Attached files
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EX-31.1 - Conmed Healthcare Management, Inc. | v178146_ex31-1.htm |
EX-32.1 - Conmed Healthcare Management, Inc. | v178146_ex32-1.htm |
EX-23.1 - Conmed Healthcare Management, Inc. | v178146_ex23-1.htm |
EX-31.2 - Conmed Healthcare Management, Inc. | v178146_ex31-2.htm |
EX-32.2 - Conmed Healthcare Management, Inc. | v178146_ex32-2.htm |
EX-21.1 - Conmed Healthcare Management, Inc. | v178146_ex21-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended: December 31, 2009
or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
File Number: 0-27554
Conmed
Healthcare Management, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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42-1297992
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(State
or other jurisdiction of
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(IRS
Employer
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incorporation or organization)
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Identification
No.)
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7250
Parkway Dr., Suite 400
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||
Hanover, MD
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21076
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(Address
of principal executive offices)
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(Zip
code)
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410-567-5520
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(Registrant's
telephone number,
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including
area code)
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange
on which registered
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Common
Stock, $.0001 par value
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NYSE
Amex LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No x
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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o
Non-accelerated filer o Smaller reporting
company x
(Do not
check if smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o
No x
The
aggregate market value of the voting and non-voting common stock held by
non-affiliates, based upon the closing sale price of the common stock on June
30, 2009 was approximately $21,263,200. Shares of common stock held
by each officer and director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates.
The
number of shares outstanding of the registrant's Common Stock, $.0001 par value,
as of March 25, 2010: 12,629,572
DOCUMENTS
INCORPORATED BY REFERENCE
The
following document is incorporated herein by reference:
Document
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Parts Into Which Incorporated
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Proxy
Statement for the Company’s 2010
Annual Meeting of Stockholders |
Part III
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CONMED
HEALTHCARE MANAGMENT, INC.
2009
FORM 10-K ANNUAL REPORT
TABLE OF
CONTENTS
Page
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PART
I.
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ITEM
1.
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Business.
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1
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ITEM
1A.
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Risk
Factors.
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9
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ITEM
1B.
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Unresolved
Staff Comments.
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16
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ITEM
2.
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Properties.
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16
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ITEM
3.
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Legal
Proceedings.
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16
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ITEM
4.
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Reserved.
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16
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PART
II.
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||
ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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17
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ITEM
6.
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Selected
Financial Data.
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17
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ITEM
7.
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Management's
Discussion and Analysis or Financial Condition and Results of
Operations.
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17
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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25
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ITEM
8.
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Financial
Statements and Supplementary Data.
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26
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ITEM
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
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49
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ITEM 9A(T).
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Controls
and Procedures.
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49
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ITEM
9B.
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Other
Information.
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49
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PART
III
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||
ITEM
10.
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Directors,
Executive Officers and Corporate Governance.
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50
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ITEM
11.
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Executive
Compensation.
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50
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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50
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ITEM
13.
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Certain Relationships and Related Transactions,
and Director Independence.
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51
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ITEM
14.
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Principal
Accountant Fees and Services.
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51
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PART
IV
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||
ITEM
15.
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Exhibits
and Financial Statement Schedules.
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52
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SIGNATURES
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55
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PART
I.
ITEM
1. BUSINESS.
The
Company
Conmed
Healthcare Management, Inc. (together with its consolidated subsidiaries,
“Conmed”, the “Company”, “we”, “us”, or “our”, unless otherwise specified or the
context otherwise requires) provides healthcare services to county and municipal
detention centers across the United States. As a result of the Supreme Court
decision in Estelle v. Gamble (1976), all individuals held against their will
are required to be provided with community standard healthcare. Under this
requirement, all counties and municipalities are required to provide healthcare
services for their inmates. We are a specialist in the provision of these
services.
Corporate
History
Prior to
January 26, 2007, the Company formerly known as Pace Health Management Systems,
Inc. (“Pace”) was classified as a shell company, had no ongoing operations,
minimal operating expenses and no employees.
On
January 26, 2007, we acquired Conmed, Inc. (“Conmed, Inc.”), a privately-owned
provider of correctional healthcare services (the “Acquisition”). Conmed, Inc.
was formed as a corporation on June 10, 1987 in the State of Maryland for the
purpose of providing healthcare services exclusively to county detention centers
located in Maryland. As Conmed, Inc. developed, it accepted more contracts for
additional services including mental health, pharmacy and out-of-facility
healthcare. In 2000, Conmed, Inc. served more than 50% of the county detention
healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek
contracts outside of Maryland and at the time of the Acquisition operated in
four states: Kansas, Maryland, Virginia and Washington. For the
fiscal year ended December 31, 2007, Conmed, Inc. had net revenues primarily
from medical services provided to correctional institutions of
$26,073,040.
As a
result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
Company and the business of Conmed, Inc. is now our primary business. On March
13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. In
2008, we purchased all of the assets of Emergency Medicine Documentation
Consultants, P.C. (“EMDC”), a provider of medical services in northwest Oregon,
and we purchased all of the stock of Correctional Mental Health Services, LLC
(“CMHS”), a provider of mental health services in Maryland. As of
December 31, 2009, we were in contract with, and providing medical services in
thirty-six counties in seven states including: Arizona, Kansas, Maryland,
Oklahoma, Oregon, Virginia and Washington and had net revenues primarily from
medical services provided to correctional institutions of
$52,784,559.
Corporate
Information
Our
principal executive offices are located at 7250 Parkway Drive, Suite 400,
Hanover, Maryland 21076. Our telephone number at such address is (410)
567-5520.
Services
Provided
County
and Municipal Correctional Healthcare Services
We
provide the following array of healthcare services for inmates in county and
municipal facilities under contract with the counties served. The contracts are
primarily multiple year, fixed-cost contracts with annual escalations, caps on
out-of-facility healthcare and catastrophic expenses that limit our maximum
financial exposure, and contain adjustments on a per diem basis for changes in
inmate population served.
1
Correctional
healthcare services include a broad array of services that support the care of
inmates detained in county detention centers. Correctional healthcare services
include, but are not limited, to the following categories:
·
General Healthcare Services
|
·
Dialysis Services
|
·
Acute Care Services
|
·
Durable Medical Equipment
|
·
Surgical Services
|
·
Hospital Services
|
·
Laboratory Services
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·
Mental Health Services
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·
IV Therapy
|
·
Pharmacy
|
·
EKG's
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·
Physical and Occupational Therapy
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·
Diagnostic Imaging/Radiology
|
·
Dental Services
|
·
Electronic Medical Records
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·
Electronic Medication Administration
Records
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We either
directly provide these services within the detention facilities or subcontract
for the provision of these services within or outside the
facility. We make every effort to safely provide the medical services
within the facilities due to security and cost considerations of out-of-facility
services.
Contracting
Most of our contracts are awarded through a competitive
bidding process in connection with responding to a Request for Proposals
(“RFP”). We have a model for predicting healthcare costs based
on 25 years of accumulated experience, external data on healthcare costs,
trending, and knowledge of current and future drivers of cost. This predictive
model is the basis for the cost proposals we provide in competitive bids. The
model addresses and aggregates costs related to staffing, on-site costs,
out-of-facility costs, pharmacy, supplies, administrative costs, taxes, and
contract fees. We have found that having predictive reliability of costs
provides for a higher probability of sustained profits.
Staffing
We
provide staffing of healthcare professionals at each of our contracted
facilities. The staffing patterns are typically defined within the RFP
distributed by the counties and municipalities soliciting proposals for inmate
healthcare services. The level of staffing varies depending on the size of the
facility, i.e., larger facilities typically require a larger staff. The ratio of
staff members to inmates varies depending on the physical structure of the
facilities and the specific scope of services required by the RFP. Generally, we
engage existing staff at the facility to the greatest extent possible when
entering into a new contract. The on-site staffing for any facility may include
Registered Nurses, Licensed Practical Nurses, Certified Medication Technicians,
Certified Nursing Assistants, nursing assistants, physicians, physician
assistants, dentists, psychiatrists, psychologists, social workers, nurse
practitioners, medical records' clerks, administrative and support
staff.
Pharmacy
We
provide medications for inmates within our contracted detention facilities.
Medications are currently provided from two national pharmacy contractors,
Diamond Pharmacy and Correct Rx, which specialize in the provision of
pharmaceutical services to detention centers. We have accumulated
information regarding pharmacy expenses in our contracted facilities, which is
useful in the cost proposal portions of our bids.
In-Facility
Services
We
provide comprehensive healthcare services from the time an inmate enters the
facility until the time of such inmate's release from the facility. In some
cases, we are responsible for the cost of providing healthcare services to an
individual at the time of his or her arrest. The vast majority of healthcare
services are provided on site by our clinical staff. Our healthcare
services begin at intake with a screening examination and triage. Such services
are continued through the provision of daily sick calls. Typically inmates
receive a comprehensive physical examination within 14 days of admission to the
facility and a dental examination within 90 days of admission. The initial and
subsequent examinations include psychiatric screening evaluations to detect
suicide potential and major psychiatric illness requiring special
treatment.
2
The costs for services provided within
the facility are generally regionally-based and fairly predictable. The highest
costs relate to providing medical and administrative support staff, professional
liability insurance, laboratory fees, and on-site radiology plus medical and
office supplies.
Out-of-Facility
Services
Inmates
requiring services outside the facility fall into two broad categories: (i)
emergencies and (ii) circumstances that require services beyond the capability
of those that can be provided in the facility. Out-of-facility services include
hospitalizations, emergency room visits and visits for specialty and
sub-specialty care plus other ancillary medical services, Most of our
out-of-facility services are provided through the use of a local or regional
contracted network of professional medical providers using third party
administrators (“TPA”).
In addition, utilization management and utilization review services are employed
to assist with case management and assure that care is provided within generally
accepted community standards.
1. Case management and
utilization reviews - To assure the most cost effective and medically
appropriate length of stays, we often utilize the services of a contracted
professional utilization management and utilization review (“UM/UR”)
organization. When an inmate is hospitalized, the UM/UR organization maintains
daily contact with the provider and the Medical Director for the site to assure
appropriate care is rendered.
2. TPA - We contract
with TPAs serving most of the areas where the facilities in which we provide
healthcare services are located. The TPAs provide a network of physicians,
hospitals and ancillary services that are paid based on contracted fee
schedules. These fee schedules typically include discounts that average
approximately 15% off the submitted charges. The TPA is compensated based on a
percent of our savings for the repriced claims.
Mobile
Imaging
We
provide mobile imaging services, primarily x-ray, which enables the facility to
avoid the cost associated with the purchase and housing of expensive equipment
and/or the use of correction staff required to accompany inmates during
out-of-facility visits.
Dental
Services
We
provide on-site dental services for many of the facilities we service. Such
facilities maintain dental suites with equipment for conducting dental
procedures and x-rays depending on the RFP requirements.
