the level of risk
assumed under the contract terms with the most potential for variability being in contracts under
the population based or fixed fee categories which do not contain the risk mitigating provisions
related to off-site utilization described above.
Healthcare expenses include the compensation of physicians, nurses and other healthcare
professionals and related benefits and all other direct costs of providing and/or administering
the managed care, including the costs associated with services provided and/or administered by
off-site medical providers, the costs of professional and general liability insurance and other
self-funded insurance reserves discussed more fully below. Many of the Companys contracts require
the Companys customers to reimburse the Company for all treatment costs or, in some cases, only
treatment costs related to certain catastrophic events, and/or for specific disease diagnoses
illnesses. Certain of the Companys 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 specific disease diagnosis-related limits. However, the occurrence of severe
individual cases, specific disease diagnoses 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 Companys operations. For certain of its contracts that do
not contain catastrophic protection, the Company maintains stop loss insurance from an
unaffiliated insurer with respect to, among other things, inpatient and outpatient hospital
expenses (as defined in the policy) for amounts in excess of $375,000 per inmate up to an annual
cap of $1.0 million per inmate and $3.0 million in total. Amounts reimbursable per claim under the policy are further
limited to the lessor of billed charges, the amount paid or the contracted amounts in
situations where the Company has negotiated rates with the applicable providers.
The cost of healthcare services provided, administered or contracted for are recognized in the
period in which they are provided and/or administered based in part on estimates, including an
accrual for estimated unbilled medical services rendered through the balance sheet date. The
Company estimates the accrual for unbilled medical services using actual utilization data including
hospitalization, one-day surgeries, physician visits and emergency room and ambulance visits and
their corresponding costs, which are estimated using the average historical cost of such services.
Additionally, the Companys utilization management personnel perform a monthly review of inpatient
hospital stays in order to identify any stays which would have a cost in excess of the historical
average rates. Once identified, reserves for such stays are determined which take into
consideration the specific facts of the stay. An actuarial analysis is also prepared at least
quarterly as an additional tool to be considered by management in evaluating the adequacy of the
Companys total accrual related to contracts which have sufficient claims payment history. The
analysis takes into account historical claims experience (including the average historical costs
and billing lag time for such services) and other actuarial data.
Actual payments and future reserve requirements will differ from the Companys current
estimates. The differences could be material if significant fluctuations occur in the healthcare
cost structure or the Companys 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.
Allowance for Doubtful Accounts
Accounts receivable are stated at estimated net realizable value. The Company recognizes
allowances for doubtful accounts based on a variety of factors, including the length of time
receivables are past due, significant one-time events, contractual rights, client funding and/or
political pressures, discussions with clients and historical experience. If circumstances change,
estimates of the recoverability of receivables would be further adjusted and such adjustments could
have a material adverse effect on the Companys results of operations in the period in which they
are recorded.
Unbilled accounts receivable generally represent additional revenue earned under shared-risk
contracting models that remain unbilled at each balance sheet date, due to provisions within the
contracts governing the timing for billing such amounts.
The Company and its clients will, from time to time, have disputes over amounts billed under
the Companys contracts. The Company records a reserve for contractual allowances in
circumstances where it concludes that a loss from such disputes is probable.
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As discussed more fully in Part II Item 1. Legal Proceedings, PHS is currently involved
in a lawsuit with its former client, Baltimore County, Maryland (the County) involving the
Countys lack of payment for services rendered. PHS has approximately $1.7 million of receivables
due from the County, primarily related to services rendered between April 1, 2006 and September 14,
2006, the date the Companys relationship with the County was terminated. The County has refused
to pay PHS for these amounts and therefore, on October 27, 2006, PHS filed suit against the County
in the Circuit Court for Baltimore County, Maryland seeking collection of the outstanding
receivables balance, damages for breach of contract, quantum meruit, and unjust enrichment as well
as prejudgment interest. As discussed more fully in Part II Item 1. Legal Proceedings, PHS
believes, in the case of this lawsuit, that it has a valid and meritorious cause of action and, as
a result, has concluded that the outstanding receivables, which represent services performed under
the contractual relationship between the parties, continues to be probable of collection.
Although PHS believes it has valid contractual and legal arguments, an adverse result in this
lawsuit could have a negative impact on the results of this matter and/or PHS ability to collect
the outstanding receivables amount. These receivables are classified as other noncurrent assets in
the Companys condensed consolidated balance sheet.
As stated above, the Company believes the recorded amount represents valid receivables which
are contractually due from the County and expects full collection. However, due to the factors
discussed above and more fully in Part II Item 1. Legal Proceedings, there is a heightened
risk of uncollectibility of these receivables which may result in future losses. Nevertheless, the
Company intends to take all necessary and available measures in order to collect these receivables.
Changes in circumstances related to the matter discussed above involving the County, or any
other receivables, could result in a change in the allowance for doubtful accounts or the estimate
of contractual adjustments in future periods. Such change, if it were to occur, could have a
material adverse affect on the Companys results of operations and financial position in the period
in which the change occurs.
Loss Contracts
On a quarterly basis, the Company performs a review of its portfolio of contracts for the
purpose of identifying potential loss contracts and developing a loss contract reserve for
succeeding periods if any loss contracts are identified. 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 the Companys ability to terminate the
contract, future contractual revenue, projected future healthcare and maintenance costs, projected
future stop-loss insurance recoveries and the contracts 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 managements estimate of future cost
increases. These estimates are subject to the same adverse fluctuations and future claims
experience as previously noted.
There are no loss contracts identified as of September 30, 2010.
In the course of performing its reviews in future periods, the Company might identify
contracts which have become loss contracts due to a change in circumstances. Circumstances that
might change and result in the identification of a contract as a loss contract in a future period
include interpretations regarding contract termination or expiration provisions, unanticipated
adverse changes in the healthcare cost structure, inmate population or the utilization of outside
medical services in a contract, where such changes are not offset by increased healthcare revenues.
Should a contract be identified as a loss contract in a future period, the Company would record,
in the period in which such identification is made, a reserve for the estimated future losses that
would be incurred under the contract. The identification of a loss contract in the future could
have a material adverse effect on the Companys results of operations in the period in which the
reserve is recorded.
Professional and General Liability Self-Insurance Retention
As a healthcare provider, the Companys business occasionally results in actions for
negligence and other causes of action related to its provision of healthcare services with the
attendant risk of substantial damage awards, or court ordered non-monetary relief such as, changes
in operating practices or procedures, which may lead to the potential for substantial increases in
the Companys operating expenses. The most significant source of potential liability in this regard
is the risk of suits brought by inmates alleging negligent healthcare services, deliberate
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indifference to their medical needs or the lack of timely or adequate healthcare services.
The Company may also be liable, as employer, for the negligence of healthcare professionals it
employs or healthcare professionals with whom it contracts. The Companys contracts generally
provide for the Company to indemnify the governmental agency for losses incurred related to
healthcare provided by the Company and its agents.
To mitigate a portion of this risk, the Company maintains a primary professional liability
insurance program, principally on a claims-made basis. For 2002 through 2006 and 2008 through 2010
with respect to the majority of its patients, the Company purchased commercial insurance coverage,
but is effectively self-insured due to the terms of the coverage which include adjustable premiums.
