Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-23340
AMERICA SERVICE GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0332317
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
105 WESTPARK DRIVE, SUITE 200 37027
BRENTWOOD, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 373-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 26, 2002 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $25,449,352. As of March 26, 2002, the registrant had
5,449,612 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 12, 2002 are incorporated by reference in Part
III.
================================================================================
PART I
ITEM 1. BUSINESS
This Form 10-K contains statements which may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of America Service Group Inc. and members of its management
team. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth below under
the caption "Cautionary Statements." America Service Group Inc. undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
GENERAL
America Service Group Inc. ("ASG" or the "Company"), through its
subsidiaries Prison Health Services, Inc. ("PHS"), EMSA Correctional Care, Inc.
("EMSA Correctional"), EMSA Military Services, Inc. ("EMSA Military"),
Correctional Health Services, Inc. ("CHS") and Secure Pharmacy Plus, Inc.
("SPP"), contracts to provide managed healthcare services including the
distribution of pharmaceuticals to over 250 correctional facilities and military
installations throughout the United States. The Company is the leading provider
of healthcare services to county/municipal jails and detention centers. ASG was
incorporated in 1990 as a holding company for PHS. Unless the context otherwise
requires, the terms "ASG" or the "Company" refer to ASG and its direct and
indirect subsidiaries. ASG's executive offices are located at 105 Westpark
Drive, Suite 200, Brentwood, Tennessee 37027. Its telephone number is (615)
373-3100.
CORRECTIONAL HEALTHCARE SERVICES
The Company contracts with state, county and local governmental
agencies to provide comprehensive healthcare services to inmates of prisons and
jails, with a focus on those facilities that maintain an average daily
population of over 300 inmates. ASG's revenues from correctional healthcare
services are generated primarily by payments from governmental agencies, none of
which are dependent on third party payment sources. Services provided by ASG
include a wide range of on-site healthcare programs, as well as off-site
hospitalization and specialty outpatient care. The hospitalization and specialty
outpatient care is performed through subcontract arrangements with independent
doctors and local hospitals. For the year ended December 31, 2001, revenues from
correctional healthcare services accounted for 90% of the Company's total
revenues.
1
The following table sets forth information regarding ASG's correctional
contracts.
HISTORICAL
DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------ ------
Number of correctional contracts(1) ............... 145 130 106 35 32
Average number of inmates in all facilities covered
by correctional contracts(2) .................. 194,137 176,563 132,304 63,783 54,364
- ----------
(1) Indicates the number of contracts in force at the end of the period
specified and includes EMSA Military and SPP contracts since
acquisition.
(2) Based on an average number of inmates during the last month of each
period specified.
ASG's target correctional market consists of state prisons and county
and local jails. A prison is a facility in which an inmate is incarcerated for
an extended period of time (typically one year or longer). A jail is a facility
in which the inmate is held for a shorter period of time, often while awaiting
trial or sentencing. The higher inmate turnover in jails requires that
healthcare be provided to a much larger number of individual inmates over time.
Conversely, the costs of chronic healthcare requirements are greater with
respect to state prison contracts. State prison contracts often cover a larger
number of facilities and often have longer terms than jail contracts.
Services Provided. Generally, ASG's obligation to provide medical
services to a particular inmate begins upon the inmate's admission into the
correctional facility and ends upon the inmate's release. Emphasis is placed
upon early identification of serious injuries or illnesses so that prompt and
cost-effective treatment is commenced.
Medical services provided on-site include physical and mental health
screening upon intake. Screening includes the compilation of the inmate's health
history and the identification of any current, chronic or acute healthcare
needs. After initial screening, services provided may include regular physical
and dental screening and care, psychiatric care, OB-GYN screening and care and
diagnostic testing. Hospitalization is provided offsite at acute-care hospitals
under contract to the Company. Nursing rounds are regularly conducted and
physicians, nurse practitioners, physicians' assistants and others are also
involved in the delivery of care on a regular basis. Necessary medications are
administered by nursing staff.
Medical services provided off-site include specialty outpatient
diagnostic testing and care, emergency room care, surgery and hospitalization.
In addition, ASG provides administrative support services on-site, at ASG's
headquarters and at regional offices. Administrative support services include
on-site medical records and management and employee education and licensing.
Central and regional offices provide quality assurance, medical audits,
credentialing, continuing education and clinical program development activities.
ASG maintains a utilization review system to monitor the extent and duration of
most healthcare services required by inmates on an inpatient and outpatient
basis.
Most of the Company's correctional contracts require it to staff the
facilities it serves with nurses 24 hours a day. Doctors at the facilities have
regular hours and are generally available on call. In addition, dentists,
psychiatrists and other specialists are often available on a routine basis. ASG
enters into contractual arrangements with independent doctors and local
hospitals with respect to more significant off-site procedures and
hospitalization. ASG is responsible for all of the costs of such arrangements,
unless the relevant contract contains a limit on ASG's obligations in connection
with the treatment costs.
The National Commission on Correctional Health Care (the "NCCHC") sets
standards for the correctional healthcare industry and offers accreditation to
facilities that meet its standards. These standards provide specific guidance
related to a service provider's operations including administration, personnel,
support services such as hospital care, regular services such as sick call,
records management and medical and legal issues. Although accreditation is
voluntary, many contracts require compliance with NCCHC standards.
2
Contract Provisions. ASG's correctional contracts encompass a wide
range of compensation arrangements. Many contracts provide for a fixed annual
fee, payable monthly. Some of ASG's contracts provide for per diem price
adjustments based upon fluctuations in the size of inmate populations beyond a
specified range in addition to a fixed annual fee. Two healthcare service
contracts are cost plus fee arrangements, whereby the Company receives
reimbursement of allowable costs plus an agreed fee. Many contracts contain
risk-sharing arrangements, such as annual aggregate limits for off-site costs or
pharmaceutical costs and cost sharing of designated expenses. Most contracts
also provide for annual increases in the fixed fee based upon the regional
medical care component of the Consumer Price Index. In all other contracts that
extend beyond one year, ASG utilizes a projection of the future inflation rate
when bidding and negotiating the fixed fee for future years. ASG often bears the
risk of increased or unexpected costs, which could result in reduced profits or
cause it to sustain losses when costs are higher than projected and increased
profits when costs are lower than projected. Certain contracts also contain
financial penalties when performance or staffing criteria are not achieved.
In general, contracts may be terminated by the governmental agency, and
often by ASG as well, without cause at any time upon proper notice (typically
between 30 and 180 days). Governmental agencies may be subject to political
influences that could lead to termination of a contract through no fault of ASG.
As with other governmental contracts, ASG's contracts are subject to adequate
budgeting and appropriation of funds by the governing legislature or
administrative body.
Administrative Systems. ASG has centralized its administrative systems
in order to enhance economies of scale and to provide management with accurate,
up-to-date field data for forecasting purposes. These systems also enable ASG to
refine its bids and help ASG reduce the costs associated with the delivery of
consistent healthcare.
ASG maintains a utilization review system to monitor the extent and
duration of most healthcare services required by inmates on an inpatient and
outpatient basis. The current automated utilization review program is an
integral part of the services provided at each facility. The system is designed
to ensure that the medical care rendered is medically necessary and is provided
safely in a clinically appropriate setting while maintaining traditional
standards of quality of care. The system provides for determinations of medical
necessity by medical professionals through a process of pre-authorization and
concurrent review of the appropriateness of any hospital stay. The system seeks
to identify the maximum capability of on-site healthcare units so as to allow
for a more timely discharge from the hospital back to the correctional facility.
The utilization review staff consists of doctors and nurses who are supported by
a medical director at the corporate level.
ASG has developed a variety of customized databases to facilitate and
improve operational review including (i) a claims management tracking system
that monitors current outpatient charges and inpatient stays, (ii) a
comprehensive cost review system that analyzes ASG's average costs per inmate at
each facility including pharmaceutical utilization and trend analysis available
from SPP and (iii) a daily operating report to manage staffing and off-site
utilization.
Bid Process. Contracts with governmental agencies are obtained
primarily through a competitive bidding process, which is governed by applicable
state and local statutes and ordinances. Although practices vary, typically a
formal request for proposal ("RFP") is issued, by the governmental agency,
stating the scope of work to be performed, length of contract, performance
bonding requirements, minimum qualifications of bidders, selection criteria and
the format to be followed in the bid or proposal. Usually, a committee appointed
by the governmental agency reviews bids and makes an award determination. The
committee may award the contract to a particular bidder or decide not to award
the contract. The committees consider a number of factors, including the bid
price and the reputation of the bidder for providing quality care. The award of
a contract may be subject to formal or informal protest by unsuccessful bidders
through a governmental appeals process. If the committee does not award a
contract, the correctional agency will continue to provide healthcare services
to its inmates with its own personnel.