Electronic
Medical Records
We have
launched an initiative to accelerate the adoption of electronic medical records
(“EMR”) and electronic medication administrator record (“EMAR”) systems by our
client facilities. Adoption and use of EMR systems in correctional
facilities is an important contemporary issue for correctional facility
administrators, as use of EMR systems occurs in parallel in the community
healthcare system. It is widely accepted that the use of EMR and EMAR
systems in the correctional setting greatly improves productivity and accuracy
as well as simplifies the quality measurement and tracking reports necessary for
accreditation standards. The availability of cost effective, user
friendly and accreditation compatible EMR systems suitable for use in the
correctional medicine arena have lagged behind community oriented systems, but
we have identified a commercially available software package and have begun to
use it in selected contracted facilities.
EMR
systems greatly simplify the tracking of care of patients with chronic
conditions, sick calls, chart notes, health problems, release forms, test
results, completion of physician orders and appointments with specialist
providers. EMAR systems allow for the tracking of medications
ordered, pending shipments and pharmacy deliveries. When medications
are delivered and logged in, they are automatically listed on the medication
pass log for the next scheduled medication pass. Documentation
detailing which inmates received medications and when, the type of medication
received and from which staff member, as well as which inmates refused
medications or were not present not only contributes to the quality of care but
also helps mitigate grievances and claims of denial of care.
3
Additional
Services
Value-added
services that we provide to our clients include the following:
|
·
|
Healthcare
services consultations - On request from the facility
administration, we will provide consultations on healthcare issues such as
Tuberculosis, Avian Flu, AIDS, Hepatitis, Methadone treatment, H1N1,
reentry programs and many other topics pertinent to correctional
healthcare patients. These consultations typically relate to policy issues
affecting multiple facilities. In many cases, we have provided expert
testimony to state legislative bodies and
agencies.
|
|
·
|
Audit
compliance programs
- We provide an audit compliance program as part of our core
responsibility to all sites. We have experts in all state and national
audit processes on staff. These individuals provide guidance to the sites
to assure 100% audit compliance. Additionally, a comprehensive continuous
quality improvement program is employed to monitor all healthcare
activities to ensure delivery of high quality healthcare services for
correctional facilities we
serve.
|
|
·
|
OSHA
compliance programs
- Regulation 1910.1030 of the U.S. Department of Labor, Occupational
Safety & Health Administration ("OSHA"), provides guidelines and
universal precautions that must be observed to prevent contact with blood
or other potentially infectious materials. Such regulations are applicable
to all occupational exposure to blood or other potentially infectious
materials. We comply with OSHA and provide to our staff members
and make available to corrections staff, among other things, appropriate
personal protective equipment such as gloves, gowns, laboratory coats,
face shields or masks and eye protection, as well as mouthpieces,
resuscitation bags, pocket masks, or other ventilation devices. The
purpose of such protective equipment is to prevent blood or other
potentially infectious materials from passing through to or reaching our
employee's or corrections staff’s clothing, undergarments, skin, eyes,
mouth, etc. Other procedures we implement in accordance with
OSHA include, but are not limited to, protection from airborne pathogens,
ensuring a clean and sanitary worksite and procedures for discarding
contaminated waste.
|
|
·
|
Risk management
- We promote risk management through a process that includes daily
monitoring of significant healthcare events, as well as weekly and monthly
review of trends and subsequent measured actions. Through attention to
detail in the provision and documentation of healthcare, adherence to
standards of care and monitoring of events, we are able to substantially
reduce the risk of poor outcomes and/or
litigation.
|
|
·
|
Sick call services for
facility staff - We provide limited sick call services to detention
center staff for acute problems. This often allows the staff to continue
at work rather than taking a sick day for a doctor's visit. This
value-added service is appreciated by the facility staff and
administration.
|
|
·
|
Emergency services for
staff and visitors - We believe it is imperative that our medical
staff be well trained and equipped to handle emergencies. Thus, we ensure
that our medical staff is familiar with the correctional facility and is
equipped to deliver prompt emergency care anywhere in the facility.
Specific equipment is maintained and restocked when necessary, within each
facility in the event of an emergency, including an emergency kit capable
of maintaining basic life support.
|
Sales
and Marketing
Our sales
and marketing efforts for correctional healthcare services are based on the
following:
1.
|
Market
opportunities - We have designated Arizona, Florida, Georgia,
Kansas, Kentucky, Iowa, North Carolina, Oklahoma, Oregon, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia and Washington as our primary
targets. We are focused on opportunities with the following types of
facilities:
|
a.
|
Facilities
of 500 inmates or more that are currently not served by a correctional
healthcare contractor;
|
b.
|
Facilities
of 500 inmates or more that are served by a local hospital or healthcare
provider;
|
4
c.
|
Facilities
of 500 inmates or more where a competitor's services are not meeting the
facility's expectations; and
|
d.
|
Facilities
of 500 inmates or more that are served by a competitor that has shifted
its focus from the county detention center market to
prisons.
|
2.
|
Word of mouth –
We have a contact network through our existing contracts and through
strategic relationships with national pharmacy contractors. This network
has provided early indications of counties and municipalities considering
outsourcing healthcare services, changing their current contractors or
seeking proposals for other
reasons.
|
3.
|
Online procurement
services – We have a contract with an on-line government
contracting research service to establish early determinations of county
intentions to seek proposals.
|
4.
|
Trade meetings
– Our staff attends annual regional and national trade meetings. These
meetings serve as an opportunity to meet and greet new potential clients.
Our trade show booth attracts attention with a variety of marketing tools
and techniques. We often sponsor special events and awards at these
meetings.
|
5.
|
Cold calls – We
use, to a limited extent, cold calls, typically only in cases where some
collateral indication of a probability of interest
exists.
|
6.
|
Advertising in trade
journals.
|
7.
|
Public speaking
engagements for special topics on
request.
|
8.
|
Website promotion of
our capabilities and
experience.
|
We
currently utilize our CEO, Chief Medical Officer, President of Mental Health
Services, and Vice President of Strategic Development, as well as a network of
regional consultants to implement our marketing strategy.
Acquisitions
We are
also open to selective acquisitions to enhance our growth in strategic areas and
have established a pipeline of potential acquisition candidates. In 2008, we
purchased all of the assets of EMDC, a provider of medical services in northwest
Oregon, and we purchased all of the stock of CMHS, a provider of mental health
services in Maryland. In January 2010, we purchased all of the assets
of a small mobile imaging company to expand the base of services that we
provide to our customers, which were previously subcontracted, and we do
not expect this acquisition to have a material impact on our financial
position or results of operations.
Competition
We are
aware of four major sources of competition:
1.
|
National contracting
companies that serve both the county and state prison systems.
While we are aware of several national companies that provide healthcare
services to county detention centers, we do not believe this is their main
focus. These companies, including Prison Health Services, Inc.,
Correctional Medical Services, Inc., Wexford Health Sources, Inc.,
Naphcare, Inc. and Armor Correctional Health Services, are primarily in
the business of providing services to state
prisons.
|
2.
|
Local or regional
companies focused on county detention centers. There are a few
companies that provide healthcare services to county detention centers
within confined regions, such as California Forensic Medical Group Inc. in
California; Correct Care Solutions, LLC in Tennessee; CorrectHealth, LLC
in Georgia: Correctional Healthcare Management, Inc. in Colorado; and
Primecare Medical, Inc. in Pennsylvania. These companies are privately
held and can be characterized as small to medium size businesses when
compared to the major national prison healthcare companies. In addition,
there are other smaller local groups in markets which we are targeting at
this time.
|
3.
|
Local
hospitals. We have seen several incidences of local hospital
systems providing healthcare services to the county detention centers.
Such incidences arose out of the absence of other interested providers.
The hospital costs for these counties are often extremely high and
counties seeking cost savings may seek the services of a professional
medical service contractor other than the local
hospital.
|
5
4.
|
Local
physicians. In some cases, our competitor is a local solo physician
or group of physicians. Such contractors typically provide only the
on-site sick call services and may have limited expertise in the provision
of full service correctional healthcare. Such physicians are often unable
to obtain cost effective and appropriate liability insurance that will
cover both their primary work, as well as their correctional healthcare
services.
|
Intellectual
Property
Conmed
has not registered any trademarks, patents, or any other intellectual
property.
Government
Regulation
The
industries in which we operate are subject to extensive federal, state and local
regulations and/or orders of judicial authorities, including healthcare,
pharmaceutical and safety regulations and judicial orders, decrees and
judgments. Some of the regulations and orders are unique to our industries, and
the combination of regulations and orders we face is unique. Generally,
prospective providers of healthcare and pharmaceutical services to correctional
facilities must be able to detail their readiness to, and must comply with, a
variety of applicable state and local regulations and state and national
standards. Our contracts typically include reporting requirements, supervision
and on-site monitoring by representatives of the contracting governmental
agencies. In
addition, the doctors, nurses, pharmacists and other healthcare professionals
who provide healthcare services on our behalf are, in all cases, required to
obtain and maintain professional licenses and are subject to state regulation
regarding professional standards of conduct. Our services are also subject to
operational and financial audits by the governmental agencies with which we have
contracts and by the courts of competent jurisdiction. Additionally, services
provided to health benefit plans in certain cases, are subject to the provisions
of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We
may not always successfully comply with these regulations and failure to comply
can result in material penalties, non-renewal or termination of contracts with
correctional facilities or prohibition from proposing for new business in
certain jurisdictions.
Health Insurance Portability and
Accountability Act of 1996. The Administrative Simplification Provisions
of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
require the use of uniform electronic data transmission standards for healthcare
claims and payment transactions submitted or received electronically. These
provisions are intended to encourage electronic commerce in the healthcare
industry. HIPAA also includes regulations on standards to protect the security
and privacy of health-related information. The privacy regulations extensively
regulate the use and disclosure of individually identifiable health-related
information, whether communicated electronically, on paper or
orally.
Corporate Practice of Medicine/Fee
Splitting. Many of the states in which we operate have laws that prohibit
unlicensed persons or business entities, including corporations, from employing
physicians or laws that prohibit certain direct or indirect payments or
fee-splitting arrangements between physicians and unlicensed persons or business
entities. Possible sanctions for violations of these restrictions include loss
of a physician's license, civil and criminal penalties and rescission of
business arrangements that may violate these restrictions. These statutes vary
from state to state, are often vague, and seldom have been interpreted by the
courts or regulatory agencies. We review, on an ongoing basis, the applicable
laws in each state in which we operate and review our arrangements with our
healthcare providers to ensure that these arrangements comply with all
applicable laws. We have no assurance that governmental officials responsible
for enforcing these laws will not assert that we, or transactions in which we
are involved, are in violation of such laws, or that such laws ultimately will
be interpreted by the courts in a manner consistent with our
interpretations.