For 2002 through 2006 and 2008 through 2010, the Company is covered by separate policies, each of
which contains a premium that is retroactively adjusted, with adjustment based on actual losses.
The Companys ultimate premium for its 2002 through 2006 and 2008 through 2010 policies will depend
on the final incurred losses related to each of these separate policy periods. For 2007, the
Company is insured through claims made policies subject to per event and aggregate coverage limits.
In addition to the coverage described above, effective January 1, 2010, the Company has purchased
an excess liability policy which provides coverage on a claims made basis for indemnity losses in
excess of $4.0 million up to a maximum coverage of $10 million per loss and in the aggregate. Any
amounts ultimately incurred above these coverage limits would be the responsibility of the Company.
Management establishes reserves for the estimated losses that will be incurred under these
insurance policies after taking into consideration the Companys professional liability claims
department and external counsel evaluations of the merits of the individual claims, analysis of
claim history, actuarial analysis and coverage limits where applicable. Any adjustments resulting
from the review are reflected in current earnings.
Given the fact that many claims are not brought during the year of occurrence, in addition to
its reserves for known claims, the Company maintains a reserve for incurred but not reported
claims. The reserve for incurred but not reported claims is recorded on an undiscounted basis.
The Companys estimates of this reserve are supported by various analyses, including an actuarial
analysis, which is performed on a quarterly basis.
At September 30, 2010, the Companys reserves for both known as well as incurred but not
reported claims totaled $21.6 million. Reserves for medical malpractice claims fluctuate because
the number of claims and the severity of the underlying incidents change from one period to the
next. Reserves for medical malpractice claims can also fluctuate as a result of court decisions or
as new facts become available. Furthermore, payments with respect to previously estimated
liabilities frequently differ from the estimated liability. Changes in estimates of losses
resulting from such fluctuations and differences between managements established reserves and
actual loss payments are recognized by an adjustment to the reserve for medical malpractice claims
in the period in which the estimates are changed or payments are made. For the nine months ended
September 30, 2010 and 2009, the Company recorded increases of approximately $6.4 million and $5.6
million, respectively, related to its prior year known claims reserves as a result of adverse
developments. The reserves can also be affected by changes in the financial health of the
third-party insurance carriers used by the Company. If a third party insurance carrier fails to
meet its contractual obligations under the agreement with the Company, the Company would then be
responsible for such obligations. Such changes could have a material adverse effect on the
Companys financial position and its results of operations in the period in which the changes
occur.
Other Self-Funded Insurance Reserves
At September 30, 2010, the Company has approximately $9.2 million in accrued liabilities for
employee health and workers compensation claims. Approximately $7.6 million of this amount is
related to workers compensation claims, of which approximately $4.5 million is included within the
noncurrent portion of accrued expenses as it is not expected to be paid within a year. The Company
is essentially self-insured for employee health and workers compensation claims subject to certain
individual case stop loss levels. As such, its insurance expense is largely dependent on claims
experience and the ability to control claims. The Company accrues the estimated liability for
employee health insurance based on its history of claims experience and estimated time lag between
the incident date and the date of actual claim payment. The Company accrues the estimated
liability for workers compensation claims based on evaluations of the merits of the individual
claims and analysis of claims history. These estimated liabilities are recorded on an undiscounted
basis. An actuarial analysis is prepared at least annually as an additional tool to be considered
by management in evaluating the adequacy of the Companys reserve for workers compensation claims.
These estimates of self-funded insurance reserves could change in the future based on changes in
the factors discussed above. Any adjustments resulting from such changes in estimates are
reflected in current earnings.
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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. When estimable, the Company accrues an estimate of the probable
costs for the resolution of these claims. Such estimates are developed in consultation with outside
counsel handling the Companys defense in these matters and are based upon an estimated range of
potential results, assuming a combination of litigation and settlement strategies. 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. See discussion of certain outstanding legal
matters in Part II Item 1. Legal Proceedings.
In addition to professional and general liability claims and other legal proceedings in the
ordinary course of business, the Company is involved in other legal matters related to an Audit
Committee investigation, which was announced by the Company on October 24, 2005. See Part II
Item 1. Legal Proceedings for further information regarding the Audit Committee investigation and
related legal matters.
Impairment of Intangible Assets and Goodwill
Goodwill acquired is not amortized but is reviewed for impairment on an annual basis or more
frequently whenever events or circumstances indicate that the carrying value may not be
recoverable. U.S. GAAP requires that goodwill be tested at the reporting unit level, defined as an
operating segment or one level below an operating segment (referred to as a component), with the
fair value of the reporting unit being compared to its carrying amount, including goodwill. If the
fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not
considered to be impaired. The Company has determined that it has one operating, as well as one
reportable, segment. The Companys policy is to perform its annual goodwill impairment test as of
the last day of each fiscal year, i.e. December 31.
In performing its annual goodwill impairment test, the Company uses a two-step process. The
first step is a screen for potential impairment, while the second step measures the amount of the
impairment, if any. The first step of the goodwill impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. The Company determined the fair value
of its reporting unit to equal the market capitalization of its common stock as of the testing
date. As of December 31, 2009, the indicated fair value of the Companys reporting unit exceeded
the carrying value of its reporting unit by 338%, and, as such, the Company concluded that there
was no indication of goodwill impairment.
Future events could cause the Company to conclude that impairment indicators exist and that
the Companys goodwill is impaired. Any resulting impairment loss could have a material adverse
impact on the Companys financial condition and results of operations.
Important factors taken into consideration when evaluating the need for an impairment review,
other than the annual impairment test, include the following:
| significant underperformance or loss of key contracts relative to expected historical or projected future operating results; | ||
| significant changes in the manner of use of the Companys assets or in the Companys overall business strategy; | ||
| significant negative industry or economic trends; and | ||
| an adverse change in the Companys market capitalization. |
If the Company determines that the carrying value of goodwill may be impaired based upon the
existence of one or more of the above or other indicators of impairment or as a result of its
annual impairment review, the impairment will be measured using a fair-value-based goodwill
impairment test. Fair value is the amount at which the asset could be bought or sold in a current
transaction between willing parties and may be estimated using a number of techniques, including
quoted market prices or valuations by third parties, present value techniques based on estimates of
cash flows, or multiples of earnings or revenues. The fair value of the asset could be different
using different estimates and assumptions in these valuation techniques.
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The Companys other identifiable intangible assets represent customer contracts acquired in
acquisitions and are amortized on the straight-line method over their estimated useful lives. The
Company also assesses the potential impairment of its other identifiable intangibles whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
When the Company determines that the carrying value of other intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of impairment, such
impairment will be measured using an estimate of the assets fair value based on the projected net
cash flows expected to result from that asset, including eventual disposition.
Amortizable Life of Contract Intangibles
The Company amortizes its contract intangibles on a straight-line basis over their estimated
useful life. The Company evaluates the estimated remaining useful life of its contract intangibles
on at least a quarterly basis, taking into account new facts and circumstances, including its
retention rate for acquired contracts. If such facts and circumstances indicate the current
estimated useful life is no longer reasonable, the Company adjusts the estimated useful life on a
prospective basis.