Many RFPs for significant contracts require the bidder to post a bid
bond. For those contracts that require performance bonds, the bonding
requirements may cover one year or up to the length of the contract and at
December 31, 2001, generally ranged between 25% and 100% of the 2001 contract
fee.
A successful bidder must often agree to comply with numerous additional
requirements regarding record-keeping and accounting, non-discrimination in the
hiring of personnel, safety, safeguarding confidential information, management
qualifications, professional licensing requirements, emergency healthcare needs
of corrections employees and other matters. Upon a violation of the terms of an
applicable contractual or statutory provision, a contractor may be debarred or
suspended from obtaining future contracts for specified periods of time in the
applicable location. ASG has never been debarred or suspended in any
jurisdiction.
Marketing. ASG gathers, monitors and analyzes relevant information on
potential jail and prison systems which meet predefined new business criteria.
Relevant factors considered include facility size, location, revenue and margin
potential and exposure to risk. ASG then devotes the necessary resources in
securing new business.
ASG is the leading provider of healthcare services to county/municipal
jails and detention centers. ASG will continue to focus its business
development efforts on these facilities where stabilization and treatment of
the population is the primary mission. ASG will also continue to monitor
opportunities at state prison systems, where in many cases, services are
provided to a larger system, with a more permanent population. Due to the more
permanent population at the state prison facilities, the primary mission shifts
to disease management and treatment.
3
ASG maintains a staff of sales and marketing representatives assigned
to specific geographic areas of the United States. In addition, ASG uses
consultants to help identify marketing opportunities, to determine the needs of
specific potential customers and to engage customers on ASG's behalf. ASG uses
paid advertising and promotion to reach prospective clients as well as to
reinforce its image with existing clients.
Management believes that the constitutional requirement to provide
healthcare to inmates, an increasing inmate population and medical Consumer
Price Index, along with the trend towards privatization of correctional
healthcare, present opportunities for revenue growth for the Company.
MILITARY HEALTHCARE SERVICES
EMSA Military provides a broad range of emergency medicine and primary
healthcare services to active and retired military personnel and their
dependents in medical facilities operated by the United States Department of
Defense ("DOD") and the United States Veterans Administration ("VA"). EMSA
Military began providing healthcare services to DOD clients in 1988 and has
provided in excess of 3.5 million patient visits during that period. During the
fiscal year ended December 31, 2001, EMSA Military provided services under seven
contracts. For the year ended December 31, 2001, revenues from military
contracts accounted for approximately 2% of the Company's total revenues.
Most military contracts are for a period of five years, with an initial
one-year base period and four one-year options. EMSA Military's bidding strategy
is to seek contract opportunities that will be awarded on a best value, rather
than a low cost basis. This allows EMSA Military to highlight the Company's
operational expertise and the overall quality of its provider staff.
PHARMACEUTICAL DISTRIBUTION SERVICES
ASG, through its wholly-owned subsidiary SPP, contracts with federal,
state and local governments and certain private entities to distribute
pharmaceuticals and certain medical supplies to inmates of correctional
facilities. SPP utilizes three packaging and distribution centers to fill
prescriptions and ship pharmaceuticals to over 350 sites in 34 states covering
over 198,000 inmates.
SPP provides clinical pharmacy services in concert with their
systematic delivery process. SPP's clinical pharmacological management adds
therapeutic value to services as well as fiscal responsibility to its clients.
In addition, SPP's medical supply service creates additional value for its
clients, as the delivery mode on certain products is specific to the corrections
environment. SPP's contracts typically cover one year with renewals upon
agreement of both parties.
SPP is the largest provider of correctional pharmacy services in the
United States with 2001 revenues of approximately $91 million, $45 million of
which relates to services provided for ASG-contracted sites, which are
eliminated in consolidation. For the year ended December 31, 2001, revenues from
correctional pharmacy services, excluding revenues eliminated in consolidation,
accounted for approximately 8% of the Company's total revenues.
RISK MANAGEMENT
For contracts where ASG's exposure to the risk of inmates' catastrophic
illness or injury is not limited, ASG maintains stop loss insurance to cover
100% of ASG's exposure with respect to hospitalization for annual amounts in
excess of $500,000 per inmate up to an annual per inmate cap of $2.0 million.
ASG believes this insurance mitigates its exposure to unanticipated expenses of
catastrophic hospitalization.
EMPLOYEES AND INDEPENDENT CONTRACTORS
The services provided by ASG require an experienced staff of healthcare
professionals and facilities administrators. In particular, a nursing staff with
experience in correctional healthcare and specialized skills in all necessary
areas contributes significantly to ASG's ability to provide efficient service.
In addition to nurses, ASG's staff of employees or independent contractors
includes physicians, dentists, psychologists and other healthcare professionals.
As of December 31, 2001, ASG had approximately 7,200 employees,
including approximately 700 doctors and 3,400 nurses. ASG also had under
contract approximately 330 independent contractors, including physicians,
dentists, psychiatrists and psychologists. Of ASG's employees, approximately
1,300 are represented by labor unions. ASG believes that its employee relations
are good.
4
COMPETITION
The business of providing correctional healthcare services to
governmental agencies is highly competitive. ASG is in direct competition with
local, regional and national correctional healthcare providers. As the private
market for providing correctional healthcare matures, ASG's competitors may gain
additional experience in bidding and administering correctional healthcare
contracts. In addition, new competitors, some of whom may have extensive
experience in related fields or greater financial resources than ASG, may enter
the market.
MAJOR CONTRACTS
ASG's operating revenue with respect to its correctional healthcare
operations is derived primarily from contracts with federal, state, county and
local governmental agencies. The Company's Rikers Island, New York contract
accounted for approximately 15% of revenues in the year ended December 31, 2001.
No other contract accounted for 10% or more of revenues during the year ended
December 31, 2001.
ASG's correctional contracts often provide for a fixed annual fee
payable in monthly installments. Certain contracts, including some of ASG's
largest contracts, include provisions which mitigate a portion of the Company's
risk. Off-site utilization risk is mitigated in certain of the Company's
contracts through aggregate pools for off-site expenses, stop loss provisions,
cost plus fee arrangements or the entire exclusion of off-site service costs.
Pharmacy expense risk is similarly mitigated in certain of the Company's
contracts. Many contracts contain termination clause provisions which allow the
Company to terminate the contract under agreed upon notice periods. The ability
to terminate a contract serves to mitigate the Company's risk of increasing
cost of services being provided. Contracts accounting for approximately 88% of
revenues for the year ended December 31, 2001 contain one or more of the
risk-mitigating provisions.
Contracts accounting for approximately 40% of revenues for the year
ended December 31, 2001 contain no limits on ASG's exposure for treatment costs
related to catastrophic illnesses or injuries to inmates. Although the cost of
certain medicines are reimbursed in varying degrees under certain contracts,
typically a dollar limit is placed on ASG's responsibility for costs related to
illness of or injury to an individual inmate, injuries to more than one inmate
resulting from an accident or contagious illnesses affecting more than one
inmate. When preparing bid proposals, ASG estimates the extent of its exposure
to cost increases, severe individual cases and catastrophic events and attempts
to compensate for its exposure in the pricing of its bids. ASG's management has
experience in evaluating these risks for bidding purposes and maintains an
extensive database of historical experience. Nonetheless, increased or
unexpected costs against which ASG is not protected could render a contract
unprofitable. In an effort to manage risk of catastrophic illness or injury of
inmates under contracts that do not limit ASG's exposure to such risk, ASG
maintains stop loss insurance from an unaffiliated insurer covering 100% of its
exposure with respect to catastrophic illnesses or injuries for annual amounts
in excess of $500,000 per inmate up to an annual per inmate cap of $2.0 million.
5
CAUTIONARY STATEMENTS
All statements made by ASG that are not historical facts are based on
current expectations. These statements are forward looking in nature and involve
a number of risks and uncertainties. Actual results may differ materially from
current expectations. Significant factors that could cause actual results to
differ materially are the following: losses from contracts that the Company
cannot terminate; changes in performance bonding requirements; the complexity of
and potential changes in government contracting procedures; the risk of
debarment or suspension from obtaining future contracts; and general business
and economic conditions; and the other risk factors described in ASG's reports
filed from time to time with the Securities and Exchange Commission. Certain of
these factors are described in greater detail below.