Regulation of Bid Process and
Contracting. Contracts with governmental agencies are obtained primarily
through a competitive proposal/bidding process, which is governed by applicable
state and local statutes and ordinances. Although practices vary, typically a
formal 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 proposals 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 technical quality of the
proposal, the offered 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 may, among various
options, continue to provide healthcare services to its inmates with its own
personnel or the existing provider. Certain RFPs and contracts
require the bidder to post a bid bond or performance bond. Performance bonding
requirements may cover one year or up to the length of the
contract.
6
Our
contracts with governmental agencies often require us to comply with numerous
additional requirements regarding recordkeeping 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. If a
violation of the terms of an applicable contractual or statutory provision
occurs, a contractor may be disbarred or suspended from obtaining future
contracts for specified periods of time in the applicable location. We have
never been disbarred or suspended from seeking procurements in any
jurisdiction.
OSHA. OSHA
Standard 29 CFR 1910 requirements include, but are not limited to, protections
against exposure to blood borne and airborne pathogens (e.g., tuberculosis),
needle stick prevention, fire safety, hazard communications, respiratory
protection, and hazardous waste operations. The federal OSHA standards have been
adopted by state regulatory agencies to conduct routine environmental
inspections.
National Fire Protection Association
(“NFPA”). Environmental fire safety is promulgated by the NFPA 101: Life
Safety Code derived from the American National Standards Institute (“ANSI”).
Enforcement of NFPA regulation is accomplished by annual inspections conducted
by the state.
Major
Contracts
Substantially
all of our operating revenue is derived from contracts with county and municipal
governmental entities. Our top three clients generated approximately
thirty-eight percent of our total revenues for the year ended December 31, 2009.
Summaries of our largest contracts follow below.
Baltimore County Detention Center
Contract. We entered into a Services Agreement with the Board
of County Commissioners of Baltimore County, Maryland (“BCDC”), on March 29,
2007, for a period of approximately two years and six months, and BCDC, at its
option, may extend the agreement annually for two additional three-year terms
upon written notice. On September 11, 2009, Baltimore County
exercised the first of the two three-year extensions for the period from
September 15, 2009 through September 14, 2012. BCDC pays us a base monthly fee,
which may be adjusted for changes in inmate population levels. Under the
agreement, we are subject to mandatory staffing requirements. The agreement also
contains provisions that allow the BCDC to assess penalties if certain staffing
criteria are not maintained and certain liquidated damages in the event certain
performance standards are not met. We also provide, at our own expense, a
performance bond for 100% of the annual amount of the awarded contract, as well
as a payment bond for approximately 25% of the annual amount of the awarded
contract. BCDC may terminate the agreement upon ninety days written notice
without cause and may immediately terminate the agreement for a material breach
of the agreement subject to certain cure provisions.
Pima County Detention Center
Contract. We entered into a Correctional Health Services
Agreement with Pima County, Arizona on August 7, 2008, to provide medical
services to the inmates at the Pima County Adult Detention Center (“PCDC”) for
an initial term of twenty-three months retroactive to August 1,
2008. On November 17, 2009, the Pima County Board of Supervisors
approved extension of the agreement for an additional twenty-four months through
June 30, 2012. Under the terms of the contract, we provide an inmate
medical services platform that includes: staffing of physicians, mid-level
providers, nurses and clerical personnel; as well as dental services, mental and
behavioral health screening and management services, and ancillary services,
such as laboratory and pharmacy services. In addition, we manage offsite
specialist and hospital services. The PCDC pays us a base monthly fee, which may
be adjusted for changes in inmate population. Under the agreement, we are
subject to mandatory staffing requirements. The agreement also contains
provisions that allow the PCDC to assess penalties if certain staffing criteria
are not maintained and impose certain liquidated damages in the event certain
performance standards are not met. We also provide, at our own expense, a
performance bond for $500,000. The contract may be terminated by Pima County at
any time and without cause by providing ninety days advance written
notice.
Sedgwick County Detention Center
Contract. We entered into a Services Agreement with the Board
of County Commissioners of Sedgwick County, Kansas (“Sedgwick County”), on
January 31, 2005, for a period of two years. On June 1, 2007, the agreement was
amended to extend the basic term through December 31, 2009. On
October 22, 2009, the Sedgwick County Board of Bids and Contracts
approved a new contract for five years through December 31,
2014. Sedgwick County pays us a base monthly fee, which may be
adjusted for changes in inmate population levels. Under the agreement, we are
subject to mandatory staffing requirements. The agreement also contains a
provision that allows Sedgwick County to assess penalties if certain staffing
criteria are not maintained. Sedgwick County may terminate the agreement upon
thirty days written notice without cause. Either party may immediately terminate
the agreement for a material breach of the agreement subject to certain cure
provisions.
7
Employees
As of
December 31, 2009, we had approximately 454 full-time and 52 part-time
employees, 357 per diem employees, and 59 position contractors. We provide all
full-time employees with a comprehensive benefits package including medical
insurance, education stipend, dental insurance, 401(k) and paid vacation. We
believe that our relations with our employees are good. None of our employees
belong to a union.
Executive
Officers of the Company
Certain
information regarding each of our executive officers is set forth
below.
Name
|
Age
|
Position
|
||
Richard
W. Turner, Ph.D.
|
63
|
Chairman,
Chief Executive Officer and Director
(
Parent and Operating
Subsidiaries )
|
||
Howard
M. Haft, MD
|
60
|
Executive
Vice President and Chief Medical Officer
(
Parent
)
|
||
Thomas
W. Fry
|
65
|
Chief
Financial Officer and Secretary
(
Parent and Operating
Subsidiaries )
|
Richard
Turner, Ph.D. - Chairman, Chief Executive Officer and Director of Parent and
Operating Subsidiaries
Dr.
Turner has been our Chairman, Chief Executive Officer and a Director since May
2008. Prior to May 2008 he served as President and Chief Executive Officer.
Prior to consulting for Pace Health Management Systems, Inc., our predecessor in
interest, in May 2006, Dr. Turner served as President and Chief Executive
Officer of EyeTel Imaging, Inc. from January 2004 to May 2006. Prior to January
2004, Dr. Turner served as President and Chief Executive Officer of BEI Medical
Systems Company, Inc. (“BEI Medical”), a company engaged in the development and
marketing of a minimally invasive endometrial ablation system. BEI Medical was
sold to Boston Scientific Corp. for approximately $95 million in
2002. Dr. Turner has held executive leadership positions in the
medical industry for approximately 25 years, including President and Director of
CooperLaserSonics, Inc., President of CooperVision, Inc., President, Chief
Executive Officer and Director of Pancretec, Inc. (sold to Abbott Labs, Inc.)
and President of Kay Laboratories (sold to Baxter, Inc.). Dr. Turner graduated
from Old Dominion University with a Bachelor of Science degree, earned his
M.B.A. from Pepperdine University and earned his Ph.D. from Berne
University.
Howard
Haft, MD - Executive Vice President and Chief Medical Officer of
Parent
Dr. Haft,
who has served as our Executive Vice President and Chief Medical Officer since
January 2007, is a founder of Conmed, Inc. and acted as Director and Chief
Medical Officer of Conmed, Inc. from 1984 to January 2007. He also serves as the
President of the Maryland Healthcare Associates and Georgetown Affiliate
Multispecialty Group Practice. He serves on the Board of Directors of Apollo
Medical Corporation that provides practice management services to Maryland
Healthcare Associates. He also serves as President of the Maryland Foundation
for Quality Healthcare, a not for profit corporation providing healthcare
education to the underprivileged of Maryland. Dr. Haft earned his M.D. from
Pennsylvania State University, performed his residency in Internal Medicine at
Brown University, received a Masters in Medical Management from Tulane
University, and is recognized as a Certified Physician Executive by the American
College of Physician Executives. He is Board Certified in Internal Medicine and
Emergency Medicine.
Thomas
W. Fry - Chief Financial Officer and Secretary of Parent and Operating
Subsidiaries
Mr. Fry
has served as our Chief Financial Officer and Secretary since January 26,
2007. Prior to joining Pace, our predecessor in interest, Mr. Fry
served as Chief Financial Officer of Vasomedical, Inc. from September 2003 to
September 2006 and as Vice President, Finance and Administration of BEI Medical
from September 1997 until December 2002. From October 1992 until November 1997,
Mr. Fry was Vice President, Finance and Administration of BEI Medical’s
predecessor company of the same name, which merged into BEI Medical in November
1997. Mr. Fry has held various executive financial positions for approximately
27 years, including Corporate Controller of Disctronics Ltd. from 1989 to 1992,
Controller and Chief Financial Officer of Cavitron Inc./CUSA, a medical device,
engineering and manufacturing subsidiary of CooperLaserSonics, Inc. and Pfizer
Inc., from 1986 to 1989, and Manager of Profit Planning and Manufacturing
Controller of Chesebrough-Ponds International, from 1979 to 1986. Prior to that
time, Mr. Fry was employed by GTE Corporation in various accounting and
financial management positions. Mr. Fry graduated from Southeast Missouri State
University with a Bachelor of Science degree, and earned his M.B.A. from Pace
University.
8
ITEM
1A. RISK FACTORS
You
should consider carefully the following risk factors and other information
included or incorporated by reference in this Annual Report on Form 10-K. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we deem to
be currently immaterial also may impair our business operations. If any of the
following risks actually occur, our business, financial condition and operating
results could be materially adversely affected.
OUR ABILITY TO CONTINUE OR EXPAND OUR
BUSINESS AND SECURE NEW CONTRACTS TO PROVIDE HEALTHCARE AND MEDICAL SERVICES TO
CORRECTIONAL AND DETENTION FACILITIES DEPENDS ON MANY FACTORS OUTSIDE OUR
CONTROL. Our growth is generally dependent upon our ability to
obtain new contracts to provide healthcare and medical services to inmates in
county correctional and detention facilities. This possible growth
depends on a number of factors we cannot control, including crime rates and
sentencing patterns in various jurisdictions as well as continued privatization
by state, county and municipal governmental agencies of healthcare services for
correctional facilities, and acceptance of such privatization. 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 which could
cause our revenue to decline and harm our business and operating
results.
The
demand for our services could be adversely affected by the relaxation of
enforcement efforts, leniency in conviction and sentencing practices or through
the decriminalization of certain activities currently proscribed by our criminal
laws. For instance, any changes with respect to drugs and controlled substances
or illegal immigration could affect the number of persons arrested, convicted
and sentenced, thereby potentially reducing demand for correctional facilities
to house them, and thus, reduce the number of inmates receiving medical
services. Legislation has been proposed in numerous jurisdictions that could
lower minimum sentences for some non-violent crimes and make more inmates
eligible for early release based on good behavior. Also, sentencing alternatives
under consideration could put some offenders on probation with electronic
monitoring who would otherwise be incarcerated. Similarly, reductions in crime
rates could lead to reductions in arrests, convictions and sentences requiring
incarceration at correctional facilities.