Income Taxes
The Company accounts for income taxes under the provisions of U.S. GAAP related to income
taxes. Under the asset and liability method of U.S. GAAP related to income taxes, 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. U.S. GAAP 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. At September 30, 2010, the Companys valuation
allowance of approximately $0.2 million represents managements estimate of state net operating
loss carryforwards which will expire unused.
The Companys estimated effective tax rate is based on expected pre-tax income, expected
permanent book/tax differences, statutory tax rates and tax planning opportunities available in the
various jurisdictions in which it operates. On an interim basis, management estimates the annual
tax rate based on projected taxable income for the full year and records a quarterly income tax
provision in accordance with the anticipated annual rate. As the year progresses, management
refines the estimate of the years taxable income as new information becomes available, including
year-to-date financial results. This continual estimation process often results in a change to the
Companys expected effective tax rate for the year. When this occurs, management adjusts the income
tax provision during the quarter in which the change in estimate occurs so that the year-to-date
provision reflects the expected annual tax rate. The Companys effective income tax rate on income
from continuing operations before taxes for each of the quarter and nine months ended September 30,
2010 is 42.6%.
The Company accounts for tax contingency accruals under the provisions of U.S. GAAP related to
accounting for uncertainty in income taxes. The Companys tax contingency accruals are reviewed
quarterly and can be adjusted in light of changing facts and circumstances, such as the progress of
tax audits, case law and emerging legislation. Adjustments to the tax contingency accruals are
recorded in the period in which the new facts or circumstances become known, therefore the accruals
are subject to change in future periods and such change, if it were to occur, could have a material
adverse effect on the Companys results of operations.
It is the Companys policy to recognize accrued interest and penalties related to its tax
contingencies as income tax expense. The Company has no tax contingencies at September 30, 2010
and there is no accrued interest and penalties included in income tax expense for the quarters and
nine months ended September 30, 2010 and 2009.
The Company files income tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company may be subject to examination by the Internal Revenue Service (IRS)
for calendar years 2007 through 2009. The Company is currently under audit for the 2008 tax year.
Additionally, open tax years related to state jurisdictions remain subject to examination.
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Share-Based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards
based on estimated fair values at the date of grant. Determining the fair value of share-based
awards at the grant date requires judgment in developing assumptions, which involve a number of
variables. These variables include, but are not limited to, the expected stock price volatility
over the term of the awards and expected stock option exercise behavior. In addition, the Company
also uses judgment in estimating the number of share-based awards that are expected to be
forfeited.
Results of Operations
The following table sets forth, for the periods indicated, the percentage relationship to
healthcare revenues of certain items in the condensed consolidated statements of income.
Quarter ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Percentage of Healthcare Revenues | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Healthcare revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Healthcare expenses |
91.3 | 94.1 | 91.2 | 93.2 | ||||||||||||
Gross margin |
8.7 | 5.9 | 8.8 | 6.8 | ||||||||||||
Selling, general and administrative expenses |
5.0 | 4.3 | 5.2 | 5.0 | ||||||||||||
Corporate restructuring expenses |
| | 0.1 | | ||||||||||||
Audit Committee investigation and related expenses |
| 0.6 | 0.1 | 0.2 | ||||||||||||
Depreciation and amortization |
0.6 | 0.4 | 0.5 | 0.4 | ||||||||||||
Income from operations |
3.1 | 0.6 | 2.9 | 1.2 | ||||||||||||
Interest expense (income) |
| | | 0.1 | ||||||||||||
Income from
continuing operations before income tax provision |
3.1 | 0.6 | 2.9 | 1.1 | ||||||||||||
Income tax provision |
1.3 | 0.3 | 1.2 | 0.5 | ||||||||||||
Income from continuing operations |
1.8 | 0.3 | 1.7 | 0.6 | ||||||||||||
Income (loss) from discontinued operations, net of taxes |
| 0.2 | | 0.2 | ||||||||||||
Net income |
1.8 | % | 0.5 | % | 1.7 | % | 0.8 | % | ||||||||
Quarter Ended September 30, 2010 Compared to Quarter Ended September 30, 2009
Healthcare revenues. Healthcare revenues for the quarter ended September 30, 2010 increased
$4.3 million, or 2.8%, from $153.6 million for the quarter ended September 30, 2009 to $157.9
million for the quarter ended September 30, 2010. Healthcare revenues in 2010 included $0.5
million of revenue growth resulting from correctional healthcare services contracts added
subsequent to July 1, 2009 through marketing activities. Correctional healthcare services
contracts in place at July 1, 2009 and continuing beyond September 30, 2010 experienced revenue
growth of 2.5% consisting of additional revenue of $3.8 million during the third quarter of 2010 as
the result of increases from contract renegotiations and automatic price increases. As discussed
in the discontinued operations section below, the Companys correctional healthcare services
contracts that have expired or otherwise been terminated have been classified as discontinued
operations.
Healthcare expenses.
Healthcare expenses for the quarter ended September 30, 2010 decreased
$0.3 million, or 0.2%, from $144.5 million, or 94.1% of revenues, for the quarter ended September
30, 2009 to $144.2 million, or 91.3% of revenues, for the quarter ended September 30, 2010.
Correctional healthcare services contracts in place at July 1, 2009 and continuing beyond September
30, 2010 experienced a decrease in healthcare expenses of $0.9 million during the third quarter of
2010 primarily due to a reduction in off-site medical services associated with providing healthcare
to inmates at existing contracts.
Included in healthcare expenses for the quarter ended September 30, 2009 is approximately $2.5 million of expense
for estimated off-site inmate medical claims incurred but not reported for the period April 1, 2009 through
June 30, 2009 for the State of Michigan Department of Corrections contract, which related to an unanticipated
increase in claims for the dates of service noted above processed during the month of August 2009 by the Companys
provider network subcontractor under this contract.
Offsetting this reduction was an increase in expenses related to
new correctional healthcare services contracts added subsequent to July 1, 2009 through marketing
activities totaling $0.6 million. Also included in healthcare expenses for the quarter ended
September 30, 2010 is approximately $0.1 million of accrued bonus expense related to the Companys
2010 incentive compensation plan. Included in healthcare expenses for the quarter ended September
30, 2009 is a net reduction of totaling $0.1 million of accrued bonus expense related to the
Companys 2009 incentive compensation plan due to the financial performance of the quarter.
Selling, general and administrative expenses. Selling, general and administrative expenses
were $7.9 million, or 5.0% of revenues, for the quarter ended September 30, 2010 as compared to
$6.6 million, or 4.3% of revenues, for the quarter ended September 30, 2009. Included in selling,
general and administrative expenses
for the quarters
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ended September 30, 2010 and 2009 is
approximately $0.3 million and $0.5 million, respectively, related to share-based compensation
expense. Also included in selling, general and administrative expenses for the quarter
ended
September 30, 2010 is approximately $0.3 million of accrued bonus expense related to the Companys
2010 incentive compensation plan. Included in selling, general and administrative expenses for the
quarter ended September 30, 2009 is a net reduction of approximately $0.3 million of accrued bonus
expense related to the Companys 2009
incentive compensation plan due to the financial performance of the quarter. The remaining
increase is primarily due to an increase in administrative salaries primarily in the clinical and
information technology areas.
