UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| (Mark One) | ||
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended September 30, 2002 | ||
| 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: 0-20135
AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)
| Delaware | 51-0332317 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 105 Westpark Drive, Suite 200 Brentwood, Tennessee |
37027 | |
| (Address of principal executive offices) | (Zip Code) |
(615) 373-3100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
There were 6,032,744 shares of Common Stock outstanding as of November 11, 2002.
AMERICA SERVICE GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
| Page | ||||
| Number | ||||
PART I. FINANCIAL INFORMATION |
||||
Item 1. Financial Statements (Unaudited) |
||||
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 |
3 | |||
Condensed Consolidated Statements of Operations for the quarter and nine month period
ended September 30, 2002 and 2001 |
4 | |||
Condensed Consolidated Statements of Cash Flows for the nine month period ended September 30, 2002
and 2001 |
5 | |||
Notes to Condensed Consolidated Financial Statements |
6 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
26 | |||
Item 4. Controls and Procedures |
26 | |||
PART II. OTHER INFORMATION |
||||
Item 1. Legal Proceedings |
27 | |||
Item 2. Changes in Securities and Use of Proceeds |
27 | |||
Item 6. Exhibits and Reports on Form 8-K |
28 | |||
Signatures |
29 | |||
Certifications |
30 | |||
2
PART I:
FINANCIAL INFORMATION
| ITEM 1. | — | FINANCIAL STATEMENTS |
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| (shown in 000's except share and per share amounts) |
||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 3,717 | $ | 10,382 | ||||||
Accounts receivable: healthcare and other, less allowances |
66,485 | 64,691 | ||||||||
Inventories |
7,475 | 7,747 | ||||||||
Prepaid expenses and other current assets |
16,481 | 9,070 | ||||||||
Total current assets |
94,158 | 91,890 | ||||||||
Property and equipment, net |
6,672 | 7,827 | ||||||||
Goodwill, net |
43,896 | 43,896 | ||||||||
Contracts, net |
12,568 | 13,912 | ||||||||
Other intangibles, net |
1,533 | 1,683 | ||||||||
Other assets |
503 | 1,172 | ||||||||
Total assets |
$ | 159,330 | $ | 160,380 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 41,520 | $ | 31,159 | ||||||
Medical claims liability |
13,969 | 15,238 | ||||||||
Accrued expenses |
31,053 | 30,148 | ||||||||
Deferred revenue |
6,829 | 4,161 | ||||||||
Current portion of loss contract reserve |
2,647 | 4,310 | ||||||||
Current portion of long-term debt |
41,589 | 10,700 | ||||||||
Total current liabilities |
137,607 | 95,716 | ||||||||
Noncurrent portion of accrued expenses |
7,886 | 6,810 | ||||||||
Noncurrent portion of loss contract reserve |
7,162 | 14,008 | ||||||||
Long-term debt, net of current portion |
— | 47,400 | ||||||||
Total liabilities |
152,655 | 163,934 | ||||||||
Commitments and contingencies |
||||||||||
Stockholders’ equity (deficit): |
||||||||||
Common stock, $.01 par value, 10,000,000 shares
authorized; 5,553,000 and 5,437,000 shares issued and
outstanding at September 30, 2002 and December 31, 2001,
respectively |
56 | 54 | ||||||||
Additional paid-in capital |
31,465 | 31,377 | ||||||||
Stockholders’ notes receivable |
(1,358 | ) | (1,383 | ) | ||||||
Accumulated other comprehensive loss |
(103 | ) | (645 | ) | ||||||
Accumulated deficit |
(23,385 | ) | (32,957 | ) | ||||||
Total stockholders’ equity (deficit) |
6,675 | (3,554 | ) | |||||||
Total liabilities and stockholders’ equity (deficit) |
$ | 159,330 | $ | 160,380 | ||||||
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Nine Months Ended | |||||||||||||||||
| Quarter Ended September 30, | September 30, | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| (Amounts shown in 000's except share and per share amounts) | |||||||||||||||||
Healthcare revenue |
$ | 141,375 | $ | 140,145 | $ | 417,735 | $ | 418,865 | |||||||||
Healthcare expenses |
132,886 | 133,085 | 392,089 | 406,394 | |||||||||||||
Reduction in loss contract reserve |
— | — | 3,320 | — | |||||||||||||
Gross margin |
8,489 | 7,060 | 28,966 | 12,471 | |||||||||||||
Selling, general and administrative expenses |
3,394 | 4,303 | 10,958 | 14,429 | |||||||||||||