WE PROVIDE CONTRACTED BUSINESS
SERVICES. IN ANY CONTRACT BUSINESS, IT IS POSSIBLE A CONTRACT WILL BE
TERMINATED, DEFAULTED UPON OR NOT RENEWED. Our top three medical service
contracts with county detention centers generated approximately thirty-eight
percent of our total revenues for the year ended December 31, 2009. These same
clients generated approximately thirty percent of our gross profit. If a
contracted detention facility, particularly one of our primary detention
facilities, terminates its contract, which generally may be effective between
thirty and ninety days prior to the termination date, our business and financial
performance may be seriously harmed.
MOST OF OUR CONTRACTS ARE FOR
SHORT-TERMS, ARE GENERALLY TERMINABLE WITHOUT CAUSE, AND THE RENEWAL OR
EXTENSION OPTIONS MAY NOT BE EXERCISED BY THE GOVERNMENTAL
AGENCY. Our detention center medical services contracts are
typically short-term, ranging from one to three years, with renewal or extension
options in favor of the contracting governmental agency. Including extension
options, we have several medical service contracts subject to renewal in the
next twelve months, which accounted for approximately twelve percent of revenue
and seventeen percent of the gross profit, respectively, for the year ended
December 31, 2009. We cannot assure you that these or any other
contracts will be renewed or that extension options will be exercised.
Additionally, the contracting governmental agency typically may terminate a
facility contract without cause by giving us adequate written notice. We
customarily incur significant development and start-up costs in establishing our
services within the new facilities, and the termination or non-renewal of a
contract would require an immediate write-off of any unamortized costs
associated with the contract, including unamortized costs for service contracts
acquired and goodwill, and could have a material adverse effect upon our
financial condition, results of operations and liquidity.
OUR CONTRACTS ARE SUBJECT TO
GOVERNMENTAL FUNDING. Our detention center medical services
contracts are subject to either annual or bi-annual governmental appropriations.
Failure by a governmental agency to receive such appropriations could result in
termination of the contract by such agency or a reduction of the fee payable to
us. In addition, even if funds are appropriated, delays in payments may occur
which could have a material adverse effect on our financial condition, results
of operations and liquidity.
9
AN INCREASE IN INFLATION COULD
ADVERSELY AFFECT OUR OPERATING RESULTS. Some of our 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, we utilize a projection of the future
inflation rate of our cost of services when bidding and negotiating the fixed
fee for future years. If inflation exceeds projected levels, depending on the
contract structure, our profitability could be adversely affected.
OUR INABILITY TO OBTAIN REQUIRED
PERFORMANCE AND/OR PAYMENT BONDS MAY LIMIT OUR ABILITY TO MAINTAIN EXISTING
CONTRACTS AND ACQUIRE ADDITIONAL CONTRACTS. In order to expand
our business and obtain new facilities' contracts, as well as maintain certain
existing contracts, we will need to be able to obtain bonds in certain counties
for which we provide our services. In order to obtain such bonds, or renew
existing bonds, we are required to fulfill certain financial requirements and
standards. To the extent we are unable to fulfill the necessary financial
requirements and standards, we may not be able to acquire new facilities'
contracts and could lose our existing contracts, all of which could negatively
impact our business operations and financial condition.
WE ARE UNCERTAIN AS TO OCCUPANCY
LEVELS AT CERTAIN FACILITIES WE SERVICE. A small portion of our revenues
are generated under detention center medical services contracts that specify an
offset for populations under a specified number. Under such a per diem rate
structure, a decrease in occupancy levels could cause a decrease in the
facilities' needs for medical services, and therefore, could cause a decrease in
revenue and profitability, and may have an adverse effect on our overall
financial condition, results of operations and liquidity.
DISTURBANCES AT FACILITIES WE SERVICE
WOULD IMPACT US NEGATIVELY. An escape, riot, epidemic,
catastrophic or other disturbance that seriously impacts the health of a large
number of inmates at one of our facilities could have a material adverse effect
on our financial condition, results of operations and liquidity. As a result of
a disturbance, inmates may suffer multiple injuries for which the cost of care
may have a temporary, but significant effect on profitability. Approximately
ninety percent of our healthcare services' revenues for the year ended December
31, 2009 are operated under caps which provide limits on the cost of exposure;
however, multiple events with significant costs may exceed budget
targets.
The
remaining ten percent of our correctional healthcare services' revenues from
continuing operations contain no limits on our exposure for treatment costs
related to catastrophic illnesses or injuries to inmates. Although we attempt to
compensate for the increased financial risk when pricing contracts that do not
contain catastrophic limits for facilities that have not had any catastrophic
illnesses or injuries to inmates that exceeded its insurance coverage in the
past, we cannot assure you that we will not experience a catastrophic illness or
injury of a patient that exceeds its coverage in the future. The occurrence of
severe individual cases outside of those catastrophic limits could render
contracts unprofitable and could have a material adverse effect on our financial
condition and results of operations.
WE MAY EXPERIENCE MALPRACTICE
LITIGATION AND OTHER LIABILITY SUITS. Our medical services to
correctional and detention facilities exposes us to potential third-party claims
or litigation by inmates or other persons for adverse outcomes (medical
malpractice), as well as suits related to infringement of their 8th and
14th
amendment rights (deliberate indifference and civil rights). It is likely that
as we grow, we will be exposed to additional healthcare liability issues. We
currently maintain medical professional liability insurance to cover potential
malpractice losses, in the amounts of $1,000,000 per incident and $5,000,000 in
the aggregate, as well as $1,000,000 general liability coverage. Such insurance
is expensive, subject to various coverage exclusions and deductibles and may not
be obtainable in the future on terms acceptable to us, or at all. In
addition, a successful claim against us in excess of our insurance coverage
could materially harm our business. Failure to obtain sufficient
levels of professional liability insurance at a reasonable price or at all, may
expose us to significant losses, which could have a material adverse impact on
our financial condition, results of operations or cash flows.
WE MAY INCUR SIGNIFICANT START-UP AND
OPERATING COSTS ON NEW CONTRACTS BEFORE RECEIVING RELATED REVENUES, WHICH MAY
IMPACT OUR CASH FLOWS AND NOT BE RECOUPED. When we are awarded a
contract to provide medical services to a facility, we may incur significant
start-up and operating expenses, including the cost of purchasing equipment and
staffing the facility, before we receive any payments under the contract. These
expenditures could result in a significant reduction in our cash reserves and
may make it more difficult for us to meet other cash obligations. In addition, a
contract may be terminated prior to its scheduled expiration and as a result, we
may not recover these expenditures or realize any return on our
investment.
10
WE UTILIZE TPA AND PROVIDER NETWORKS
TO OBTAIN OUT-OF-FACILITY CARE IN VARIOUS MARKETS. SHOULD THOSE NETWORKS BECOME
INACCESSIBLE, OUR COSTS FOR PROVIDING THOSE SERVICES WOULD RISE APPROXIMATELY FIFTEEN
PERCENT. Our current profit
margin is, in part, due to our ability to reduce out-of-facility costs that are
defined by contracted networks. Our net costs are typically approximately
fifteen percent less than the stated charges for these services. It is important
to note that healthcare providers for the general public utilize these same
programs. It is unlikely the environment will change, causing the return of
payments based on healthcare provider's charges without discounts. If
the contracted networks become inaccessible, or discounting slows, it would
negatively impact our operating margins and could have a material adverse effect
on us.
CHANGES IN STATE AND FEDERAL
REGULATIONS COULD RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS. We are
subject to extensive regulation by both the federal government and the states in
which we conduct our business. There are numerous healthcare and other laws and
regulations that we are required to comply with in the conduct of our business.
These laws may be materially changed in the future or new or additional laws or
regulations may be adopted with which we will be required to comply. The cost of
compliance with current and future applicable laws, rules and regulations may be
significant.
These
state and federal laws and regulations that affect our business and operations
include, but are not necessarily limited to:
|
·
|
healthcare
fraud and abuse laws and regulations, which prohibit illegal referral and
other payments;
|
|
·
|
ERISA
and related regulations, which regulate many healthcare
plans;
|
|
·
|
pharmacy
laws and regulations;
|
|
·
|
privacy
and confidentiality laws and
regulations;
|
|
·
|
civil
liberties protection laws and
regulations;
|
|
·
|
state
and national correctional healthcare auditing
bodies;
|
|
·
|
various
licensure laws, such as nursing and physician licensing
bodies;
|
|
·
|
drug
pricing legislation; and
|
|
·
|
Medicare
and Medicaid reimbursement
regulations.
|
We
believe we are operating our business in substantial compliance with all
existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and there cannot be any assurance that
a regulatory agency charged with enforcement of any of these laws or regulations
will not interpret them differently or, if there is an enforcement action, that
our interpretation would prevail. In addition, there are numerous proposed
healthcare laws and regulations at the federal and state levels, many of which
could materially affect our ability to conduct business or adversely affect our
results of operations.
WE ARE SUBJECT TO HIPAA, AND OUR
FAILURE TO COMPLY COULD ADVERSELY AFFECT OUR BUSINESS. On August 21,
1996, Congress passed HIPAA. This legislation required the Secretary of the
Department of Health and Human Services to adopt national standards for
electronic health transactions and the data elements used in such transactions.
The Secretary has adopted safeguards to ensure the integrity and confidentiality
of such health information. Violation of the standards is punishable by fines
and, in the case of wrongful disclosure of individually identifiable health
information, imprisonment. Failure to comply with HIPAA could have an adverse
effect on our business.
OUR BUSINESS PRACTICES MAY BE FOUND
TO CONSTITUTE ILLEGAL FEE-SPLITTING OR CORPORATE PRACTICE OF MEDICINE, WHICH MAY
LEAD TO PENALTIES AND ADVERSELY AFFECT OUR BUSINESS. Many of the states in which we operate have laws that
prohibit unlicensed persons or business entities, including corporations, from
employing physicians or laws that prohibit certain direct or indirect payments
or fee-splitting arrangements between physicians and unlicensed persons or
business entities. Possible sanctions for violations of these restrictions
include loss of a physician's license, civil and criminal penalties and
rescission of business arrangements that may violate these restrictions. These
statutes vary from state to state, are often vague, and seldom have been
interpreted by the courts or regulatory agencies. We review, on an ongoing
basis, the applicable laws in each state in which we operate and review our
arrangements with our healthcare providers to ensure that these arrangements
comply with all applicable laws. We have no assurance that governmental
officials responsible for enforcing these laws will not assert that we, or
transactions in which we are involved, are in violation of such laws, or that
such laws ultimately will be interpreted by the courts in a manner consistent
with our interpretations.
11
GOVERNMENT AGENCIES MAY INVESTIGATE
AND AUDIT OUR CONTRACTS AND, IF ANY IMPROPRIETIES ARE FOUND, WE MAY BE REQUIRED TO
REFUND REVENUES WE HAVE RECEIVED, OR FOREGO ANTICIPATED REVENUES, AND WE MAY BE
SUBJECT TO PENALTIES AND SANCTIONS. Certain government agencies have the
authority to audit and investigate our contracts. As part of that process,
government agencies may review our performance of the contract, our pricing
practices, our cost structure and our compliance with applicable laws,
regulations and standards. For contracts that actually or effectively provide
for reimbursement of expenses, if an agency determines we have improperly
allocated costs to a specific contract, we may not be reimbursed for those
costs, and we could be required to refund the amount of any such costs that have
been reimbursed. If a government audit asserts improper or illegal activities by
us, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification from doing
business with certain government entities.