Audit Committee investigation and related expenses. Audit Committee investigation and related
expenses were $31,000 for the quarter ended September 30, 2010 as compared to $1.0 million for the
quarter ended September 30, 2009. The Audit Committee investigation and related expenses incurred
in the quarter ended September 30, 2010, are primarily due to legal expenses incurred as part of
the Company reaching a settlement on February 19, 2010, regarding the shareholder litigation filed
against the Company and certain individual defendants on April 6, 2006 and related litigation filed
by the Company against one of its insurance carriers. See Part II Item 1. Legal Proceedings
for further discussion of the Audit committee investigation and related legal matters.
Depreciation and amortization. Depreciation and amortization expense was $0.9 million and
$0.6 million for the quarters ended September 30, 2010 and 2009, respectively. The increase in
depreciation and amortization is primarily due to an increase in capital expenditures.
Interest expense (income). Net interest income was $26,000 for the quarter ended September
30, 2010 compared to net interest expense totaling $28,000 for the quarter ended September 30,
2009. During the quarter ended September 30, 2010, the Company had no borrowings outstanding on
its Credit Agreement resulting in a reduction in interest expense. This reduction, combined with
earnings on cash balances, resulted in net interest income for the period.
Income tax provision. The income tax provision for the quarter ended September 30, 2010 was
$2.1 million as compared with $0.4 million for the quarter ended September 30, 2009 as a result of
an increase in income from continuing operations before income tax provision to $5.0 million for
the quarter ended September 30, 2010 as compared with $0.9 million for the quarter ended September
30, 2009.
Income from continuing operations. Income from continuing operations for the quarter ended
September 30, 2010 was $2.8 million, as compared with $0.5 million for the quarter ended September
30, 2009 as the result of the factors discussed above.
Income (loss) from discontinued operations, net of taxes. The loss from discontinued
operations, net of taxes, for the quarter ended September 30, 2010 was $0.1 million as compared
with income of $0.2 million for the quarter ended September 30, 2009. Income (loss) from
discontinued operations, net of taxes, represents the operating results of the Companys
correctional healthcare services contracts that have expired or otherwise been terminated. The
classification of these expired contracts is the result of the Companys application of U.S. GAAP
related to discontinued operations. See Note 6 of the Companys condensed consolidated financial
statements for further discussion of this application of U.S. GAAP.
Net income. Net income for the quarter ended September 30, 2010 was $2.8 million, or 1.8% of
revenues, as compared with $0.7 million, or 0.5% of revenues, for the quarter ended September 30,
2009. This change in net income resulted from the factors discussed above.
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Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Healthcare revenues. Healthcare revenues for the nine months ended September 30, 2010
increased $46.0 million, or 10.7%, from $428.4 million for the nine months ended September 30, 2009
to $474.4 million for the nine months ended September 30, 2010. Healthcare revenues in 2010
included $26.5 million of revenue growth resulting from correctional healthcare services contracts
added subsequent to January 1, 2009 through marketing activities. The primary correctional
healthcare services contract added during this time period was the Companys contract to provide
healthcare services to the State of Michigan Department of Corrections, which commenced on April 1,
2009. Correctional healthcare services contracts in place at January 1, 2009 and continuing beyond
September 30, 2010 experienced revenue growth of 5.3% consisting of additional revenue of $19.5
million during the nine months ended September 30, 2010 as the result of increases from contract
renegotiations and automatic price increases. As discussed in the discontinued operations section
below, the Companys correctional healthcare services contracts that have expired or otherwise been
terminated have been classified as discontinued operations.
Healthcare expenses. Healthcare expenses for the nine months ended September 30, 2010
increased $33.3 million, or 8.3%, from $399.2 million, or 93.2% of revenues, for the nine months
ended September 30, 2009 to $432.4 million, or 91.2% of revenues, for the nine months ended
September 30, 2010. Expenses related to new correctional healthcare services contracts added
subsequent to January 1, 2009 through marketing activities accounted for $15.8 million of the
increase. The primary correctional healthcare services contract added during this time period was
the Companys contract to provide healthcare services to the State of Michigan Department of
Corrections, which commenced on April 1, 2009. Correctional healthcare services contracts in place
at January 1, 2009 and continuing beyond September 30, 2010 experienced an increase in healthcare
expenses of $17.2 million during the nine months ended September 30, 2010 as a result of increases
in the levels of staff and staff compensation, increases in the off-site medical services and
pharmacy costs associated with providing healthcare to inmates at existing contracts. Also
included in healthcare expenses for the nine months ended September 30, 2010 is approximately $0.8
million of accrued bonus expense related to the Companys 2010 incentive compensation plan.
Included in healthcare expenses for the nine months ended September 30, 2009 is approximately $0.5
million of accrued bonus expense related to the Companys 2009 incentive compensation plan.
Selling, general and administrative expenses. Selling, general and administrative expenses
were $24.9 million, or 5.2% of revenues, for the nine months ended September 30, 2010 as compared
to $21.3 million, or 5.0% of revenues, for the nine months ended September 30, 2009. Included in
selling, general and administrative expenses for the nine months ended September 30, 2010 and 2009
is approximately $1.7 million and $1.3 million, respectively, related to share-based compensation
expense. Included in this increase is approximately $0.5 million related to the accelerated
vesting of restricted shares that were issued in the first quarter of 2009, as a result of the
achievement of a specified target for the average closing share price of the Companys common
stock. Also included in selling, general and administrative expenses for the nine
months ended September 30, 2010 is approximately $2.1 million of accrued bonus expense related to
the Companys 2010 incentive compensation plan. Included in selling, general and administrative
expenses for the nine months ended September 30, 2009 is approximately $1.1 million of accrued
bonus expense related to the Companys 2009 incentive compensation plan. The remaining increase is
primarily due to an increase in administrative salaries primarily in the clinical and business
development areas.
Corporate restructuring expenses. Corporate restructuring expenses were $0.3 million for the
nine months ended September 30, 2010, which related to the management transitional changes
implemented in the second quarter of 2010. There were no corporate restructuring expenses in the
nine months ended September 30, 2009.
Audit Committee investigation and related expenses. Audit Committee investigation and related
expenses were $0.4 million for the nine months ended September 30, 2010 as compared to $1.1 million
for the nine months ended June 30, 2009. The Audit Committee investigation and related expenses
incurred in the nine months ended September 30, 2010, are primarily due to legal expenses incurred
as part of the Company reaching a settlement on February 19, 2010, regarding the shareholder
litigation filed against the Company and certain individual defendants on April 6, 2006 and related
litigation filed by the Company against one of its insurance carriers. See Part II Item 1.
Legal Proceedings for further discussion of the Audit committee investigation and related legal
matters.
Depreciation and amortization. Depreciation and amortization expense was $2.5 million and
$1.9 million, respectively, for the nine months ended September 30, 2010 and 2009, respectively.