Dependence on Major Contracts. ASG's operating revenue is derived
almost exclusively from contracts with federal, state, county and local
governmental agencies. Generally, contracts may be terminated by the
governmental agency at will and without cause upon proper notice (typically
between 30 and 180 days). Governmental agencies may be subject to political
influences that could lead to termination of a contract through no fault of the
Company. Although ASG generally attempts to renew or renegotiate contracts at or
prior to their termination, contracts that are put out for bid are subject to
intense competition. The loss of one or more major contracts could have a
material adverse effect on ASG's business.
Privatization of Government Services, Competition and Correctional
Population. ASG's future revenue growth will depend in part on continued
privatization by state, county and local governmental agencies of healthcare
services for correctional facilities. There can be no assurance that this market
will continue to grow or that existing contracts will continue to be made
available to the private sector. Revenue growth could also be adversely affected
by material decreases in the inmate population of correctional facilities.
Competition. The business of providing correctional healthcare services
to governmental agencies is highly competitive. ASG is in direct competition
with local, regional and national correctional healthcare providers. As the
private market for providing correctional healthcare matures, ASG's competitors
may gain additional experience in bidding and administering correctional
healthcare contracts. Competitors may use the additional experience to under bid
the Company. In addition, new competitors, some of whom may have extensive
experience in related fields or greater financial resources than ASG, may enter
the market.
Acquisitions. ASG's expansion strategy involves both internal growth
and, as opportunities become available, acquisitions. The Company took
significant steps toward implementing this strategy with the EMSA acquisition in
January 1999 and the acquisitions of CHS, SPP and certain assets of Correctional
Physician Services, Inc. ("CPS") during 2000. ASG previously had limited
experience acquiring businesses and integrating them into its operations;
however, the transitions of the recent acquisitions provide valuable frameworks
for future acquisition opportunities.
Exposure to Catastrophic Events. Contracts accounting for 40% of
revenues for the year ended December 31, 2001 contain no limits on ASG's
exposure for treatment costs related to catastrophic illnesses or injuries to
inmates. For those contracts that contain no catastrophic limits, ASG maintains
stop loss insurance for 100% of its exposure with respect to catastrophic
illnesses or injuries for annual amounts in excess of $500,000 per inmate up to
an annual per inmate cap of $2.0 million. ASG attempts to compensate for the
increased financial risk when pricing contracts that do not contain catastrophic
limits. The occurrence of severe individual cases without such limits could
render the contract unprofitable and could have a material adverse effect on
ASG's financial condition and results of operations.
Dependence on Key Personnel. The success of ASG depends in large part
on the ability and experience of its senior management. The loss of services of
one or more key employees could adversely affect ASG's operations. ASG has
employment contracts with Michael Catalano, Chairman, President and Chief
Executive Officer, Gerard F. Boyle, Executive Vice President and Chief
Development Officer, Bruce A. Teal, Executive Vice President and Chief Operating
Officer and Michael W. Taylor, Senior Vice President and Chief Financial
Officer, as well as certain other key personnel. ASG does not have an employment
contract with Richard D. Wright, Vice Chairman of Operations.
6
Dependence on Healthcare Personnel. ASG's success depends on its ability to
attract and retain highly skilled healthcare personnel. A shortage of trained
and competent employees and/or independent contractors may result in overtime
costs or the need to hire less efficient and more costly temporary staff.
Attracting qualified nurses at a reasonable cost has been and continues to be of
concern to ASG. There can be no assurance that ASG will be successful in
attracting and retaining a sufficient number of qualified healthcare personnel
in the future.
Corporate Exposure to Professional Liability. ASG periodically becomes
involved in medical malpractice claims with the attendant risk of substantial
damage awards. The most significant source of potential liability in this regard
is the risk of suits brought by inmates alleging lack of timely or adequate
healthcare services. ASG may be vicariously liable, for the negligence of
healthcare professionals who are contracted to ASG. ASG mitigates its risk by
requiring its healthcare professionals to maintain professional liability
insurance policies. ASG's contracts generally provide for ASG to indemnify the
governmental agency for losses incurred related to healthcare provided by ASG
and its agents. ASG maintains professional liability insurance and requires its
independent contractors to maintain professional liability insurance in amounts
deemed appropriate by management based upon ASG's claims history and the nature
and risks of its business. There can be no assurance that a future claim or
claims will not exceed the limits of available insurance coverage or that such
coverage will continue to be available at a reasonable cost.
Dependence on Credit Facility. The Company's debt consists of a
revolving credit facility which was amended on March 15, 2002. The credit
facility requires the Company to meet certain financial covenants related to
minimum levels of net worth and earnings. The Company is dependent on the
availability of borrowings pursuant to this credit facility to meet its working
capital needs, capital expenditure requirements and other cash flow requirements
during 2002. Management believes the Company can remain in compliance with the
terms of the credit facility and meet its expected obligations throughout 2002.
However, should the Company fail to meet its projected results, it may be forced
to seek additional sources of financing in order to fund its working capital
needs.
ITEM 2. PROPERTIES
The Company occupies approximately 22,600 square feet of leased office
space in Brentwood, Tennessee, where it maintains its corporate headquarters.
The Company's lease on its current headquarters expires in October 2003. The
Company leases additional office facilities in Franklin, Tennessee; Hanover and
Jessup, Maryland; Alameda, California; Topeka, Kansas; Fort Lauderdale, Florida;
Verona, New Jersey; Boise, Idaho; Indianapolis, Indiana; Queens and
Williamsville, New York; and Camp Hill, Concordville and Pittsburgh,
Pennsylvania. While the Company may open additional offices to meet the local
needs of future contracts awarded in new areas, management believes that its
current facilities are adequate for its existing contracts for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, pending legal proceedings and claims against
the Company will not, in the aggregate, have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on The Nasdaq Stock Market's National Market
System under the symbol "ASGR." As of March 26, 2002, there were approximately
57 registered holders of record of the Common Stock. The high and low prices
of the Common Stock as reported on The Nasdaq Stock Market during each quarter
from January 1, 2000 through December 31, 2001 are shown below:
QUARTER ENDED HIGH LOW
------------- -------- --------
March 31, 2000 ................................... $ 15.00 $ 13.00
June 30, 2000 .................................... 20.50 14.13
September 30, 2000 ............................... 26.00 17.13
December 31, 2000 ................................ 28.00 21.00
March 31, 2001 ................................... 28.23 21.25
June 30, 2001 .................................... 27.65 21.11
September 30, 2001 ............................... 25.69 5.55
December 31, 2001 ................................ 7.63 2.19
The Company did not pay cash dividends on the Common Stock during the
years ended December 31, 2001 and 2000. The Company does not currently intend to
pay cash dividends on the Common Stock in the foreseeable future because, under
the terms of its Credit Facility, the Company is prohibited from paying cash
dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Healthcare revenues ................................... $ 552,471 $ 381,946 $ 272,926 $ 113,287 $ 129,211
Income (loss) before income taxes ..................... (46,695) 13,310 7,731 5,099 1,786
Net income (loss) ..................................... (44,843) 7,807 4,640 5,724 1,685
Net income (loss) attributable to common shares ....... (45,006) 7,159 2,328 5,724 1,742
Net income (loss) per common share-- basic ............ (8.50) 1.86 0.64 1.61 0.50
Net income (loss) per common share-- diluted .......... (8.50) 1.40 0.60 1.57 0.48
Weighted average common shares outstanding - basic .... 5,292 3,854 3,613 3,554 3,480
Weighted average common shares outstanding - diluted .. 5,292 5,587 3,877 3,653 3,657
Cash dividends per share .............................. -- -- -- -- --
See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to Consolidated Financial Statements describing
the financial impact for 2001 of charges related to goodwill impairment and loss
contracts, for 2000 due to the CPS, CHS and SPP acquisitions and for 1999 due to
the EMSA acquisition.
AS OF DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit)..................................... $ (3,826) $ 15,573 $ 9,498 $ 10,515 $ 257
Total assets.................................................. 158,294 161,402 98,727 28,375 27,754
Long-term debt, including current portion..................... 58,100 56,800 25,500 -- --
Mandatory redeemable preferred stock.......................... -- 12,397 12,375 -- --
Mandatory redeemable common stock............................. -- -- 1,842 1,842 1,842
Common stock, additional paid-in capital, stockholders' notes
receivable, accumulated other comprehensive loss and
retained earnings (deficit)................................. (3,554) 28,965 16,723 10,949 4,799
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements provided under Part II, Item 8 of this Annual
Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon the its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including, but not limited to, those related to:
- revenue and cost recognition,
- loss contracts,
- professional and general liability insurance,
- legal contingencies,
- impairment of intangible assets and goodwill,
- income taxes.