THERE ARE LARGE COMPETITORS IN THE
HEALTHCARE INDUSTRY THAT COULD CHOOSE TO COMPETE AGAINST US, REDUCING OUR PROFIT
MARGINS OR CAUSING US TO LOSE CUSTOMERS. Existing national correctional
healthcare contract companies, local and regional contracting companies,
hospitals and integrated health systems are our potential competitors. These
companies include well-established companies which may have greater financial,
marketing and technological resources than we do, such as Prison Health
Services, Inc., Correctional Medical Services, Inc. and Wexford Health Sources,
Inc. Increased price competition could result in the loss of customers or
otherwise reduce our profit margins and have a material adverse effect on
us.
THERE ARE BARRIERS TO ENTRY INTO THE
CORRECTIONAL HEALTHCARE SERVICES MARKET WHICH COULD BE OVERCOME RESULTING IN
GREATER COMPETITION. The barriers to entrance to compete for contracts
are typically five years experience providing the same services and demonstrated
financial stability. It would be possible for an investor to purchase an
existing experienced company, add capital and quickly become competitive on a
national scale.
WE ARE DEPENDENT ON GOVERNMENT
APPROPRIATIONS. Our cash flow is subject to the receipt of sufficient
funding of, and timely payment by, contracting governmental entities. If the
appropriate governmental agency does not receive sufficient appropriations to
cover its contractual obligations, it may terminate our contract or delay or
reduce payment to us. Any delays in payment, or the termination of a contract,
could have an adverse effect on our cash flow and financial condition. In
addition, as a result of, among other things, recent economic developments,
federal, state and local governments have encountered, and may encounter,
unusual budgetary constraints. As a result, a number of state and local
governments are under pressure to control additional spending or reduce current
levels of spending. Accordingly, we may be requested in the future to reduce our
existing per diem contract rates or forego prospective increases to those rates.
In addition, it may become more difficult to renew our existing contracts on
favorable terms or otherwise.
OUR INABILITY TO REACT EFFECTIVELY TO
CHANGES IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
In recent years, the healthcare industry has undergone significant change
driven by various efforts to reduce costs, including potential national
healthcare reform, trends toward managed care, cuts in Medicare reimbursements,
and horizontal and vertical consolidation within the healthcare industry.
Proposed changes to the U.S. healthcare system may increase governmental
involvement in healthcare and ancillary health services, and otherwise change
the way payers, networks and providers conduct business. Healthcare
organizations may react to these proposals and the uncertainty surrounding them
by reducing or delaying purchases of cost control mechanisms and related
services that we provide. Other legislative or market-driven changes in the
healthcare system that we cannot anticipate could also materially adversely
affect our business. Our inability to react effectively to these and other
changes in the healthcare industry could adversely affect our operating results
and business. We cannot predict whether any healthcare reform efforts will be
enacted and what effect any such reforms may have on us or our
customers.
A PROLONGED ECONOMIC SLOWDOWN OR
RECESSION COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS. The current economic slowdown may have a negative effect
on our business and financial condition and could also result in inadequate
payments under our healthcare services contracts. Unfavorable economic
conditions also could increase our funding and working capital costs or limit
our access to the capital markets, any of which would adversely affect our
business, financial condition, operating results or cash
flows.
12
NEGATIVE PUBLICITY ABOUT US OR OUR
BUSINESS COULD ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND ABILITY
TO OBTAIN FUTURE BUSINESS. Negative
publicity regarding the provision of correctional healthcare services by
for-profit companies could adversely affect our results of operations or
business. Privatization of healthcare services for correctional facilities may
encounter resistance from groups or constituencies that believe that healthcare
services to correctional facilities should only be provided by governmental
agencies. Negative publicity regarding the privatization of correctional
healthcare services or specific alleged actions or inactions of us or other
industry participants may result in increased regulation and legislative review
of industry practices that further increase our costs of doing business and
adversely affect its results of operations by:
|
·
|
adversely affecting our ability to market our
services;
|
|
·
|
placing pressure on certain of our clients either
to force such clients to change the way they do business with us or sever
their relationship with us
altogether;
|
|
·
|
increasing the regulatory burdens under which we
operate;
|
|
·
|
increasing our exposure to litigation;
or
|
|
·
|
requiring us to change our
services.
|
Moreover, negative publicity relating to us in
particular also may adversely affect our ability to renew or maintain existing
contracts or to obtain new contracts, which could have a material adverse effect
on our business.
THE CONTINUED SERVICES AND LEADERSHIP
OF OUR SENIOR MANAGEMENT IS CRITICAL TO OUR ABILITY TO MAINTAIN GROWTH AND ANY
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. The future of
our business depends, to a significant degree, on the skills and efforts of
our senior executives, in particular, Dr.
Richard Turner, our Chairman and Chief Executive Officer
and Dr. Howard Haft, MD, MMM, CPE, our
Executive Vice President and Chief Medical Officer. If we lose the services of
any of our senior executives, and
especially if any of our executives join a
competitor or form a competing company, it could result in a setback to our
operating plan and our business and
financial performance could be seriously harmed.
We have
executed employment agreements with Dr. Haft and Dr. Turner, effective as of the
closing of the Acquisition, which include, except for Dr. Turner's employment
agreement, noncompetition clauses that expire three years after termination of
employment, or during the period that such employee is an owner of any of our
issued and outstanding stock.
AS A PUBLIC COMPANY, WE INCUR
SUBSTANTIAL ADDITIONAL COSTS AND MAY BE UNABLE TO OPERATE
PROFITABLY. As a publicly-traded company, our business is
subject to significant additional costs. These costs include, among other
things, additional legal and accounting costs incurred as a result of being a
public company plus the additional compliance, reporting, corporate governance
and NYSE Amex LLC (the “NYSE Amex”) continued listing requirements and investor
relations activities which this entails. Furthermore, the financial,
administrative and managerial structures necessary to operate as a public
company or the development of such structures require a significant amount of
management's time and other resources including financial resources, which may
hinder our ability to operate profitably.
OUR REVENUE MARGINS MAY DECREASE DUE
TO FIXED REVENUE BASE. Our existing contracts are primarily
structured as fixed fee contracts. The costs of inmate healthcare may fluctuate
from what we anticipated due to several variables, including increases in inmate
population and increased inmate illness. Such additional costs may not be easily
passed through under those contracts containing a fixed fee structure, and
therefore, we may not always have sufficient revenue to cover such increased
costs. As a result, our revenue margins may fall. If our revenue margins
decrease more than one or two percentage points, our ability to perform under
our contracts may be limited, which could negatively impact our business
operations and financial performance.
WE MAY BE UNSUCCESSFUL IN THE HIRING
AND RETENTION OF SKILLED PERSONNEL. The future growth of our business
depends on successful hiring and retention of skilled personnel, and we may be
unable to hire and retain the skilled personnel we need to succeed. Qualified
personnel are in great demand throughout the healthcare industry, thus it is
difficult to predict the availability of qualified personnel or the compensation
levels required to hire and retain them. We face stiff competition for staffing,
which may increase our labor costs and reduce profitability. We compete with
other healthcare and service providers in recruiting qualified management and
staff personnel for the day-to-day operations of our business, including nurses
and other healthcare professionals. In some markets, the scarcity of nurses and
other medical support personnel has become a significant operating issue to
healthcare businesses. This scarcity may require us to enhance wages and
benefits to recruit and retain qualified nurses and other healthcare
professionals. Because a significant percentage of our existing contracts are
structured as fixed fee contracts, we have a limited ability to pass along
increased labor costs to existing customers. The failure to attract and retain
sufficient skilled personnel at economically reasonable compensation levels may
limit our ability to perform under our contracts, which could lead to the loss
of existing contracts or our ability to gain new contracts, and may impair our
ability to operate and expand our business, as well as harm our financial
performance.
13
WE MAY EXPERIENCE UNBUDGETED
INCREASES IN COSTS RELATED TO THE PROVISION OF HEALTHCARE. Currently, we
predict the costs of healthcare based on prior experience and projected
increases. The projections for future increases are based on historical trends
and expected increases related to the development of new healthcare initiatives,
treatments and disease states. For example, recent increases in the use of high
cost psychiatric medications have triggered increases in the projected costs of
those medications in the bid process. However, mid-cycle increases, such as
those associated with the need to use a more expensive antibiotic for a drug
resistant infection, or the development of a standard treatment for Hepatitis C,
for example, would produce significant cost overruns in pharmacy budgeted
expenses.
WE ARE SUBJECT TO NECESSARY INSURANCE
COSTS. Workers' compensation, employee health, and medical professional
and general liability insurance represent significant costs to us. Because we
significantly self-insure for workers' compensation, employee health, medical
professional and general liability risks, our insurance expense is dependent on
claims experience, our ability to control our claims experience, and in the case
of workers' compensation and employee health, rising healthcare costs in
general. Further, additional terrorist attacks, such as those on September 11,
2001, and concerns over corporate governance and corporate accounting scandals,
could make it more difficult and costly to obtain liability and other types of
insurance. Unanticipated additional insurance costs could adversely impact our
results of operations and cash flows, and the failure to obtain or maintain any
necessary insurance coverage could have a material adverse effect on
us.
WE FACE RISKS ASSOCIATED WITH
ACQUISITIONS. We intend to grow through internal expansion and through
selective acquisitions. We cannot assure you that we will be able to identify,
acquire or profitably manage acquired operations or that operations acquired
will be profitable or achieve levels of profitability that justify the related
investment. We may not realize the anticipated benefits of these acquisitions,
or may not realize them in the timeframe expected. Acquisitions
involve a number of special risks, including possible adverse short-term effects
on our operating results, diversion of management's attention from existing
business, dependence on retaining, hiring and training key personnel, risks
associated with unanticipated problems or legal liabilities, and amortization of
acquired intangible assets, any of which could have a material adverse effect on
our financial condition, results of operations and liquidity.
THE LIABILITY OF OUR OFFICERS AND
DIRECTORS IS LIMITED. On March 13, 2007, we reincorporated as a Delaware
corporation and we provide our officers and directors indemnification to the
fullest extent allowed under the Delaware General Corporation Law (the “DGCL”).
We also carry directors and officers liability insurance. As a result of the
foregoing, our officers and directors may not be personally liable to us or our
stockholders for actions taken or failure to take any action and may otherwise
discourage or deter our stockholders from suing our officers or directors even
though such actions, if successful, might otherwise benefit us and our
stockholders.