The increase in depreciation and amortization is primarily due to an increase in capital
expenditures.
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Interest expense (income). Net interest income was $0.1 million for the nine months ended
September 30, 2010 compared to net interest expense totaling $0.1 million for the nine months ended
September 30, 2009. During the nine months ended September 30, 2010, the Company had no borrowings
outstanding on its Credit Agreement resulting in a reduction in interest expense. This reduction,
combined with earnings on cash balances, resulted in net interest income for the period.
Income tax provision. The income tax provision for the nine months ended September 30, 2010
was $5.9 million as compared with $2.1 million for the nine months ended September 30, 2009 as a
result of an increase in income from continuing operations before income tax provision to $13.9
million for the nine months ended September 30, 2010 as compared with $4.9 million for the nine
months ended September 30, 2009.
Income from continuing operations. Income from continuing operations for the nine months
ended September 30, 2010 was $8.0 million, as compared with $2.7 million for the nine months ended
September 30, 2009 as the result of the factors discussed above.
Income (loss) from discontinued operations, net of taxes. The loss from discontinued
operations, net of taxes, for the nine months ended September 30, 2010 was $0.1 million as compared
with income of $0.8 million for the nine months ended September 30, 2009. Income (loss) from
discontinued operations, net of taxes, represents the operating results of the Companys
correctional healthcare services contracts that have expired or otherwise been terminated. The
classification of these expired contracts is the result of the Companys application of U.S. GAAP
related to discontinued operations. See Note 6 of the Companys condensed consolidated financial
statements for further discussion of this application of U.S. GAAP.
Net income. Net income for the nine months ended September 30, 2010 was $7.9 million, or 1.7%
of revenues, as compared with $3.5 million, or 0.8% of revenues, for the nine months ended
September 30, 2009. This change in net income resulted from the factors discussed above.
Liquidity and Capital Resources
Overview
The Company had working capital of $10.8 million at September 30, 2010 compared to negative
working capital of $2.8 million at December 31, 2009. At September 30, 2010, days sales
outstanding in accounts receivable were 38, accounts payable days outstanding were 25 and accrued
medical claims liability days outstanding were 48. At December 31, 2009, days sales outstanding in
accounts receivable were 25, accounts payable days outstanding were 19 and accrued medical claims
liability days outstanding were 46. The increase in days sales outstanding in accounts receivable
at September 30, 2010 was primarily due to temporary delays in collections from certain large
clients.
The Company had stockholders equity of $49.7 million at September 30, 2010 and $42.0 million
at December 31, 2009. The Company had cash and cash equivalents of $15.4 million at September 30,
2010 compared to $37.7 million at December 31, 2009. This decrease is primarily the result of
the increase in days sales outstanding discussed above, combined with reductions in accrued expenses due to payments totaling $14.1 million made during the second
quarter of 2010 related to settlements of shareholder litigation, as discussed more fully in Part
II Item 1. Legal Proceedings, and professional liability claims payments.
Cash flows from operating activities represent the year to date net income plus adjustments
for various non-cash charges, such as depreciation and amortization expense and share-based
compensation expense, and changes in various components of working capital. Cash flows used in
operating activities during the nine months ended September 30, 2010 were $16.6 million, a decrease
of $32.6 million from cash flows provided by operations during the nine months ended September 30,
2009 of $16.0 million as a result of the items discussed above.
Cash flows used in investing activities were $3.7 million and $3.2 million for the nine months
ended September 30, 2010 and 2009, respectively, which represented capital expenditures, which were
financed through working capital.
Cash flows used in financing activities during the nine months ended September 30, 2010 were
$2.0 million, which resulted from dividends on common stock of $1.6 million, share repurchases of
$0.5 million and restricted stock repurchased from employees for employees tax liability of $1.0
million, partially offset by the issuance of
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common stock under the Companys employee stock
purchase plan of $0.4 million, excess tax benefits from share-based compensation arrangements of
$0.1 million and cash receipts resulting from option exercises of $0.6 million. Cash flows used
in financing activities during the nine months ended September 30, 2009 were $2.0 million, which
resulted from dividends on common stock of $0.4 million, share repurchases of $3.5 million and
restricted stock repurchased from employees for employees tax liability of $0.2 million, partially
offset by the issuance of common stock under the Companys employee stock purchase plan of $0.3
million, excess tax benefits from share-based compensation arrangements of $0.1 million and cash
receipts resulting from option exercises of $1.7 million.
Share Repurchases
On February 27, 2008, the Companys Board of Directors approved a stock repurchase program to
repurchase up to $15 million of the Companys common stock through the end of 2009. On July 28,
2009, the Companys Board of Directors authorized the extension of this program by two years
through the end of 2011, while maintaining the total $15 million limit. As of September 30, 2010,
the Company has repurchased and retired a total of 891,850 shares of common stock under the stock
repurchase program at an aggregate cost of approximately $11.2 million.
The stock repurchase program is intended to be implemented through purchases made from time to
time in either the open market or through private transactions, in accordance with SEC
requirements. The Company may elect to terminate or modify the program at any time. Under the
stock repurchase program, no shares will be purchased directly from officers or directors of the
Company. The timing, prices and sizes of purchases will depend upon prevailing stock prices,
general economic and market conditions and other considerations. Funds for the repurchase of
shares are expected to come primarily from cash provided by operating activities and also from
funds on hand, including amounts available under the Companys credit facility.
Dividends
On April 13, 2010, the Company paid a $0.06 cash dividend per share on the Companys common
stock for the quarter ended March 31, 2010. On June 8, 2010, the Company paid a $0.06 cash
dividend per share on the Companys common stock for the quarter ended June 30, 2010. On September 9,
2010, the Company paid a $0.06 cash dividend per share on the Companys common stock for the
quarter ended September 30, 2010. On October 27, 2010, the Companys Board of Directors declared a
quarterly cash dividend of $0.06 per share on the Companys common stock for the quarter ended
December 31, 2010. The dividend will be paid on December 9, 2010 to stockholders of record on
November 18, 2010.
The Board of Directors recent adoption of a dividend program reflects the Companys intent to
return capital to stockholders. The Company expects that any future quarterly cash dividends will
be paid from cash generated by the Companys business in excess of its operating needs, interest
and principal payments on indebtedness, dividends on any future senior classes of the Companys
capital stock, if any, capital expenditures, taxes and future reserves, if any. Any future
dividends will be authorized by the Board of Directors and declared by the Company based upon a
variety of factors deemed relevant by directors of the Company. In addition, financial covenants
in the Credit Agreement may restrict the Companys ability to pay future quarterly dividends. The
Board of Directors will continue to evaluate the Companys dividend program each quarter and will
make adjustments as necessary, based on a variety of factors, including, among other things, the
Companys financial condition, liquidity, earnings projections and business prospects, and no
assurance can be given that this dividend program will not change in the future.