The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue and Cost Recognition
The Company's contracts with correctional institutions are principally
fixed price contracts adjusted for census fluctuations. Revenues earned under
contracts with correctional institutions are recognized in the period that
services are rendered. Cash received in advance for future services is recorded
as deferred revenue and recognized as income when the service is performed.
Healthcare expenses include the compensation of physicians, nurses and
other healthcare professionals including any related benefits and all other
direct costs of providing the managed care. The cost of healthcare services
provided or contracted for are recognized in the period in which they are
provided based in part on estimates, including an accrual for unbilled medical
services rendered through the balance sheet dates. The Company estimates this
medical claims reserve using an actuarial analysis prepared by an independent
actuary taking into account historical claims experience (including the average
historical costs and billing lag time for such services) and other actuarial
data.
While management believes that its estimation methodology effectively
captures trends in medical claims costs, actual payments and future reserve
requirements could differ significantly from the Company's current estimates if
significant adverse fluctuations occur in the healthcare cost structure or the
Company's future claims experience. Changes in estimates of claims resulting
from such fluctuations and differences between actuarial estimates and actual
claims payments are recognized in the period in which the estimates are changed
or the payments are made.
9
During the second quarter of 2001, the Company recorded changes in
accounting estimate charges of approximately $6 million to strengthen medical
claims reserves due to adverse development of prior years' medical claims
primarily as a result of updated information that indicated actual utilization
and cost data for inpatient and outpatient services were higher than the
historical levels previously used to estimate the reserve.
Loss Contracts
The Company accrues losses under its fixed price contracts when it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company performs this loss accrual analysis on a
specific contract basis taking into consideration such factors as future
contractual revenue, projected future healthcare and maintenance costs,
projected future stop-loss insurance recoveries and each contract's specific
terms related to future revenue increases as compared to increased healthcare
costs. The projected future healthcare and maintenance costs are estimated
based on historical trends and management's estimate of future cost increases.
These estimates are subject to the same adverse fluctuations and future claims
experience as previously noted. As discussed above, some of the Company's
contracts provide for annual increases in the fixed base fee upon changes in the
regional medical care component of the Consumer Price Index, while others do not
contain such provisions.
The Company performs an annual comprehensive review of its
portfolio of 145 contracts for the purpose of identifying loss contracts and
developing a contract loss reserve for succeeding years. As a result of the
2001 review, the Company identified five non-cancelable contracts with combined
2001 annual revenues of $59.7 million and negative gross margin of $4.7
million. Based upon management's projections, these contracts are expected to
continue to incur negative gross margin over their remaining terms. In December
2001, the Company recorded a charge of $18.3 million to establish a reserve for
future losses under these non-cancelable contracts. The five contracts covered
by the charge have expiration dates ranging from June 30, 2002 through June 30,
2005. Ninety percent of the charge relates to the State of Kansas contract,
which expires June 30, 2005, and the City of Philadelphia contract, which
expires June 30, 2004. The remaining liability covers the State of Maine
contract, which expires June 30, 2002, and two county contracts, which expire
August 15, 2002 and June 30, 2005.
Professional and General Liability Insurance
As a healthcare provider, the Company may become subject to medical
malpractice claims or lawsuits. The most significant source of potential
liability in this regard is the risk of suits brought by inmates alleging lack
of timely or adequate healthcare services. The Company may also be liable, as
employer, for the negligence of healthcare professionals it employs or the
healthcare professionals it engages as independent contractors. The Company's
contracts generally require it to indemnify the governmental agency for losses
incurred related to healthcare provided by the Company or its agents.
To mitigate a portion of this risk, in 2001, the Company maintained
third party commercial insurance on a claims-made basis with primary limits of
$1 million each occurrence and $3 million in the aggregate. In addition, during
2001, the Company maintained excess liability insurance of $15 million for each
claim and $15 million annual aggregate. The Company also requires the healthcare
professionals it employs and its independent contractors to maintain
professional liability insurance. The Company assumes liabilities in excess of
these third-party insurance limits.
The Company records a liability for its estimated uninsured exposure to
reported and unreported professional liability claims based upon an independent
actuarial estimate of the cost of settling losses and projected loss adjustment
expenses using historical claims data, demographic factors, severity factors and
other actuarial assumptions. Reserves for medical malpractice exposures are
subject to fluctuations in frequency and severity of claims experience. The
reserves can also be affected by changes in the financial health of the
third-party insurance carriers used by the Company. Changes in estimates of
losses resulting from such fluctuations and differences between actuarial
estimates and actual loss payments are recognized in the period in which the
estimates are changed or payments are made.
As discussed in Note 6, during 2001, the Company increased its legal
reserves for professional and general liability claims by $1.9 million
primarily as a result of liquidation by certain insurance carriers who provided
coverage to the Company from 1992-1997.
10
Legal Contingencies
In addition to professional and general liability claims, the Company
is also subject to other legal proceedings in the ordinary course of business.
Such proceedings generally relate to labor, employment or contract matters. The
Company accrues an estimate of the probable costs for the resolution of these
claims. This estimate has been developed in consultation with outside counsel
handling the Company's defense in these matters and is based upon an estimated
range of potential results, assuming a combination of litigation and settlement
strategies. The Company does not believe these proceedings will have a material
adverse effect on its consolidated financial position. However, it is possible
that future results of operations for any particular quarterly or annual period
could be materially affected by changes in assumptions, new developments or
changes in approach such as a change in settlement strategy in dealing with such
litigation.
Impairment of Intangible Assets and Goodwill
Goodwill associated with the excess purchase price over the fair value
of assets acquired and other identifiable intangible assets, such as customer
contracts acquired in acquisitions and covenants not to compete, are currently
amortized on the straight-line method over their estimated useful lives.
The Company assesses the impairment of its identifiable intangibles and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Important factors taken into
consideration when evaluating the need for an impairment review include the
following:
- significant underperformance or loss of key contracts acquired
in an acquisition relative to expected historical or projected
future operating results;
- significant changes in the manner of use of the Company's
acquired assets or in the Company's overall business strategy;
- significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles and
related goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, any impairment is measured using an
estimate of the asset's fair value based on the projected net cash flows
expected to result from that asset, including eventual disposition. Future
events could cause the Company to conclude that impairment indicators exist and
that goodwill associated with its acquired businesses is impaired. Any
resulting impairment loss could have a material adverse impact on the Company's
financial condition and results of operations.
During 2001, the Company was notified that another vendor had been
selected to negotiate a contract to provide healthcare services for the Eastern
Region of the Pennsylvania Department of Corrections upon the expiration of the
Company's contract on December 31, 2002. The Company also anticipates that it
will cease operations under the contract with the Yonkers Region of the New York
Department of Correctional Services upon the expiration of the Company's
contract on May 31, 2002 as the healthcare services are to be assumed by the
client. These contracts represent substantially all of the operations acquired
in the acquisition of certain assets of CPS. Given these factors, in accordance
with FAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", the Company recorded a non-cash impairment
charge of approximately $13.2 million representing the excess net goodwill
recorded in connection with the aforementioned acquisition of certain assets of
CPS over the fair value of the two contracts. The Company estimated the fair
value of the contracts by calculating the net present value of estimated cash
flows during the remaining term of the contracts adjusted for certain other
factors.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, the
Company will cease to amortize approximately $44.6 million of goodwill. In lieu
of amortization, the Company will be required to perform impairment reviews of
goodwill on an annual basis, or more frequently if impairment indicators, such
as those discussed above, arise. Amortization expense related to goodwill in
2001 was $3,842.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The Company regularly reviews its deferred tax assets for
recoverability taking into consideration such factors as historical losses,
projected future taxable income and the expected timing of the reversals of
existing temporary differences. SFAS 109 requires the
11
Company to record a valuation allowance when it is "more likely than not that
some portion or all of the deferred tax assets will not be realized." It further
states "forming a conclusion that a valuation allowance is not needed is
difficult when there is negative evidence such as cumulative losses in recent
years." At December 31, 2001, a 100% valuation allowance has been recorded equal
to the deferred tax assets after considering deferred tax assets that can be
realized through offsets to existing taxable temporary differences. Assuming the
Company achieves sufficient profitability in future years to realize the
deferred income tax assets, the valuation allowance will be reduced in future
years through a credit to income tax expense (increasing shareholders' equity).