WE HAVE LIMITED EXPERIENCE ATTEMPTING
TO COMPLY WITH PUBLIC COMPANY OBLIGATIONS, INCLUDING SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002. As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC has adopted rules requiring public companies
to include a report of management on the company's internal controls over
financial reporting in their annual reports on Form 10-K. In addition, the
registered certified public accounting firm auditing a public company's
financial statements must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting. The
requirement for a report of management, as currently in effect, was included in
our Annual Report on Form 10-K for our fiscal year ended December 31, 2007. The
requirement for our auditor to attest on management assessment will apply for
the fiscal year ending December 31, 2010. If we are unable to conclude that we
have effective internal controls over financial reporting, or if our independent
auditors are unable to provide us with an unqualified report as to the
effectiveness of our internal controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence
in the reliability of our financial statements, which could result in a decrease
in the value of our securities.
CERTAIN STOCKHOLDERS CAN EXERT
CONTROL OVER US AND MAY NOT MAKE DECISIONS THAT FURTHER THE BEST INTERESTS OF
ALL STOCKHOLDERS. Our officers, directors and principal stockholders
(greater than five percent stockholders) together own a majority of our issued
and outstanding common stock. Consequently, these stockholders, if they act
individually or together, may exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change of control of us and might affect the market price of our common stock,
even when a change of control may be in the best interest of all stockholders.
Furthermore, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders, and
accordingly, they could cause us to enter into transactions or agreements which
we would not otherwise consider.
14
OUR ORGANIZATIONAL DOCUMENTS AND
DELAWARE LAW MAKE IT HARDER FOR US TO BE ACQUIRED WITHOUT THE CONSENT AND
COOPERATION OF OUR BOARD OF DIRECTORS AND MANAGEMENT. Provisions of our
organizational documents and Delaware law may deter or prevent a takeover
attempt, including a takeover attempt in which the potential purchaser offers to
pay a per share price greater than the current market price of our common stock.
Under the terms of our certificate of incorporation, our Board of Directors has
the authority, without further action by the stockholders, to issue shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such shares. The ability to issue shares of
preferred stock could tend to discourage takeover or acquisition proposals not
supported by our current Board of Directors. In addition, we are subject to
Section 203 of the DGCL, which restricts business combinations with some
stockholders once the stockholder acquires fifteen percent or more of our common
stock.
TRADING IN OUR COMMON STOCK HAS BEEN
LIMITED, SO INVESTORS MAY NOT BE ABLE TO SELL AS MANY OF THEIR SHARES AS THEY
WANT AT PREVAILING PRICES. Shares of our common stock are traded on the
NYSE Amex market. Approximately 8,649 shares were traded on an average daily
trading basis for the year ended December 31, 2009. If limited trading in our
common stock continues, it may be difficult for investors once and if the
securities are registered, to sell the securities acquired by them. Also, the
sale of a large block of our common stock could depress the market price of our
common stock to a greater degree than a company that typically has a higher
volume of trading of its securities.
THE MARKET PRICE OF OUR COMMON STOCK
MAY BE HIGHLY VOLATILE, WHICH MAY LEAD TO LAWSUITS AGAINST US. Our common
stock currently trades on the NYSE Amex market under the symbol “CONM”. The
trading price of our common stock may be subject to volatility in response to,
among other things, quarter-to-quarter variations in our operating results,
announcements of new contracts, cancellations of existing contracts or new
acquisitions by us or our competitors, changes in financial estimates by
securities analysts or other events or factors. Sales of substantial
amounts of our common stock, or the perception that such sales might occur,
could also adversely affect prevailing market prices of our common
stock. When the market price of a company's stock drops
significantly, stockholders often institute securities class action lawsuits
against that company. A lawsuit against us could cause us to incur substantial
costs and could divert the time and attention of our management and other
resources.
WE MAY NOT BE ABLE TO MEET THE NYSE
AMEX’S CONTINUED LISTING STANDARDS AND AS A RESULT, THE NYSE AMEX MAY DELIST OUR
SECURITIES FROM QUOTATION ON ITS EXCHANGE, WHICH COULD LIMIT INVESTORS’ ABILITY
TO MAKE TRANSACTIONS IN OUR SECURITIES AND SUBJECT US TO ADDITIONAL TRADING
RESTRICTIONS. Our securities are currently listed on the NYSE Amex,
however we cannot assure you that our securities will continue to be listed on
the NYSE Amex if we are unable to meet certain of the continued listing
standards. If the NYSE Amex delists our securities from trading on
its exchange, we could face significant material adverse consequences,
including:
|
·
|
a
limited availability of market quotations for our
securities;
|
|
·
|
reduced
liquidity with respect to our
securities;
|
|
·
|
a
determination that our common stock is a “penny stock” (as defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), which will require brokers trading in our common
stock to adhere to more stringent rules, possibly resulting in a reduced
level of trading activity in the secondary trading market for our common
stock;
|
|
·
|
a
limited amount of news and analyst coverage for our company;
and
|
|
·
|
a
decreased ability to issue additional securities or obtain additional
financing in the future.
|
15
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
applicable because the Company is a Smaller Reporting Company.
ITEM
2.
|
PROPERTIES.
|
Hanover,
Maryland. In December 2007, we entered into a five year office lease agreement
for approximately 6,668 square feet of office space to house our executive and
administrative offices at an annual rent of $131,693 beginning February
2008 and subject to incremental annual increases up to $148,222 in
the final year of the lease, which expires on February 28, 2013, subject to a
five-year renewal option.
Newberg,
Oregon. In November, 2008, we entered into a sixteen month office lease
agreement for office space at an annual rent of $14,400 per year, subject to a
one year renewal option.
We
believe all of our facilities are well-maintained and in good operating
condition and have adequate capacity to meet our current business
needs.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
Although
we are a party to various claims and legal actions arising in the ordinary
course of business, we believe, on the basis of information presently available
to us, that the ultimate disposition of these matters will be resolved within
our insurance limits and will not likely have a material adverse effect on our
consolidated financial position or results of operations.
16
PART
II.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Our
common stock has been quoted on the NYSE Amex market under the symbol “CONM”
since July 15, 2009. From March 15, 2007 through July 14, 2009, our
common stock was quoted on the OTC Bulletin Board under the symbol
“CMHM.OB”. From May 19, 1998 until March 14, 2007, our common stock
was quoted on the OTC Bulletin Board under the symbol “PCES.OB”. From
our initial public offering on April 27, 1995 through May 18, 1998, our common
stock was traded on The NASDAQ Small Cap Market.
The
following table sets forth the range of high and low sales prices of our common
stock by quarter over the last two years. These quotations reflect inter-dealer
prices, without retail markup, markdown, or commission and may not reflect
actual transactions.
Quarter ended
|
High
|
Low
|
|||||||
3/31/08
|
2.80 | 1.30 | |||||||
6/30/08
|
2.40 | 1.55 | |||||||
9/30/08
|
2.75 | 1.40 | |||||||
12/31/08
|
2.80 | 1.75 | |||||||
3/31/09
|
2.50 | 1.65 | |||||||
6/30/09
|
3.90 | 1.70 | |||||||
9/30/09
|
4.40 | 3.15 | |||||||
12/31/09
|
3.45 | 2.57 |
From
January 1, 2010 through March 17, 2010, the high and low sales prices of our
common stock were $3.60 and $3.00, respectively.
On March
17, 2010, the closing price of our common stock was $3.25.
As of
March 17, 2010, there were 66 shareholders of record of our common
stock.
Dividend
Policy
We have
declared no cash dividends since inception with respect to our common stock, and
have no plans to declare a dividend in the near future. The payment
by us of dividends, if any, in the future, rests within the sole discretion of
our Board of Directors. The payment of dividends will depend upon our
earnings, our capital requirements and our financial condition, as well as other
relevant factors.
SELECTED
FINANCIAL DATA.
|
Not
applicable because the Company is a Smaller Reporting Company.
ITEM 7.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The
statements set forth in this Annual Report on Form 10-K, including under the
headings “Business”, “Risk Factors”, “Legal Proceedings” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
those incorporated by reference herein which are not historical constitute
“Forward Looking Statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Exchange Act, including
statements regarding the expectations, beliefs, intentions or strategies for the
future of both the Company and its subsidiaries. Such statements may involve
known and unknown risks, uncertainties and other factors which may cause the
Company's actual results, performance or achievements to be materially different
from our future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe the Company's future plans, strategies and
expectations, are generally identifiable by use of words such as “may,”, “will,”
“should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “plan,”
“potential” or “project” or the negative of these words or other variations on
these words or comparable terminology. We intend that all forward-looking
statements be subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are only
predictions and reflect our views as of the date they are made with respect to
future events and financial performance. Forward-looking statements are subject
to many risks and uncertainties which could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking
statements. It is possible that the assumptions made by us for
purposes of such forward-looking statements may not be valid and that the
results may not materialize. We caution you not to place undue
reliance on these forward-looking statements. Such forward-looking statements
relate only to events as of the date on which the statements are made. Except to
the extent required by applicable laws or rules, we do not undertake any
obligation or duty to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make in future public
statements and press releases.
17
General
Prior to
January 26, 2007, the Company, formerly known as Pace, was classified as a shell
company, had no ongoing operations, minimal operating expenses and no
employees.
On
January 26, 2007, we acquired Conmed, Inc., a privately-owned provider of
correctional healthcare services. Conmed, Inc. was formed as a corporation on
June 10, 1987 in the State of Maryland for the purpose of providing healthcare
services exclusively to county detention centers located in Maryland. As Conmed,
Inc. developed, it accepted more contracts for additional services including
mental health, pharmacy and out-of-facility healthcare. In 2000, Conmed, Inc.
served more than 50% of the county detention healthcare services market in
Maryland. In 2003, Conmed, Inc. elected to seek contracts outside of Maryland
and at the time of the Acquisition operated in four states: Kansas, Maryland,
Virginia and Washington. For the fiscal year ended December 31, 2007,
Conmed, Inc. had net revenues primarily from medical services provided to
correctional institutions of $26,073,040.
As a
result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
Company and the business of Conmed, Inc. is now our primary business. On March
13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. In
2008, we purchased all of the assets of EMDC, a provider of medical
services in northwest Oregon and we purchased all of the stock of CMHS, a
provider of mental health services in Maryland. As of December 31,
2009, we were in contract with, and providing medical services in thirty-six
counties in seven states including: Arizona, Kansas, Maryland, Oklahoma, Oregon,
Virginia and Washington and had net revenues primarily from medical services
provided to correctional institutions of $52,784,559.
Critical
Accounting Policies
Our
discussion and analysis of our financial position and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”). The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported revenues and expenses during the period. Actual results
could differ from those estimates.