Credit Facility
On July 28, 2009, the Company entered into a Revolving Credit and Security Agreement which was
subsequently amended on March 2, 2010 (the Credit Agreement) with CapitalSource Bank
(CapitalSource). The Credit Agreement is set to mature on October 31, 2011 and includes a $40.0
million revolving credit facility, with a current facility cap of $20.0 million, under which the
Company has available standby letters of credit up to $15.0 million. The Company may request an
increase in the current facility cap of up to an additional $20.0 million subject to lender
approval. The amount available to the Company for borrowings under the Credit Agreement is based
on the Companys collateral base, as determined under the Credit Agreement, and is reduced by the
amount of each outstanding standby letter of credit. The Credit Agreement is secured by
substantially all assets of the Company and its operating subsidiaries. At September 30, 2010, the
Company had no borrowings outstanding
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under the Credit Agreement and $20.0 million available for
borrowing, based on the current facility cap and the Companys collateral base on that date.
Borrowings under the Credit Agreement are limited to the lesser of (1) 85% of eligible
receivables or (2) $20.0 million (the Borrowing Capacity). Interest under the Credit Agreement
is payable monthly at an annual rate of one-month LIBOR plus 2%, subject to a minimum LIBOR rate of
3.14%. The Company is also required to pay a monthly collateral management fee equal to 0.042% on
average borrowings outstanding under the Credit Agreement.
Under the terms of the Credit Agreement, the Company is required to pay a monthly unused line
fee equal to 0.0375% on the Borrowing Capacity less the actual average borrowings outstanding under
the Credit Agreement for the month and the balance of any outstanding letters of credit.
All amounts outstanding under the Credit Agreement will be due and payable on October 31,
2011. If the Credit Agreement is extinguished prior to July 31, 2011, the Company will be required
to pay an early termination fee equal to $0.4 million.
The Credit Agreement requires the Company to maintain a minimum level of EBITDA of $8.0
million on a trailing twelve-month basis to be measured at the end of each calendar quarter. The
Credit Agreement defines EBITDA as net income plus interest expense, income taxes, depreciation
expense, amortization expense, any other non-cash non-recurring expense, loss from asset sales
outside of the normal course of business and charges and cash expenses arising out of the Audit
Committee investigation into matters at SPP including any expenses or charges incurred in the
associated shareholder securities suit provided such amounts, net of insurance recoveries, do not
exceed $4.5 million in the aggregate, minus gains on asset sales outside the normal course of
business or other non-recurring gains. The Company was in compliance with the minimum level of
EBITDA covenant requirement at September 30, 2010.
The Credit Agreement permits the Company to declare and pay cash dividends, but requires the
Company to maintain both a pre-distribution fixed charge coverage ratio and a post-distribution
fixed charge coverage ratio both calculated on a trailing twelve-month basis to be measured at the
end of each calendar quarter. The Credit Agreement defines the pre-distribution fixed charge
coverage ratio as EBITDA, as defined above, divided by the sum of principal payments on outstanding
debt, cash interest expense on outstanding debt, capital expenditures and cash income taxes paid or
accrued. The Credit Agreement requires that the Company maintain a minimum pre-distribution fixed
charge coverage ratio of 1.75. The Credit Agreement defines the post-distribution fixed charge
coverage ratio as EBITDA, as defined above, divided by the sum of principal payments on outstanding
debt, cash interest expense on outstanding debt, capital expenditures, cash income taxes paid or
accrued, and cash dividends paid or accrued or declared. The Credit Agreement requires a minimum
post-distribution fixed charge coverage ratio of 1.25 if the Companys average net cash (cash less
outstanding debt) plus the average amount available for borrowing under the Credit Agreement is
greater than or equal to $20.0 million for the most recent calendar quarter; or, a minimum
post-distribution fixed charge coverage ratio of 1.50 if the Companys average net cash (cash less
outstanding debt) plus the average amount available for borrowing under the Credit Agreement is
less than $20.0 million for the most recent calendar quarter. At September 30, 2010, the Company
was in compliance with both the pre-distribution fixed charge coverage ratio and the
post-distribution fixed charge coverage ratio.
Liquidity and Capital Resources Outlook
The Company currently believes that cash flows from operating activities, its available cash,
and its expected available credit under the Credit Agreement will continue to enable it to
meet its contractual obligations and capital expenditure requirements for the foreseeable future.
The Company may, from time to time, consider acquisitions involving other companies or assets.
Such acquisitions or other opportunities may require the Company to raise additional capital by
expanding its existing credit facility and /or issuing debt or equity, as market conditions permit.
If the Company is unable to obtain such additional capital on a timely basis, on favorable terms
or at all, it could have inadequate capital to operate its business, meet its contractual
obligations and capital expenditure requirements or fund potential acquisitions. Current market
and economic conditions, including turmoil and uncertainty in the financial services industry and
credit markets, have caused credit markets to tighten and led many lenders and institutional
investors to reduce, and in some cases, cease to provide, funding to borrowers. Should the credit
markets not improve, the Company can make no assurances that it would be able to secure additional
financing if needed and, if such funds were available, whether the terms or conditions would be
acceptable.
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A portion of the Companys cash resources were used in the second quarter of 2010 to fund the
settlement of the shareholder litigation against the Company and certain executive officers. On
February 19, 2010 the Company agreed to the terms of a mediators proposed settlement, which
received final Court approval on October 15, 2010. As part of the settlement, the Company paid
$10.5 million in cash to the escrow agent appointed by the Court during the second quarter of 2010.
In October 2010, the Company issued 300,000 shares of common stock.
Other Financing Transactions
At September 30, 2010, the Company was contingently liable for $5.3 million of performance
bonds.
Off-Balance Sheet Transactions
As of September 30, 2010, the Company did not have any off-balance sheet financing
transactions or arrangements except for operating leases.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the condensed consolidated financial
statements of the Company due to adverse changes in financial market prices and rates. The
Companys exposure to market risk is primarily related to changes in the variable interest rate
under the Companys Credit Agreement. The Credit Agreement contains an interest rate based on the
one-month LIBOR rate, subject to a minimum LIBOR rate of 3.14%; therefore the Companys cash flow
may be affected by changes in the one-month LIBOR rate. A hypothetical 10% change in the
underlying interest rate for the quarter ended September 30, 2010 would have had no material effect on
interest expense paid under the Credit Agreement. Net interest expense (income) represents less
than 1% of the Companys revenues for each of the nine months ended September 30, 2010 and 2009.
The Company has no debt outstanding at September 30, 2010.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are the Companys controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934, as amended, (the Exchange Act) is recorded,
processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commission (SEC) rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed in
the reports that the Company files or furnishes under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company evaluated under the
supervision and with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, the effectiveness of the design and operation of the Companys disclosure
controls and procedures, pursuant to the Exchange Act. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed in the reports that
the Company files or furnishes under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
There were no changes in the Companys internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II:
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings in the ordinary course of business. A discussion
is provided below of significant outstanding matters for which there have been updates during
2010. For a discussion of all other significant outstanding matters, please refer to Note 21 of
the Companys 2009 Annual Report on Form 10-K filed on March 8, 2010.