Depreciation and amortization |
1,256 | 1,798 | 3,573 | 5,741 | |||||||||||||
Strategic
initiative and severance expenses |
— | 1,319 | — | 2,586 | |||||||||||||
Impairment of long-lived assets |
— | — | — | 13,236 | |||||||||||||
Income (loss) from operations |
3,839 | (360 | ) | 14,435 | (23,521 | ) | |||||||||||
Interest, net |
1,223 | 1,390 | 4,627 | 3,915 | |||||||||||||
Income (loss) before income tax provision (benefit) |
2,616 | (1,750 | ) | 9,808 | (27,436 | ) | |||||||||||
Income tax provision (benefit) |
331 | (754 | ) | 236 | (10,399 | ) | |||||||||||
Net income (loss) |
2,285 | (996 | ) | 9,572 | (17,037 | ) | |||||||||||
Preferred stock dividends |
— | — | — | 163 | |||||||||||||
Net income (loss) attributable to common shares |
$ | 2,285 | $ | (996 | ) | $ | 9,572 | $ | (17,200 | ) | |||||||
Net income (loss) per common share: |
|||||||||||||||||
Basic |
$ | 0.41 | $ | (0.18 | ) | $ | 1.75 | $ | (3.28 | ) | |||||||
Diluted |
$ | 0.41 | $ | (0.18 | ) | $ | 1.72 | $ | (3.28 | ) | |||||||
Weighted average shares outstanding: |
|||||||||||||||||
Basic |
5,526,000 | 5,428,000 | 5,472,000 | 5,245,000 | |||||||||||||
Diluted |
5,631,000 | 5,428,000 | 5,578,000 | 5,245,000 | |||||||||||||
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
AMERICA SERVICE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (Amounts shown in 000's) | ||||||||||
Operating activities: |
||||||||||
Net income (loss) |
$ | 9,572 | $ | (17,037 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
||||||||||
Depreciation and amortization |
3,573 | 5,741 | ||||||||
Amortization of deferred financing costs |
821 | 349 | ||||||||
Impairment of long-lived assets |
— | 13,236 | ||||||||
Reduction in loss contract reserve |
(3,320 | ) | — | |||||||
Deferred income taxes |
— | (7,028 | ) | |||||||
Interest on stockholders’ notes receivable |
(58 | ) | (60 | ) | ||||||
Other comprehensive loss amortized to interest expense |
542 | — | ||||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
(2,021 | ) | (16,748 | ) | ||||||
Prepaid expenses and other current assets |
(7,139 | ) | (5,253 | ) | ||||||
Other assets |
397 | (40 | ) | |||||||
Accounts payable |
10,361 | 9,967 | ||||||||
Accrued expenses |
1,030 | 14,946 | ||||||||
Reserve for loss contracts |
(5,188 | ) | — | |||||||
Deferred revenue |
2,668 | (1,085 | ) | |||||||
Net cash provided by (used in) operating activities |
11,238 | (3,012 | ) | |||||||
Investing activities: |
||||||||||
Capital expenditures |
(925 | ) | (1,658 | ) | ||||||
Net cash used in investing activities |
(925 | ) | (1,658 | ) | ||||||
Financing activities: |
||||||||||
Net advances (payments) on line of credit |
(16,511 | ) | 6,200 | |||||||
Payment of deferred financing costs |
(550 | ) | (786 | ) | ||||||
Proceeds from stockholder notes receivable |
83 | 81 | ||||||||
Payment of preferred stock dividends |
— | (61 | ) | |||||||
Exercise of stock options |
— | 578 | ||||||||
Net cash provided by (used in) financing activities |
(16,978 | ) | 6,012 | |||||||
Net increase (decrease) in cash and cash equivalents |
(6,665 | ) | 1,342 | |||||||
Cash and cash equivalents, beginning of period |
10,382 | 256 | ||||||||
Cash and cash equivalents, end of period |
$ | 3,717 | $ | 1,598 | ||||||
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
AMERICA SERVICE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(shown in 000’s except share and per share amounts)
1. Basis of Presentation
The interim condensed consolidated financial statements as of September 30, 2002 and for the quarter and nine month period then ended are unaudited, but in the opinion of management, have been prepared in conformity with accounting principles generally accepted in the United States applied on a basis consistent with those of the annual audited consolidated financial statements. Such interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position and the results of operations for the quarter and nine month period presented. The results of operations for the quarter and nine month period presented are not necessarily indicative of the results to be expected for the year ending December 31, 2002. The interim condensed consolidated financial statements should be read in connection with the audited consolidated financial statements for the year ended December 31, 2001.