A summary
of our critical accounting policies is as follows:
Acquisition
Acquisitions
are recorded as required by business combination accounting standards using the
purchase method. Under purchase accounting, assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree should be stated on the
financial statements at “fair value” (see definition in Fair Value of Financial
Instruments section below), with limited exceptions, as of the acquisition
date. This standard requires that intangible assets be recognized as
assets apart from goodwill if they meet one of two criteria, (1) the
contractual-legal criterion, or (2) the separability criterion. This
standard also requires disclosure of the primary reasons for business
combination and the allocation of the purchase price paid to the assets acquired
and the liabilities assumed by major balance sheet caption. Goodwill is to be
recognized as a residual. If the acquisition-date fair value exceeds the
consideration transferred, a gain is to be recognized. The statement generally
requires that acquisition costs be expensed as incurred. This standard is
effective for business combinations for which the acquisition date is on or
after January 1, 2009.
Fair
Value of Financial Instruments
Financial
instruments include cash, receivables, accounts payable, accrued expenses,
deferred revenue and long-term debt. We believe the fair value of each of these
instruments approximates their carrying value in the balance sheet as of the
balance sheet date. The fair value of current assets and current liabilities is
estimated to approximate carrying value due to the short-term nature of these
instruments. The fair value of the long-term debt is estimated based on
anticipated interest rates which we believe would currently be available to us
for similar issues of debt, taking into account our current credit risk and
other market factors. The same assumptions are used to record
financial instruments acquired through acquisition at fair
value.
18
Effective
January 1, 2008, we adopted the new accounting guidance on fair value
measurements. The fair value measurement guidance defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under the fair value measurement guidance as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under the fair
value measurement guidance must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value, as
follows:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of the fair value measurement guidance did not have a material impact
on our financial statements. Details related to our adoption of this
standard are discussed in Note 6, “Fair Value Measurements”.
Service
Contracts Acquired
There are
material costs in obtaining a customer list, especially customers with recurring
revenue streams. The value of service contracts acquired is represented by the
future revenue streams, therefore, the income approach is the most applicable
fair value measurement approach to value these assets. The operating income
streams of service contracts acquired are calculated based on the net present
value of estimated earnings. Operating income streams are estimated on a
contract by contract basis and an overall cost factor is used to estimate
management expenses. Service contracts acquired are amortized over
the life of each individual contract.
Non-Compete
Agreements
Non-compete
agreements are generally acquired as part of our acquisition
agreements. Key considerations in estimating the value of non-compete
agreements include consideration of the potential losses resulting from such
competition, the enforceability of the terms of the agreement, and the
likelihood of competition in the absence of the agreement. Non-compete
agreements are amortized over the lives of the agreements.
Goodwill
We record
as goodwill the excess of purchase price over the fair value of the identifiable
net assets acquired. Annually, as well as when an event triggering
impairment may have occurred, the Company is required to perform a two-step
impairment test on goodwill. The first step tests for impairment, while the
second step, if necessary, measures the impairment. There have been no
indicators of impairment for any of the goodwill. We have elected to perform our
annual analysis during the fourth quarter of each fiscal year.
Revenue
Recognition
Our
principal source of revenue is contracts to provide medical assistance to county
and municipal correctional facilities. Deferred revenue represents amounts that
may be paid in advance of delivery under these contracts.
Most of
our contracts call for a fixed monthly fee. In addition, most contracts have
incremental charges based on the average daily population (“ADP”) of the
correctional facility or a contractual fee adjustment based on the ADP. Revenues
from contracts are recognized ratably for fixed fees, or monthly for contracts
with variable charges based on ADP. We have one contract that partially operates
on a cost plus basis. The timing of each payment varies per contract. Credit
terms are not more than thirty days from the date of invoice.
Certain
contracts provide for monthly fee adjustments to reflect any missed hours of
work required under terms of the contract. In addition, we may incur liquidated
damages related to specific performance measurements required under the contract
that we have failed to meet. Reductions in monthly fees resulting from staffing
adjustments and liquidated damages are recorded by us as reductions to
revenue.
19
Certain
contracts include “stop/loss” limits, which create a ceiling to our financial
responsibility for an individual inmate's care or a maximum amount in the
aggregate for certain categories of medical expenses, whereby we are protected
from catastrophic medical losses. In circumstances where a stop/loss is reached,
we are reimbursed for any costs incurred over the predetermined stop/loss
amount. Any reimbursement received by us is recorded as
revenue.
Accrued
Medical Claims Liability
Medical
expenses include the costs associated with medical services provided by off-site
medical providers; pharmacy, laboratory and radiology fees; professional and
general liability insurance as well as other generally related medical expenses.
The cost of medical services provided, administered or contracted for are
recognized in the period in which they are provided based in part on estimates
for unbilled medical services rendered through the balance sheet date. The
Company estimates an accrual for unbilled medical services using available
utilization data including hospitalization, one-day surgeries, physician visits
and emergency room and ambulance visits and other related costs, which are
estimated. Additionally, Company personnel review certain inpatient hospital
stays and other high cost medical procedures and expenses in order to attempt to
identify costs in excess of the historical average rates. Once identified,
reserves are determined which take into consideration the specific facts
available at that time.
Actual
payments and future reserve requirements will differ from the Company’s current
estimates. The differences could be material 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 estimates and actual claims payments are recognized in the
period in which the estimates are changed or the payments are made.
Stock
Compensation
Compensation
expense for stock-based awards is recorded over the vesting period at the fair
value of the award at the time of grant. The recording of such compensation
began on January 1, 2006 for shares not yet vested as of that date and for all
new grants subsequent to that date. The exercise price of options granted under
our incentive plans is equal to the fair market value of the underlying stock at
the grant date. We assume no projected forfeitures on stock-based compensation,
since actual historical forfeiture rates on our stock-based incentive awards
have been negligible.
Fair
Value of Derivative Financial Instruments
Effective
January 1, 2009, we adopted derivative accounting on warrants that are indexed
to an entity’s own stock. Details related to our adoption of this standard and
its impact on our financial position and results of operations are discussed in
Note 5, “Fair Value of Warrants”.
Income
Taxes
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
Recently
Adopted Accounting Standards
Effective
with the quarter ended June 30, 2009, we adopted guidance on interim disclosures
about fair value of financial instruments and it did not have a material impact
on our financial position or results of operations. This guidance
requires disclosures about fair value of financial instruments in interim and
annual financial statements.
Effective
with the quarter ended September 30, 2009, we adopted The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. The FASB Accounting Standards Codification (the
“Codification”) became the source of authoritative U.S. GAAP recognized by the
Financial Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date the Codification
superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative. This
standard was effective for financial statements issued for interim and annual
periods ending after September 15, 2009. In the FASB’s view, the
issuance of the Codification did not change GAAP, except for those nonpublic
nongovernmental entities that must now apply the American Institute of Certified
Public Accountants Technical Inquiry Service Section 5100, “Revenue
Recognition”, paragraphs 38-76.
20
Results
of Operations
Year
Ended December 31, 2009 Compared to the Year Ended December 31,
2008
The
following discussion of financial results below is derived from audited
financial statements for the years ended December 31, 2009 and December 31,
2008.
For the Year Ended
December 31, 2009
|
For the Year Ended
December 31, 2008
|
|||||||||||||||
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
|||||||||||||
Service
contract revenue
|
$ | 52,784,559 | 100.0 | % | $ | 40,550,414 | 100.0 | % | ||||||||
HEALTHCARE
EXPENSES:
|
||||||||||||||||
Salaries,
wages and employee benefits
|
29,871,129 | 56.6 | % | 21,412,861 | 52.8 | % | ||||||||||
Medical
expenses
|
10,283,969 | 19.5 | % | 10,378,753 | 25.6 | % | ||||||||||
Other
operating expenses
|
1,940,000 | 3.7 | % | 1,333,425 | 3.3 | % | ||||||||||
Total
healthcare expenses
|
42,095,098 | 79.7 | % | 33,125,039 | 81.7 | % | ||||||||||
Gross
profit
|
10,689,461 | 20.3 | % | 7,425,375 | 18.3 | % | ||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling,
general & administrative expenses
|
7,720,525 | 14.6 | % | 6,359,694 | 15.7 | % | ||||||||||
Depreciation
and amortization
|
1,971,288 | 3.7 | % | 2,132,748 | 5.3 | % | ||||||||||
Total
operating expenses
|
9,691,813 | 18.4 | % | 8,492,442 | 20.9 | % | ||||||||||
Operating
income (loss)
|
997,648 | 1.9 | % | (1,067,067 | ) | (2.6 | )% | |||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
80,215 | 0.2 | % | 154,949 | 0.4 | % | ||||||||||
Interest
(expense)
|
(8,294 | ) | 0.0 | % | (7,149 | ) | 0.0 | % | ||||||||
Change
in fair value of derivatives
|
(1,209,715 | ) | (2.3 | )% | — | 0.0 | % | |||||||||
Total
other income (expense)
|
(1,137,794 | ) | (2.2 | )% | 147,800 | 0.4 | % | |||||||||
Loss
before income taxes
|
(140,146 | ) | (0.3 | )% | (919,267 | ) | (2.3 | )% | ||||||||
Income
tax (benefit)
|
(113,000 | ) | (0.2 | )% | — | 0.0 | % | |||||||||
Net
(loss)
|
$ | (27,146 | ) | (0.1 | )% | $ | (919,267 | ) | (2.3 | )% |
Revenues
Net
revenue from medical services provided primarily to correctional institutions
for the years ended December 31, 2009 and 2008, was $52,784,559 and $40,550,414,
respectively, which represents an increase of $12,234,145 or 30.2%. Net loss was
$27,146 or 0.1% of revenue compared to a net loss of $919,267 or 2.3% of revenue
for the years ended December 31, 2009 and 2008, respectively, which represented
an improvement of $892,121.
Approximately
$10,834,081 or 88.6% of the increase in revenue for the year ended December 31,
2009 compared to the prior year resulted from the addition of the following new
medical service contracts since December 31, 2007: Caroline County, MD;
Chesapeake City, VA; Coos County, OR; Creek County, OK; Douglas County, OR; Pima
County, AZ; Washington County, MD; and Western Virginia Regional Jail,
VA. Revenues also increased as a result of the contracts in Oregon
which we acquired when we purchased all of the assets of EMDC in February 2008,
plus the revenue generated from the acquisition of CMHS on November 4, 2008.
Revenue improvement totaling approximately $777,160, or 6.3% of the increase,
resulted primarily from expansion of the services provided under a number of our
existing contracts in which we were providing services prior to 2008. Price
increases related to existing service requirements totaled approximately
$1,726,017 or 14.1% of the revenue increase. Partially offsetting the above were
decreases in other volume related activities totaling $1,103,113, or 9.0% of
revenue, primarily associated with lower stop/loss reimbursements resulting from
reduced out of facility medical expenditures in excess of stop/loss limits that
are billed back to counties.
21
Healthcare
Expenses
Salaries
and employee benefits
Salaries
and employee benefits for healthcare employees were $29,871,129 or 56.6% of
revenue for the year ended December 31, 2009, compared to $21,412,861 or 52.8%
of revenue for the year ended December 31, 2008. The increase in spending for
salaries and employee benefits of $8,458,268 or 39.5% is due primarily to the
addition of new healthcare employees resulting from new business. Approximately
65% of the increase related to new healthcare employees required to support the
staffing requirements for our new medical service contracts as detailed above
and approximately 15% in the increase relates to the salaries and employee
benefits for the new mental health employees related to the CMHS acquisition in
November 2008. Additional medical services related to previously
existing medical service contracts plus cost-of-living and wage and benefit
adjustments for existing employees accounted for the remainder of the increase.