DeSantis Professional Liability Suit. On August 26, 2010, Theresa DeSantis and Julie
Giangiolini, as guardians of the estate of Anthony DeSantis, Jr., filed a complaint in the Court of
the Sixteenth Judicial Circuit in Kane County, Illinois alleging that PHS, by and through the
actions of its medical staff committed medical negligence which caused Anthony DeSantis Jr. to suffer
from significant injuries. Plaintiffs seek damages to recoup past and future pain and suffering,
loss of income, medical bills incurred and for the cost of future medical treatment. This matter is currently in the
discovery phase, therefore, at this time,
the Company is unable to determine the significance of this matter, however, the outcome of this
lawsuit could have a material adverse effect on the Companys result of operations or financial
position in future periods once additional information becomes available.
Matters involving PHS and Baltimore County, Maryland. PHS is currently involved in a lawsuit
with its former client, Baltimore County, Maryland (the County) in the Circuit Court for
Baltimore County, Maryland seeking collection of outstanding receivable balances, damages for
breach of contract, quantum meruit, and unjust enrichment as well as prejudgment interest (the
Collection Matter). The outstanding receivable balances total approximately $1.7 million at
September 30, 2010 and are primarily related to services performed by PHS between April 1, 2006 and
September 14, 2006 while PHS and the County were jointly seeking a judicial interpretation of a
contract dispute regarding whether the County had timely exercised its first renewal option under
its contract with PHS.
PHS contended that the original term of its contract with the County expired on June 30, 2005,
without the County exercising the first of three, two-year renewal options. On July 1, 2005, PHS
sent a letter to the County stating its position that PHS contract to provide services expired on
June 30, 2005 due to the Countys failure to provide such extension notice. The County disputed
PHS contention asserting that it properly exercised the first renewal option and that the term of
the contract therefore was through June 30, 2007, with extension options through June 30, 2011. In
July 2005, the County and PHS agreed to have a judicial authority interpret the contract through
formal judicial proceedings (the Contract Matter). At the written request of the County, PHS
continued to provide healthcare services to the County from July 1, 2005 to September 14, 2006,
under the terms and conditions of the contested contract, pending the judicial resolution of the
Contract Matter, while reserving all of its rights. Finally, during September 2006, amid
reciprocal claims of default, both PHS and the County took individual steps to terminate the
relationship between the parties. PHS contends that it terminated the relationship effective
September 14, 2006, due to various breaches by the County, including failure to remit payment of
approximately $1.7 million primarily related to services rendered between April 1, 2006 and
September 14, 2006. On October 27, 2006, PHS initiated the Collection Matter lawsuit against the
County.
The Collection Matter, although filed, was initially dormant, pending the resolution of the
Contract Matter. As discussed in more detail below, the Contract Matter was resolved in favor of
PHS on August 26, 2008, when the Maryland Court of Appeals (the States highest appellate court)
denied the Countys request for a review of a Maryland Court of Special Appeals decision in favor
of PHS. After the resolution of the Contract Matter, the parties, during 2009, commenced the
discovery process on the Collection Matter. On March 30, 2010, the court held a scheduling
conference in which the judge set February 8, 2011 as the trial date for the Collection Matter.
PHS believes, in the case of the Collection Matter, that it has a valid and meritorious cause of
action and, as a result, has concluded that the outstanding receivables, which represent services
performed under the relationship between the parties, continues to be probable of collection.
However, although PHS believes it has valid contractual and legal arguments, an adverse result in
the Collection Matter could have a negative impact on PHS ability to collect the outstanding
receivable amount and result in losses in future periods.
During 2009, the Contract Matter, mentioned above, was resolved in the following manner. In
November 2005, the Circuit Court for Baltimore County, Maryland ruled in favor of the County, with
respect to the Contract
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Matter, ruling that the County properly exercised its first, two-year
renewal option by sending a faxed written renewal amendment to PHS on July 1, 2005. PHS appealed
this ruling. On December 6, 2006, the Maryland Court of Special Appeals (i) reversed this
judgment; (ii) ruled that the County did not timely exercise its renewal option by its actions of
July 1, 2005; and (iii) remanded the case to the Circuit Court to determine whether the County
properly exercised the option by its conduct prior to June 30, 2005 an issue not originally
decided by the Circuit Court. On May 15, 2007, the Circuit Court, upon remand, held a hearing on
the parties pending cross motions for summary judgment. The
Court issued an oral opinion at the end of the hearing indicating its intention to rule in
favor of the Countys motion for summary judgment and against PHS motion for summary judgment. On
June 6, 2007, the Court filed its order memorializing the aforementioned ruling. In its order, the
Court ruled that, by its actions, the County properly and timely exercised the first two-year
renewal option. The Company filed a Notice of Appeal and on May 14, 2008, the Maryland Court of
Special Appeals issued its ruling that the actions the County claimed constituted an exercise of
renewal were ineffective. Accordingly, the Court of Special Appeals reversed the Circuit Courts
ruling and directed it to grant the Companys motion for summary judgment in the lawsuit. On June
27, 2008, the County petitioned the Maryland Court of Appeals (the States highest appellate court)
to review the May 14, 2008 Court of Special Appeals decision. By order dated August 26, 2008, the
Court of Appeals denied the Countys request to review the decision, resulting in the ruling of the
Court of Special Appeals in favor of the Company becoming final, thereby bringing closure to the
Contract Matter.
Matters Related to the Audit Committee Investigation and Shareholder Litigation
On March 15, 2006 the Company announced that its Audit Committee had concluded its
investigation and reached certain conclusions with respect to findings of the investigation that
resulted in the recording of amounts due to SPPs customers that were not charged in accordance
with the terms of their respective contracts.
Shareholder Litigation. On April 6, 2006, plaintiffs filed the first of four similar
securities class action lawsuits in the United States District Court for the Middle District of
Tennessee against the Company and the Companys Chief Executive Officer, at that time, and Chief
Financial Officer. Plaintiffs allegations in these class action lawsuits were substantially
identical and generally alleged on behalf of a putative class of individuals who purchased the
Companys common stock between September 24, 2003 and March 16, 2006 that, prior to the Companys
announcement of the Audit Committee investigation, the Company and/or the Companys Chief Executive
Officer, at that time, and Chief Financial Officer violated Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1934 and SEC Rule 10b-5 by making false and misleading statements,
or concealing information about the Companys business, forecasts and financial performance. The
complaints sought certification as a class action, unspecified compensatory damages, attorneys
fees and costs, and other relief. By order dated August 3, 2006, the district court consolidated
the lawsuits into one consolidated action and on October 31, 2006, plaintiff filed an amended
complaint adding SPP, Enoch E. Hartman III and Grant J. Bryson as defendants. Enoch E. Hartman III
is a former employee of the Company and SPP and Grant J. Bryson is a former employee of SPP. The
amended complaint also generally alleged that defendants made false and misleading statements
concerning the Companys business which caused the Companys securities to trade at inflated prices
during the class period. Plaintiff sought an unspecified amount of damages in the form of (i)
restitution; (ii) compensatory damages, including interest; and (iii) reasonable costs and
expenses. Defendants moved to dismiss the amended complaint on January 19, 2007, and the parties
completed the briefs on the motion in May 2007. On March 31, 2009, the Court ruled on the
defendants motion to dismiss, granting it in part and denying it in part. While the Courts
ruling dismissed significant portions of plaintiffs amended complaint and, as a result, narrowed
the scope of plaintiffs claims, none of the defendants were dismissed from the case and several of
plaintiffs claims under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
SEC Rule 10b-5 remained. The parties were not in agreement as to the scope of the Courts order
and defendants filed a motion to confirm which claims the Court dismissed in its March 31, 2009
ruling. The Court granted defendants motion to confirm the scope of the dismissal order on July
20, 2009, ruling that certain of Plaintiffs claims had been in fact dismissed. The Court also
confirmed, however, that certain other claims remained viable.