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship to total revenue of certain items in the Consolidated Income
Statements.
YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE OF TOTAL REVENUES 2001 2000 1999
- ---------------------------- ----- ----- -----
Healthcare revenues................................................................... 100.0% 100.0% 100.0%
Healthcare expenses................................................................... 96.4 90.3 90.0
----- ----- -----
Gross margin.......................................................................... 3.6 9.7 10.0
Selling, general and administrative expenses.......................................... 3.5 3.6 4.5
Depreciation and amortization......................................................... 1.4 1.6 1.3
Impairment of long-lived assets....................................................... 2.4 -- --
Strategic initiative and severance expenses........................................... .4 -- --
Charge for loss contracts............................................................. 3.3 -- --
----- ----- -----
Income (loss) from operations......................................................... (7.4) 4.5 4.2
Interest, net......................................................................... 1.0 1.1 1.4
----- ----- -----
Income (loss) before income taxes..................................................... (8.4) 3.4 2.8
Provision for income taxes (benefit).................................................. (.3) 1.4 1.1
------ ----- -----
Net income (loss)..................................................................... (8.1) 2.0 1.7
Preferred stock dividends............................................................. -- 0.1 0.8
----- ----- -----
Net income (loss) attributable to common shares....................................... (8.1)% 1.9% 0.9%
===== ===== =====
2001 Compared to 2000
Healthcare revenues increased $170.6 million from $381.9 million in
2000 to $552.5 million in 2001, representing a 45% increase. Approximately $54.2
million of this increase relates to a full year of activity of CPS contracts,
CHS and SPP, all of which were acquired during 2000. The Company experienced
$23.1 million of revenue growth resulting from the first full year of operations
on contracts added in 2000 through marketing activities. The addition of the
Riker's Island contract, effective January 1, 2001, added approximately $81.2
million in additional revenue. In addition to the Riker's Island contract, the
Company added eleven new contracts during 2001 generating partial year revenues
of $31.6 million. For contracts in place throughout both 2001 and 2000, the
Company experienced $25.6 million, or 11.1%, of revenue growth from
contract renegotiations and automatic price adjustments. During 2001, revenues
were negatively impacted by the loss of contracts, some of which the Company
elected not to renew, resulting in a decrease in revenues of approximately $45.1
million from 2000 to 2001.
Healthcare expenses increased $187.9 million from $344.8 million in
2000 to $532.7 million in 2001, due mainly to the new contracts from both
acquisition and marketing activity. Healthcare expenses as a percentage of
revenues increased by 6.1% primarily due to increased use of temporary labor due
to continued labor shortages in certain geographic areas and increased use of
off-site healthcare and diagnostic services. Pharmaceutical costs increased from
7.9% to 9.5% of revenues from 2000 to 2001. Also included in healthcare
expenses for 2001 was a charge of $6.0 million recorded in the second quarter to
increase the Company's reserve for medical claims. This charge was primarily the
result of updated information showing actual utilization and cost data for
inpatient and outpatient services were higher than the historical levels on
which the Company's reserve had previously been based.
Selling, general and administrative expenses were $19.1 million or 3.5%
of revenue in 2001 compared to $13.8 million or 3.6% of revenue in 2000.
Included in selling, general and administrative expenses for 2001 were charges
to increase the Company's legal reserves by $1.9 million. These charges were
primarily required to reflect the Company's increased exposure to certain
outstanding cases previously covered by insurance carriers that are now in
liquidation. The percentage of revenue decrease in selling, general and
administrative expenses excluding these charges reflects the Company's continued
ability to leverage its corporate support services to a broader revenue base as
new contracts are added through acquisitions or marketing activity.
12
Depreciation and amortization expenses increased to $7.5 million or
1.4% of revenue in 2001 from $6.0 million or 1.6% of revenue in 2000. The
increase is primarily related to the first full year of amortization of goodwill
and other intangibles recorded in the 2000 acquisitions of CPS, CHS and SPP.
During the second quarter of 2001, the Company was notified that
another vendor had been selected to negotiate a contract to provide healthcare
services for the Eastern Region of the Pennsylvania Department of Corrections
upon the expiration of the Company's contract on December 31, 2002. The Company
also anticipates that it will cease operations under the contract with the
Yonkers Region of the New York Department of Correctional Services upon the
expiration of the Company's contract on May 31, 2002 as the healthcare services
are to be assumed by the client. Each of these contracts was acquired in the
Company's acquisition of certain assets of CPS in 2000. In the second quarter of
2001, the Company recorded a non-cash impairment charge of $13.2 million
representing the amount by which goodwill related to these contracts exceeded
the contract's fair value.
During 2001, the Company incurred $2.6 million of expenses related to
severance and a terminated strategic initiative.
During the fourth quarter of 2001, the Company completed an annual
comprehensive review of its portfolio of 145 contracts for the purpose of
identifying loss contracts and developing a contract loss reserve for succeeding
years. As a result of this review the Company identified five non-cancelable
loss contracts with combined annual revenues of $59.7 million and negative gross
margins of $4.7 million. The Company recorded a charge of $18.3 million to
establish a reserve for future losses under these non-cancelable contracts as of
December 31, 2001. The five contracts covered by the charge have expiration
dates ranging from June 30, 2002 through June 30, 2005. Ninety percent of the
charge relates to the State of Kansas contract, which expires June 30, 2005, and
the City of Philadelphia contract, which expires June 30, 2004. The remaining
liability covers the State of Maine contract, which expires June 30, 2002, and
two county contracts, which expire August 15, 2002 and June 30, 2005.
Net interest expense increased to $5.7 million or 1.0% of revenue in
2001 from $4.1 million or 1.1% of revenue in 2000.
The provision for income taxes was a benefit of $1.9 million in 2001
for an effective tax rate of 4%, a decrease from the 2000 effective tax rate of
41%. The decrease in the effective tax rate is due to the establishment of a
full valuation allowance related to the Company's deferred tax asset of
approximately $16.1 million.
2000 Compared to 1999
Healthcare revenues increased $109.0 million from $272.9 million in
1999 to $381.9 million in 2000, representing a 40% increase. Approximately $56.6
million of this increase relates to the acquisitions of CHS, SPP and certain
assets of CPS during 2000. Additionally, the Company added fourteen new
contracts generating revenues of $24.7 million in 2000 and experienced $37.7
million of revenue growth from existing contracts through contract
renegotiations, automatic price adjustments and from certain contracts being in
effect for the full year. Revenues were negatively impacted by the loss of
twelve contracts during 2000 resulting in a decrease in revenues of
approximately $10.0 million from 1999 to 2000.
The cost of healthcare increased $99.3 million from 1999 to 2000 due
mainly to the new contracts. Healthcare expenses as a percentage of revenues
increased by .3% primarily due to increased pharmaceutical costs and increased
temporary labor utilization due to labor shortages in certain geographic areas.
Pharmaceutical costs increased from 8.9% to 10.4% of revenues (excluding net
pharmaceutical sales) from 1999 to 2000. Temporary labor costs increased from
6.0% to 7.6% of revenues (excluding net pharmaceutical sales) from 1999 to
2000.
Selling, general and administrative expenses were $13.8 million or 3.6%
of revenue in 2000 compared to $12.3 million or 4.5% of revenue in 1999. The
percentage decrease reflects the Company's ability to leverage its corporate
support services to a broader revenue base with the contract gains from 2000
acquisitions and net marketing activity.
Depreciation and amortization expenses increased to $6.0 million or
1.6% of revenue in 2000 from $3.5 million or 1.3% of revenue in 1999. The
increase is primarily related to the goodwill, contract and non-compete
amortization expense related to the CPS, CHS and SPP acquisitions during 2000 of
approximately $1.8 million. Net interest expense increased to $4.1 million or
1.1% of
13
revenue in 2000 from $3.7 million or 1.4% in 1999. The percentage decrease
during 2000 resulted from the Company's ability to manage the additional
leverage required to finance the 2000 acquisitions.
The provision for income taxes was $5.5 million in 2000 for an
effective tax rate of 41%, an increase from the 1999 effective tax rate of 40%.