2. Description of Business
America Service Group Inc. and its consolidated subsidiaries (the “Company”) provide managed healthcare services to correctional facilities under capitated contracts (with certain adjustments) with state and local governments, certain private entities and medical facilities operated by the Department of the Navy and Veterans Administration. The health status of inmates may impact results of operations under such contractual arrangements.
3. 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 (“SFAS 138”), 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. At September 30, 2002, the Company maintained an interest collar agreement with a bank for a notional amount of $6,000 and an expiration date of March 2003. On October 31, 2002, the Company terminated this interest collar agreement at a cost of $165.
On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting in a charge to other comprehensive income of approximately $212, net of tax, as the cumulative effect of a change in accounting principle representing the fair value of the collar agreements on the date of adoption.
In June 2001, the FASB issued SFAS No. 141, Business Combinations (“SFAS 141”), and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 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 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 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 SFAS 141 on July 1, 2001. Such adoption had no effect on the Company’s financial position or results of operations. The Company adopted SFAS 142 effective January 1, 2002, at which time the amortization of the Company’s existing goodwill ceased. Other than the effect on net income of not amortizing goodwill, the adoption of SFAS 142 had no effect on the Company’s results of operations or financial position. Amortization expense related to goodwill during the quarter and nine month period ended September 30, 2001 was $627 and $2,225, respectively.
6
The following table reflects unaudited pro forma results of operations of the Company for the quarter and nine month period ended September 30, 2002 and 2001, giving effect to SFAS 142 as if it were adopted on January 1, 2001:
| Quarter ended | Nine months ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net income (loss) attributable to common shares, as
reported |
$ | 2,285 | $ | (996 | ) | $ | 9,572 | $ | (17,200 | ) | |||||||
Add back: amortization expense, net of tax |
— | 389 | — | 1,380 | |||||||||||||
Pro forma net income (loss) attributable to common shares |
$ | 2,285 | $ | (607 | ) | $ | 9,572 | $ | (15,820 | ) | |||||||
Basic net income (loss) per common share: |
|||||||||||||||||
As reported |
$ | 0.41 | $ | (0.18 | ) | $ | 1.75 | $ | (3.28 | ) | |||||||
Pro forma |
$ | 0.41 | $ | (0.11 | ) | $ | 1.75 | $ | (3.02 | ) | |||||||
Diluted net income (loss) per common share: |
|||||||||||||||||
As reported |
$ | 0.41 | $ | (0.18 | ) | $ | 1.72 | $ | (3.28 | ) | |||||||
Pro forma |
$ | 0.41 | $ | (0.11 | ) | $ | 1.72 | $ | (3.02 | ) | |||||||
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) 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 adopted SFAS 144 effective January 1, 2002. Such adoption had no impact on the Company’s financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB 30 will now be used to classify those gains and losses. SFAS 145 amends SFAS 13, “Accounting for Leases,” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leas