On July 22, 2009, the Court administratively closed the shareholder litigation case, while the
parties pursued mediation of this matter. On February 19, 2010, the parties agreed to the terms of
a mediators proposal to settle all of the claims in this lawsuit. At a hearing on October 15,
2010, the Court approved the settlement, entering a final judgment and dismissing with prejudice
all claims against all defendant in the litigation. The settlement provided for payment by the
Company of $10.5 million and issuance by the Company of 300,000 shares of common stock. The total
value of the settlement, based upon the Companys closing share price for its common stock of
$15.12 per share on October 15, 2010, is approximately $15.0 million. During the second quarter of
2010, the $10.5 million
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cash component of the settlement was paid by the Company to the escrow
agent appointed by the Court. As such, at September 30, 2010 the Company has a remaining reserve
of $4.5 million, which represents the final value of the stock component of the settlement and was
included in accrued expenses in the Companys condensed consolidated balance sheet as of September
30, 2010. On October 18, 2010, the Company issued 300,000 shares of its common stock to the escrow
agent appointed by the Court, thereby fulfilling all terms of the approved settlement. The Company
now considers this matter closed.
In September 2009, the Company and its primary directors and officers liability (D&O)
carrier reached an agreement under which the Company and the primary D&O carrier mutually released
each other from future claims related to this matter and the primary D&O carrier remitted insurance
proceeds to the Company totaling $8.0 million, less approximately $0.4 million in legal fees paid
by the primary D&O carrier as of the settlement date.
In addition to its primary D&O carrier, with which the Company has settled all claims, the
Company also maintains D&O insurance with an excess D&O carrier that provides for additional
insurance coverage of up to $5.0 million for losses in excess of $10.0 million. The excess D&O
carrier has denied coverage of this matter. After failing to reach agreement with the excess D&O
carrier concerning the amount of their contribution to the settlement, the Company filed suit
against the excess D&O carrier in the second quarter of 2010.
Delaware Department of Justice Inquiry. On April 4, 2006, the Company received a letter
notifying it that the Office of the Attorney General, Delaware Department of Justice is conducting
an inquiry into the indirect payment of claims by the Delaware Department of Correction to SPP
beginning in July 2002 and ending in the spring of 2005 for pharmaceutical services. There can be
no assurance that the Delaware Department of Justice inquiry will not result in the Company
incurring additional investigation and related expenses; being required to make additional refunds;
incurring criminal, or civil penalties, including the imposition of fines; or being debarred from
pursuing future business in certain jurisdictions. Management of the Company is unable to predict
the effect that any such actions may have on its business, financial condition, results of
operations or stock price. During the second quarter of 2010, the Company received a written offer
from the Delaware Department of Justice to settle the inquiry in exchange for a cash payment. The
Company has reserves totaling $0.4 million related to this matter which is the Companys estimate
of refund and associated interest due to the Delaware Department of Corrections, which was serviced
by a customer of SPP (see Note 3). This amount is recorded in accrued expenses in the Companys
condensed consolidated balance sheet. The Company is continuing to cooperate with the Delaware
Department of Justice during its inquiry.
Other Matters
The Companys business results from time to time in labor and employment related claims and
matters, actions for professional liability and related allegations of deliberate indifference in
the provision of healthcare and other causes of action related to its provision of healthcare
services. Therefore, in addition to the matters discussed above, the Company is a party to filed
or pending legal and other proceedings incidental to its business. An estimate of the amounts
payable on existing claims for which the liability of the Company is probable and estimable is
included in accrued expenses. The Company is not aware of any unasserted claims that would have a
material adverse effect on its consolidated financial position, results of operations or cash
flows.
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ITEM 1A. RISK FACTORS
The Company previously disclosed risk factors under Item 1A. Risk Factors in its Annual
Report on Form 10-K for the year ended December 31, 2009. The risks discussed in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 are not the only risks facing the
Company. Additional risks and uncertainties not currently known to the Company or that the Company
deems immaterial may materially adversely affect our business, financial condition and/or results
of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Repurchases (shown in 000s except share and per share amounts):
(c) Total | (d) Maximum | |||||||||||||||
Number of | Number (or | |||||||||||||||
Shares | Approximate Dollar | |||||||||||||||
(b) | Purchased as | Value) of shares that | ||||||||||||||
(a) Total | Average | Part of Publicly | May Yet Be | |||||||||||||
of Number | Price | Announced | Purchased Under | |||||||||||||
of Shares | Paid per | Plans or | the Plans or | |||||||||||||
Period | Purchased | Share | Programs | Programs (1) | ||||||||||||
July 2010 (7/1/10 to 7/31/10) |
| $ | | | $ | | ||||||||||
August 2010 (8/1/10 to 8/31/10) |
| $ | | | $ | | ||||||||||
September 2010 (9/1/10 to
9/30/10) |
| $ | | | $ | |
(1) | On February 27, 2008, the Companys Board of Directors approved a stock repurchase program to repurchase up to $15 million of the Companys common stock through the end of 2009. On July 28, 2009, the Companys Board of Directors authorized the extension of this program by two years through the end of 2011, while maintaining the total $15 million limit. As of September 30, 2010, the Company has repurchased and retired a total of 891,850 shares of common stock under the stock repurchase program at an aggregate cost of approximately $11.2 million. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
3.1 | | Amended and Restated Certificate of Incorporation of America Service Group Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the three month period ended June 30, 2002). |
3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation of America Service Group Inc. (incorporated herein by reference to Exhibit 3.4 to the Companys Quarterly Report on Form 10-Q for the three month period ended June 30, 2004). |
3.3 | | Amended and Restated By-Laws of America Service Group Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on March 3, 2009). |
4.1 | | Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-Q for the three month period ended June 30, 2002). |
4.2 | | Certificate of Designation of the Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on February 10, 1999). |
10.1 | | Change Notice No. 2 to the Contract between Prison Health Service, Inc. and the State of Michigan (incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August 26, 2010). |
11 | | Computation of Per Share Earnings.* |
31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Data required by U.S. GAAP related to earnings per share is provided in Note 19 to the condensed consolidated financial statements in this report. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICA SERVICE GROUP INC. |
||||
/s/ RICHARD HALLWORTH | ||||
Richard Hallworth | ||||
President & Chief Executive Officer (Duly Authorized Officer) |
||||
/s/ MICHAEL W. TAYLOR | ||||
Michael W. Taylor | ||||
Executive Vice President & Chief Financial Officer (Principal Financial Officer) |
||||
Dated: November 2, 2010
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