The increase in the effective tax rate is due to the non-deductibility of
certain intangible assets related to the CHS acquisition for tax purposes. The
preferred stock dividends of $.6 million relate to the redeemable preferred
stock and have decreased by $1.7 million from 1999 due to a $1.9 million
noncash, nonrecurring dividend related to a beneficial conversion feature at the
date the stock was issued, which increased additional paid-in capital during
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss attributable to common shares of $45.0
million and net income attributable to common shares of $7.2 million and $2.3
million for the years ended December 31, 2001, 2000 and 1999, respectively. The
Company had a stockholders' deficit of $3.6 million at December 31, 2001. The
Company's cash and cash equivalents increased to $10.4 million at December 31,
2001, an increase of $10.1 million over the cash and cash equivalents at
December 31, 2000 of $256,000. Cash flows from operating activities during 2001
were $11.0 million, an increase of $2.8 million over the cash provided from
operating activities in 2000 of $8.2 million. The increase is primarily the
result of increased accounts payable and accrued expenses.
The Company's debt consists of a revolving credit facility (the "Credit
Facility"). At December 31, 2001, the Company had $58.1 million outstanding
under the Credit Facility and approximately $50,000 available for future
borrowings. The Credit Facility was executed with a syndicate of three banks
(the "Lenders") with Bank of America, N.A. acting as the lead bank and
administrative agent.
On March 15, 2002, the Company executed an amendment to the Credit
Facility (the "Amended Credit Facility"). Beginning March 15, 2002, the
Company's borrowings under the Amended Credit Facility are limited to the lesser
of (1) the sum of eligible accounts and other receivables (as defined) plus an
intangible advance of up to $11.0 million ("Intangible Advances") or (2) $57.0
million (the "Maximum Commitment"). Interest under the Amended Credit Facility
is payable monthly at the Bank of America, N.A. prime rate plus 3.0% (5.0% for
balances due under Intangible Advances). The Amended Credit Facility matures on
April 1, 2003 and all amounts outstanding will be due and payable on such date.
In addition, the Company is required to make scheduled reductions in the
Intangible Advances allowed and the Maximum Commitment prior to that date. The
following table presents the Maximum Commitment and the maximum allowed
Intangible Advances (included within the Maximum Commitment) as of March 15,
2002 and each scheduled reduction date.
Maximum Intangible
Date Commitment Advances
------------------------ -------------- ------------
March 15, 2002 $ 57 million $ 11 million
July 1, 2002 57 million 10 million
September 1, 2002 56 million 10 million
October 1, 2002 55 million 9 million
December 1, 2002 54 million 9 million
February 1, 2003 53 million 9 million
March 1, 2003 52 million 9 million
The Amended Credit Facility is secured by substantially all of the
assets of the Company and its operating subsidiaries.
At December 31, 2001, the Company had standby letters of credit
outstanding totaling $3.4 million. The letters of credit were issued pursuant to
the Amended Credit Facility. The amount available to the Company for borrowing
under the Amended Credit Facility is reduced by the amount of each outstanding
standby letter of credit. Under the terms of the Amended Credit Facility, the
Company may have up to $6.6 million of standby letters of credit outstanding.
At December 31, 2001, the Company was not in compliance with certain
financial covenant requirements of the Credit Facility. In connection with the
execution of the Amended Credit Facility in March 2002, the Company obtained
waivers of these financial covenants. Subsequent to March 15, 2002, the Amended
Credit Facility will require the Company to meet certain financial covenants
related to minimum levels of shareholders' equity (deficit) and earnings.
Under the Amended Credit Facility, the Company will be required to
maintain minimum shareholders' equity (deficit) as of the end of any fiscal
quarter ending on or after the period specified below as follows:
Minimum Shareholders'
Period Equity (Deficit)
------ ---------------------
December 31, 2001 to March 30, 2002 $(4,000,000)
March 31, 2002 to June 29, 2002 (3,250,000)
June 30, 2002 to September 29, 2002 (2,500,000)
September 30, 2002 to December 30, 2002 (1,000,000)
December 31, 2002 to April 1, 2003 0
The Amended Credit Facility also requires the Company to achieve a
minimum level of cumulative EBITDA from January 1, 2002, through the end of
each month ending on each of the respective dates set forth below. The Amended
Credit Facility defines EBITDA to be the sum of consolidated net income, plus
interest expense, plus any provision for taxes based on income or profits that
was deducted in computing consolidated net income, plus depreciation,
amortization of intangible assets and other non-computing consolidated net
income, plus depreciation, amortization of intangible assets and other
non-recurring non-cash charges, which non-cash charges may not exceed $500,000
in any month or any fiscal quarter and $2 million in any Fiscal Year, less
amounts charged against the Company's reserve for loss contract.
Monthly Cumulative
Period Ending Minimum EBITDA
------------- --------------------
January 31, 2002 $ 350,000
February 28, 2002 1,500,000
March 31, 2002 1,800,000
April 30, 2002 2,450,000
May 31, 2002 2,775,000
June 30, 2002 3,600,000
July 31, 2002 4,275,000
August 31, 2002 5,300,000
September 30, 2002 6,800,000
October 31, 2002 7,950,000
November 30, 2002 9,200,000
December 31, 2002 10,000,000
After December 31, 2002, the Company will be required to achieve a
minimum monthly EBITDA of $500,000. The Amended Credit Facility also contains
restrictions on the Company with respect to certain types of transactions
including payment of dividends, capital expenditures, indebtedness and sales or
transfers of assets.
14
Under the terms of the Amended Credit Facility, if any Amended Credit
Facility obligations remain outstanding at December 31, 2002, the Company will
be required to issue the Lenders warrants to purchase common shares equal to a
5.0% interest in the Company's outstanding common stock. The number of warrants
required to be issued will be reduced to a 2.5% interest if the balance
outstanding under the Amended Credit Facility does not exceed $45 million, there
are no outstanding Intangible Advances and the Company is not in default with
the terms of the Amended Credit Facility. The exercise price of the warrants
will be $.01 per share.
The Company is dependent on the availability of borrowings pursuant to
the Amended Credit Facility to meet its working capital needs, capital
expenditure requirements and other cash flow requirements. Management believes
that the Company can remain in compliance with the terms of the Amended Credit
Facility and meet its expected obligations throughout 2002. However, should the
Company fail to meet its projected results, it may be forced to seek additional
sources of financing in order to fund its working capital needs.
On February 5, 2001, the Company completed the conversion of 12,500
shares of Series A Convertible Preferred Stock, having an aggregate liquidation
preference of $12.5 million, into 1,322,751 shares of common stock. The Company
registered the shares of common stock issued upon conversion of the preferred
stock and warrants to purchase an additional 135,000 shares of common stock.
INFLATION
Some of the Company's contracts provide for annual increases in the
fixed base fee based upon changes in the regional medical care component of the
Consumer Price Index. In all other contracts that extend beyond one year, the
Company utilizes a projection of the future inflation rate when bidding and
negotiating the fixed fee for future years. If the rate of inflation exceeds the
levels projected, the excess costs will be absorbed by the Company. Conversely,
the Company will benefit should the actual rate of inflation fall below the
estimate used in the bidding and negotiation process.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended in June 2000 by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which requires the
Company to recognize all derivatives as assets or liabilities measured at fair
value. Changes in fair value are recognized through either earnings or other
comprehensive income dependent on the effectiveness of the hedge instrument. The
Company currently maintains three interest collar agreements with three of its
syndicate banks for a notional amount of $24 million. The collar agreements
expire between October 2002 and May 2003.
On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting
in a charge to other comprehensive income of approximately $212,000 net of tax,
as the cumulative effect of a change in accounting principle representing the
fair value of the collar agreements on the date of adoption (see Note 11).
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.
The Company adopted the provisions of SFAS No. 141 on July 1, 2001.
Such adoption had no effect on the Company's financial position or results of
operations. The Company will be required to adopt the provisions of SFAS No. 142
effective January 1, 2002, at which time the amortization of the Company's
existing goodwill will cease. Other than the effect on net income of not
amortizing goodwill, management believes the adoption of SFAS No. 142 will not
have a significant effect on the Company's results of operations or financial
position. As of December 31, 2001, the Company has unamortized goodwill in the
amount of approximately $44.6 million which will be subject to the transition
provisions of SFAS 142. Amortization expense related to goodwill during 2001 was
approximately $3.8 million or $0.70 per share, net of tax using the Company's
effective tax rate for 2001 of 4%.
15
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective for fiscal years
beginning after December 15, 2001. SFAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Company does not believe
the 2002 adoption of SFAS 144 will have a material impact on its financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest expense represents 1.0% and 1.1% of the Company's revenues for
2001 and 2000, respectively. Long-term debt of $58.1 million at December 31,
2001 represents 36.7% of the Company's total liabilities and stockholders'
equity (deficit). The Credit Facility requires the Company to protect its
operating results from increases in interest rates. The Company, therefore,
hedged its interest risk related to $30 million of the total borrowing capacity
available under the Credit Facility by entering into four separate interest rate
collar agreements with three of its syndicate banks for notional amounts ranging
from $6 million to $9 million. One of these collar agreements expired on May 24,
2001, leaving notional amounts totaling $24 million outstanding on the remaining
agreements at December 31, 2001, which expire between October 2002 and March
2003. These collar agreements, establish floors and ceilings on the 90-day LIBO
rate in order to reduce the volatility of the Company's interest rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, together with the
report thereon of Ernst & Young LLP, dated February 20, 2002, except for Note
10, as to the which the date is March 15, 2002, begin on page F-1 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no disagreements with accountants on accounting and financial
disclosure required to be reported in this annual report pursuant to Item 304 of
Regulation S-K.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the Directors and Executive Officers of the
Company, the heading "Information as to Directors, Nominees and Executive
Officers" and the subsection "Compliance with Section 16(a) of the Securities
Exchange Act" under the heading "Additional Information" in the Company's Proxy
Statement for its 2002 Annual Meeting of Stockholders to be held on June 12 ,
2002 (the "Company's 2002 Proxy Statement") and the accompanying text are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The subsection under the heading "Additional Information" entitled
"Committees and Meetings" and the heading entitled "Executive Compensation" in
the Company's 2002 Proxy Statement and the accompanying text are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The headings "Information as to Directors, Nominees and Executive
Officers" and "Principal Stockholders" in the Company's 2002 Proxy Statement and
the accompanying text are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The heading "Certain Transactions" in the Company's 2002 Proxy
Statement and the accompanying text is incorporated hereby by reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Listed on the Index to the Consolidated Financial Statements and
Schedule on page F-1 of this Report.
(2) Financial Statement Schedule
Listed on the Index to the Consolidated Financial Statements and
Schedule on page F-1 of this Report.
(3) Exhibits
EXHIBIT DESCRIPTION
- --------- -----------
2.1 -- Securities Purchase Agreement, dated as of January
26, 1999, among the Company, Health Care Capital
Partners L.P. and Health Care Executive Partners L.P.
(incorporated herein by reference to Exhibit 99.2 to
the Company's Current Report on Form 8-K filed on
February 10, 1999).
2.2 -- First Amendment to Securities Purchase Agreement,
dated as of June 17, 1999, among the Company, Health
Care Capital Partners L.P. and Health Care Executive
Partners L.P. (incorporated herein by reference to
Exhibit 2.4 to the Company's Amended Annual Report on
Form 10-K/A for the year ended December 31, 1998,
which Amended Annual Report was filed on July 29,
1999).
3.1 -- Amended and Restated Certificate of Incorporation of
America Service Group Inc. (incorporated herein by
reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, Registration No.
33-43306).
3.2 -- Amended and Restated Bylaws of America Service Group
Inc. (incorporated herein by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No.
33-43306, as amended).
10.1 -- Amended and Restated Warrant, dated as of January 26,
1999 and amended and restated on July 2, 1999,
issued by the Company to Health Care Capital
Partners L.P. (incorporated herein by reference to
Exhibit 10.2.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
18
10.2 -- Amended and Restated Warrant, dated as of January 26,
1999 and amended and restated on July 2, 1999, issued
by the Company to Health Care Executive Partners
L.P. (incorporated herein by reference to
Exhibit 10.3.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
10.3 -- Registration Rights Agreement, dated as of January
26, 1999, among the Company, Health Care Capital
Partners L.P. and Health Care Executive Partners L.P.
(incorporated herein by reference to Exhibit 99.8 to
the Company's Current Report on Form 8-K filed on
February 10, 1999).
10.4 -- America Service Group Inc. Amended Incentive Stock
Plan (as adopted by the Board of Directors on March
19, 1996) (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for
the three month period ending June 30, 1996).
10.5 -- America Service Group Inc. 401(k) Profit Sharing Plan
(incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.6 -- Asset Purchase Agreement, dated as of March 29, 2000,
between the Company and Correctional Physician
Services, Inc., Kenan Umar and Emre Umar, Consent
and Agreement, as amended by Amendment One to Asset
Purchase Agreement, dated as of March 29, 2000.
(incorporated herein by reference to Exhibit 2.8 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.7 -- Stock Purchase Agreement, dated as of April 24, 2000,
between the Company and the Shareholders of
Correctional Health Services, Inc. (incorporated
herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on July 14, 2000).
10.8 -- Asset Purchase Agreement, dated September 20, 2000,
by and among Secure Pharmacy Plus, Inc.; Stadtlander
Operating Company L.L.C.; Stadtlander Licensing
Company, LLC; Stadtlander Drug of California, LP
and Stadtlander Drug of Hawaii, LP (incorporated
herein by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on October 4, 2000).
10.9 -- Amended and Restated Employment Agreement, dated
September 1, 1998, between Michael Catalano and the
Company (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
three month period ending September 31, 1998).
10.10 -- Non-Qualified Stock Option between the Company and
Michael Catalano, dated July 12, 1996, (incorporated
by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.11 -- Employment Agreement dated February 20, 1998 between
Bruce A. Teal and the Company (incorporated by
reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
10.12 -- Non-Qualified Stock Option between the Company and
Bruce A. Teal dated, December 18, 1996, (incorporated
by reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996).
10.13 -- Employment Agreement, dated February 12, 1998,
between Gerard F. Boyle and the Company (incorporated
by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997).
10.14 -- Non-Qualified Stock Option between the Company and
Gerard F. Boyle, dated February 12, 1998
(incorporated by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.15 -- Employment Agreement, dated October 10, 2000,
between S. Walker Choppin and the Company.
(incorporated herein by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000).
10.16 -- Lease by and between Principal Mutual Life Insurance
Company and America Service Group Inc. dated
September 6, 1996 (incorporated herein by reference
to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.17 -- Amended and Restated Incentive Stock Plan of the
Company (incorporated by reference to Exhibit 10.27
to the Company's Quarterly Report on Form 10-Q for
the three months ending June 30, 1997).
10.18 -- America Service Group Inc. 1999 Incentive Stock Plan
(incorporated by reference to Annex B to the
Company's definitive Proxy Statement for its Annual
Meeting of Stockholders held on August 30, 1999,
which definitive Proxy Statement was filed on July
28, 1999).
10.19 -- Amended and Restated Credit Agreement, dated as of
August 1, 2000, between the Company as Borrower,
the Company's subsidiaries as listed therein, as
Guarantors, the Lenders identified therein and Bank
of America, N.A., as Administrative Agent and as
Issuing Bank. (incorporated herein by reference to
Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
19
10.20 -- Overline Agreement, dated September 19, 2000, among
the Company, the Company's Subsidiaries, who are
parties to the Credit Agreement, the lenders who are
party to the Credit Agreement, and Bank of America,
N.A. (incorporated herein by reference to Exhibit
10.28 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).
10.21 -- Waiver No. 1, dated July 25, 2001, to Amended and
Restated Credit Agreement, as of August 1, 2000, by
and among the Company, the subsidiaries of the
Company who are parties to the Credit Agreement, the
several lenders who are now or hereafter become
parties to the Credit Agreement, and Bank of America,
N.A., a national banking association, individually
and as administrative agent of the lenders
(incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
three month period ended June 30, 2001).
10.22 -- Amendment No. 1 to Amended and Restated Credit
Agreement, dated August 27, 2001, by and among the
Company, the subsidiaries of the Company who are
parties to the Credit Agreement, the several lenders
who are now or hereafter become parties to the Credit
Agreement, and Bank of America, N.A., a national
banking association, individually and as
administrative agent of the lenders (incorporated
herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.23 -- Contract between the Company and healthprojects, LLC
dated September 17, 2001, to perform services as
directed by ASG management (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the three month period ended
September 30, 2001).
10.24 -- Employment Agreement, dated October 15, 2001, with
Michael W. Taylor as Senior Vice President and Chief
Financial Officer of the Company (incorporated herein
by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.25 -- Waiver and Second Amendment To Amended and Restated
Credit Agreement dated November 13, 2001, by and
among the Company, the subsidiaries of the Company
who are parties to the Credit Agreement, the several
lenders who are now or hereafter become parties to
the Credit Agreement, and Bank of America, N.A., a
national banking association, individually and as
administrative agent of the lenders (incorporated
herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the three month
period ended September 30, 2001).
10.26 -- Amendment No. 3 to Amended and Restated Credit
Agreement, dated March 15, 2002, by and among the
Company, the subsidiaries of the Company who are
parties to the Credit Agreement, the several lenders
who are now or hereafter become parties to the Credit
Agreement, and Bank of America, N.A., a national
banking association, individually and as
administrative agent of the lenders.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP.
(b) Reports on Form 8-K
None.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registration has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized, on March 28, 2002.
AMERICA SERVICE GROUP INC.
By: /s/ MICHAEL CATALANO
--------------------------------------
Michael Catalano
Chairman, President and
Chief Executive Officer
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated on March 28, 2002.
SIGNATURES TITLE
- ---------- -----
/s/ MICHAEL CATALANO Chairman, President and Chief Executive Officer
- -----------------------------------------------------
Michael Catalano
/s/ MICHAEL W. TAYLOR Senior Vice President and Chief Financial Officer
- -----------------------------------------------------
Michael W. Taylor
/s/ WILLIAM D. EBERLE Director
- -----------------------------------------------------
William D. Eberle
/s/ BURTON C. EINSPRUCH Director
- -----------------------------------------------------
Burton C. Einspruch
/s/ DAVID A. FREEMAN Director
- -----------------------------------------------------
David A. Freeman
/s/ CAROL R. GOLDBERG Director
- -----------------------------------------------------
Carol R. Goldberg
/s/ RICHARD M. MASTALER Director
- -----------------------------------------------------
Richard M. Mastaler
/s/ JEFFREY L. MCWATERS Director
- -----------------------------------------------------
Jeffrey L. McWaters
/s/ RICHARD D. WRIGHT Vice Chairman of Operations
- -----------------------------------------------------
Richard D. Wright
21
AMERICA SERVICE GROUP INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................................ F-2
Consolidated Balance Sheets at December 31, 2001 and 2000................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999............................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31,
2001, 2000 and 1999..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999................................ F-6
Notes to Consolidated Financial Statements................................................................................ F-7
FINANCIAL STATEMENT SCHEDULE
Valuation and qualifying Accounts and Reserves (Schedule II) for the years ended December 31,
2001, 2000 and 1999..................................................................................................... F-22
All other schedules are omitted as the required information is
inapplicable or is presented in the Company's Consolidated Financial Statements
or the Notes thereto.
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Service Group Inc.
We have audited the accompanying consolidated balance sheets of America
Service Group Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Service
Group Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects the information set forth
therein.
As described in Note 2 to the consolidated financial statements, America
Service Group Inc. changed its method of accounting for derivative financial
instruments.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 20, 2002, except for Note 10,
as to which the date is March 15, 2002.
F-2
AMERICA SERVICE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
2001 2000
------------ ------------
(SHOWN IN 000'S EXCEPT SHARE AND
PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 10,382 $ 256
Accounts receivable: healthcare and other less allowances of $344
and $205 at December 31, 2001 and 2000, respectively................................. 64,691 64,053
Inventories............................................................................ 7,747 7,497
Prepaid expenses and other current assets.............................................. 6,984 1,427
Current deferred taxes................................................................. -- 1,143
------------ ------------
Total current assets..................................................................... 89,804 74,376
Property and equipment, net.............................................................. 7,827 8,651
Goodwill, net............................................................................ 44,566 61,358
Contracts, net........................................................................... 13,242 14,002
Other intangibles, net................................................................... 1,683 1,925
Other assets............................................................................. 1,172 1,090
------------ ------------
Total assets............................................................................. $ 158,294 $ 161,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................................... $ 31,159 $ 21,664
Medical claims liability............................................................... 15,238 11,285
Accrued expenses....................................................................... 28,062 24,213
Deferred revenue....................................................................... 4,161 1,641
Current portion of loss contract reserve............................................... 4,310 --
Current portion of long-term debt...................................................... 10,700 --
------------ ------------
Total current liabilities................................................................ 93,630 58,803
Noncurrent portion of accrued expenses................................................... 6,810 3,680
Noncurrent portion of loss contract reserve.............................................. 14,008 --
Deferred taxes........................................................................... -- 757
Long-term debt, net of current portion................................................... 47,400 56,800
------------ ------------
Total liabilities........................................................................ 161,848 120,040
Commitments and contingencies
Mandatory redeemable preferred stock, 500,000 shares authorized;
125,000 shares issued and outstanding at December 31, 2000............................. -- 12,397
Common stock, $.01 par value, 10,000,000 shares authorized; 5,437,000 and
4,057,000 shares issued and outstanding at December 31, 2001 and 2000,
respectively.......................................................................... 54 41
Additional paid-in capital............................................................... 31,377 18,259
Stockholders' notes receivable........................................................... (1,383) (1,384)
Accumulated other comprehensive loss..................................................... (645) --
Retained earnings (deficit).............................................................. (32,957) 12,049
------------ ------------
Total liabilities and stockholders' equity (deficit)..................................... $ 158,294 $ 161,402
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
F-3
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
(SHOWN IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
2001 2000 1999
------------ ------------ ------------
Healthcare revenues............................................ $ 552,471 $ 381,946 $ 272,926
Healthcare expenses............................................ 532,739 344,759 245,485
------------ ------------ ------------
Gross margin................................................. 19,732 37,187 27,441
Selling, general, and administrative expenses.................. 19,063 13,838 12,335
Depreciation and amortization.................................. 7,535 5,962 3,545
Impairment of long-lived assets................................ 13,236 -- --
Strategic initiative and severance expenses.................... 2,562 -- --
Charge for loss contracts...................................... 18,318 -- --
------------ ------------ ------------
Income (loss) from operations................................ (40,982) 17,387 11,561
Interest, net.................................................. 5,713 4,077 3,830
------------ ------------ ------------
Income (loss) before income taxes............................ (46,695) 13,310 7,731
Income tax provision (benefit)................................. (1,852) 5,503 3,091
------------- ------------ ------------
Net income (loss)............................................ (44,843) 7,807 4,640
Preferred stock dividends...................................... 163 648 2,312
------------- ------------- -------------
Net income (loss) attributable to common shares................ $ (45,006) $ 7,159 $ 2,328
============ ============ ============
Net income (loss) per common share:
Basic........................................................ $ (8.50) $ 1.86 $ 0.64
============ ============ ============
Diluted...................................................... $ (8.50) $ 1.40 $ 0.60
============ ============ ============
Weighted average common shares outstanding:
Basic........................................................ 5,292,000 3,854,000 3,613,000
============ ============ ============
Diluted...................................................... 5,292,000 5,587,000 3,877,000
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
AMERICA SERVICE GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(SHOWN IN 000'S EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------------- PAID-IN NOTES
SHARES AMOUNT CAPITAL RECEIVABLES
------------ ------------ ------------ -------------
BALANCE AT JANUARY 1, 1999................. 3,573,000 $ 36 $ 8,351 --
Issuance of common stock under employee
stock plan............................... 26,000 -- 310 --
Exercise of options and related
tax benefits............................. 55,000 -- 519 --
Issuance of common stock under incentive
stock plan............................... 75,000 1 1,075 (1,039)
Issuance of common stock warrants.......... -- -- 659 --
Noncash, nonrecurring dividend on
redeemable preferred stock -- beneficial
conversion feature....................... -- -- 1,942 --
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable................................ -- -- -- (21)
Net income................................. -- -- -- --
---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1999............... 3,729,000 $ 37 $ 12,856 $ (1,060)
Issuance of common stock under employee
stock plan............................... 38,000 1 615 --
Exercise of options and related
tax benefits............................. 274,000 3 2,646 --
Issuance of common stock under incentive
stock plan............................... 16,000 -- 300 (263)
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable............................... -- -- -- (61)
Expiration of redemption feature of
redeemable common stock.................... -- -- 1,842 --
Net income................................. -- -- -- --
---------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 2000............... 4,057,000 $ 41 $ 18,259 $ (1,384)
Unrealized loss on interest rate collar
agreements............................... -- -- -- --
Net loss................................... -- -- -- --
Total comprehensive loss .............
Cumulative effect of change in accounting
principle................................ -- -- -- --
Issuance of common stock under employee
stock plan................................ 9,000 -- 35 --
Exercise of options and related tax benefits 42,000 -- 509 --
Issue of common stock under incentive stock
plan..................................... 6,000 -- 87 --
Dividends on redeemable preferred stock.... -- -- -- --
Interest income on stockholders' notes
receivable................................ -- -- -- (80)
Proceeds from st