The increase in salaries and employee benefits as a percentage of revenue is due
to a change in the mix of expense for salaries and benefits. Several of our new
medical service contracts plus the mental health contracts related to the CMHS
acquisition have a higher proportion of staffing services compared to our
previously existing contracts. As a result, these new contracts
increased the mix of salaries and employee benefits as a percentage of total
revenue.
Medical
expenses
Medical
expenses for the years ended December 31, 2009 and 2008 were $10,283,969 or
19.5% of revenue and $10,378,753 or 25.6% of revenue, respectively, which
represented a decrease of $94,784 or 0.9%. The decrease in spending for medical
expenses in absolute dollars, despite the increase in revenue, reflects
decreases for reimbursable expenditures for hospitalization. Additionally, the
mental health services provided by CMHS, as a subcontractor, to Conmed prior to
the acquisition of CMHS on November 4, 2008 were being recorded as independent
contractor medical expenses totaling approximately
$885,000. Following the acquisition, those expenses are primarily
recorded as salaries and employee benefits. The reduction in spending as a
percentage of revenue results from the favorable mix factor generated from the
new staffing services and the CMHS acquisition as detailed above. Finally, the
new contracts entered into in 2008 and 2009 have a lower ratio of medical
expenses compared to our previously existing contracts, which reduced the mix of
medical expenses as a percentage of total revenue.
Other
operating expenses
Other
operating expenses were $1,940,000, or 3.7% of revenue, for the year ended
December 31, 2009, compared to $1,333,425, or 3.3% of revenue, for the year
ended December 31, 2008. The increase of $606,575 is directly related to the
increase in the number of inmates served as a result of the new service
contracts and reflects increased spending for employment advertising and
recruiting, professional liability insurance, legal expenses and office supplies
partially offset by a reduction in travel expenses.
Operating
Expenses
Selling,
general and administrative expenses
Selling,
general and administrative expenses for the years ended December 31, 2009 and
2008 were $7,720,525 or 14.6% of revenue and $6,359,694 or 15.7% of revenue,
respectively. The increased expenditure of $1,360,831 reflects an increased
investment in additional management and administrative personnel required to
support additional new contracts and services added in 2008 and 2009, as well as
to sustain the Company during anticipated future growth as well as increased
travel and legal expenses. Stock based compensation for the years ended December
31, 2009 and 2008 was $628,618 and $573,775, respectively.
Depreciation
and amortization
Depreciation
and amortization primarily reflects the amortization of intangible assets
related to the acquisition of Conmed, Inc. in January 2007, the purchase of
medical service contracts from EMDC in February 2008 and the acquisition of CMHS
in November 2008. Amortization of service contracts acquired was $1,370,000, or
2.6% of revenue, for the year ended December 31, 2009, compared to $1,693,000,
or 4.2% of revenue, for the year ended December 31, 2008. The decrease primarily
reflects a decrease in amortization expense related to the Conmed, Inc.
acquisition and the EMDC asset purchase as certain individual contracts acquired
have become fully amortized, which was partially offset by amortization expense
for mental health service contracts acquired in the CMHS acquisition in November
2008. Amortization of non-compete agreements was $385,000, or 0.7% of
revenue, for the year ended December 31, 2009, compared to $327,333, or 0.8% of
revenue, for the year ended December 31, 2008. The increase primarily reflects
an additional non-compete agreement related to the acquisition of CMHS.
Depreciation expense increased to $216,288 for the year ended December 31, 2009
compared to $112,415 for the prior year due primarily to capital expenditures
associated with vehicle purchases, a new corporate accounting system and
computer equipment in our Pima County, AZ facility.
22
Interest
income
Interest
income was $80,215 for the year ended December 31, 2009 compared to $154,949 in
2008. Average cash balances in 2009 were higher compared to 2008, however the
lower interest income reflects reduced short-term interest rates during the
period.
Interest
expense
Interest
expense for the year ended December 31, 2009 and 2008 was $8,294 and $7,149,
respectively.
Change
in fair value of derivatives
As a
result of adopting derivative accounting for warrants effective January 1, 2009,
1,705,000 of our issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity treatment and as a
result they are now being recorded as a liability based on fair value
estimates. These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using the Black-Scholes option pricing model and all changes in the
fair value of these warrants will be recognized currently in earnings until such
time as the warrants are exercised, amended or expire. As such, on
January 1, 2009, we recorded a cumulative adjustment to reclassify $2,399,538
from additional paid-in capital and $366,612 from retained earnings and recorded
a $2,766,150 long-term warrant liability to recognize the fair value of such
warrants on such date.
During
the year ended December 31, 2009, warrants to purchase 40,000 shares of common
stock were exercised generating $12,000 of net proceeds and warrants to purchase
132,333 shares of common stock were exercised by cashless exercise and as a
result, a total of 155,783 shares of common stock were issued. During
the year ended December 31, 2009, warrants to purchase 814,570 shares of common
stock were amended to remove the provisions that resulted in liability treatment
and are now treated as equity.
The
following table summarizes the warrant activity subject to fair value accounting
for the year ended December 31, 2009:
Pre-
Acquisition
Warrants
|
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
|||||||||||||
Warrants
outstanding subject to fair value accounting as of January 1,
2009
|
225,000 | 980,000 | 500,000 | 1,705,000 | ||||||||||||
Warrants
exercised
|
(2,000 | ) | (167,000 | ) | (3,333 | ) | (172,333 | ) | ||||||||
Warrants
amended
|
(223,000 | ) | (591,570 | ) | - | (814,570 | ) | |||||||||
Warrants
outstanding subject to fair value accounting as of December 31,
2009
|
- | 221,430 | 496,667 | 718,097 |
Pre-
Acquisition
Warrants
|
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
|||||||||||||
Fair
value of warrants outstanding as of January 1, 2009
|
$ | 428,221 | $ | 1,882,701 | $ | 455,228 | $ | 2,766,150 | ||||||||
Realized
loss on warrants
|
142,017 | 638,364 | 7,473 | 787,854 | ||||||||||||
Unrealized
loss on warrants
|
— | 189,885 | 231,976 | 421,861 | ||||||||||||
Fair
value of warrants transferred to equity upon amendment
|
(562,653 | ) | (1,670,824 | ) | - | (2,233,477 | ) | |||||||||
Fair
value of warrants exercised
|
(7,585 | ) | (424,846 | ) | (10,507 | ) | (442,938 | ) | ||||||||
Fair
value of warrants outstanding as of December 31, 2009
|
$ | — | $ | 615,280 | $ | 684,170 | $ | 1,299,450 |
Income
tax expense
As of
December 31, 2009, management has evaluated all available evidence, both
negative and positive, and has determined that it is more likely than not that
all of the deferred tax asset, excluding net operating loss
carryforwards and research and development credit carryforwards, will be
realized and the remaining valuation allowance is no longer required based upon
the following:
|
·
|
the
Company’s history of generating taxable
income;
|
|
·
|
taxable
income has been increasing year over year during the Company’s history;
and
|
23
|
·
|
management
projects taxable income continuing to increase and believes that it is
more likely than not that the Company can continue to generate taxable
income in the foreseeable future.
|
For the
year ended December 31, 2009, we recorded an income tax benefit of $113,000 as
the result of reversing the valuation allowance of $709,000 and an increase in
net deferred tax assets of $129,000. Our effective tax rate differs
from the expected tax rate primarily due to permanent differences related to
stock-based compensation, change in valuation allowance and derivatives related
to warrants.
Liquidity
and Capital Resources
Financing
is generally provided by funds generated from our operating activities. Funds
used to acquire the EMDC contracts and CMHS were provided by working
capital.
Cash
Flow for the year ended December 31, 2009 compared to the year ended December
31, 2008
Cash as
of December 31, 2009 and December 31, 2008 was $11,056,143 and $7,472,140,
respectively. We believe that our existing cash balances and
anticipated cash flows from future operations will be sufficient to meet our
normal operating requirements and liquidity needs for the next twelve
months.
Cash
Flows from Operating Activities
Cash flow
from operating activities for the year ended December 31, 2009 totaled
$4,308,372, reflecting a net loss of $27,146 offset by $2,971,621 in adjustments
for non-cash expenses such as the change in fair value of derivatives of
$1,209,715, amortization of $1,755,000 and stock-based compensation of $628,618
partially offset by deferred income taxes of $838,000. Changes in
working capital components generated an additional $1,363,897, reflective of
increases in accounts payable of $409,239, accrued expenses of $852,421, income
taxes payable of $117,620 and deferred revenue of $456,911 partially offset by
an increase in prepaid expenses of $573,662. The increase in accounts
payable resulted primarily from the timing of vendor payments in relation to
year end. The increase in accrued expenses resulted primarily from
the addition of new healthcare employees required to support the increased
staffing requirements from our new medical service contracts in addition to the
wage accrual covering one additional day as compared to December 31, 2008 and
increased accruals associated with legal expenses. The increase in
income taxes payable resulted primarily from our increased taxable income,
resulting in taxes payable in excess of scheduled estimated tax
payments. The increase in deferred revenue resulted primarily from an
increase in advance customer payments for services to be provided in the
future. The increase in prepaid expenses resulted primarily from the
prepayment of our annual professional liability insurance policy in
October.
Cash flow
from operating activities for the year ended December 31, 2008 totaled
$2,810,990, reflecting a net loss of $919,267 offset by $2,153,780 in
adjustments for non-cash expenses such as amortization, stock-based compensation
and deferred income taxes and $1,576,477 in changes in working capital
components because of increases in accrued expenses, accounts payable and
deferred revenue partially offset by increases in accounts receivable and
prepaid expenses. The increase in accrued expenses resulted primarily
from increases in estimated medical expenses resulting primarily from the
increase in medical service contracts and accrued wages resulting primarily from
the addition of new healthcare employees required to support the increased
staffing requirements from our new medical service contracts in addition to the
wage accrual covering two additional days as compared to 2007 as well as the
accrued purchase price adjustment related to the CMHS
acquisition. The increase in accounts receivable and accounts payable
resulted primarily from the increase in revenues and expenses resulting
primarily from the increase in medical service contracts. The
increase in deferred revenue was primarily the result of new medical service
contracts with payments in advance. The increase in income taxes
payable resulted primarily from the decreased loss which resulted in an
increased taxable income.
Cash
Flows from Investing Activities
Cash flow
from investing activities for the year ended December 31, 2009 used
$567,953. Purchases of property and equipment used $292,562 primarily
for purchases of vehicles, computer equipment and medical
equipment. The acquisition of CMHS used $187,891 primarily related to
payment of the holdback. Service contract extension costs used
$87,500.
Cash flow
from investing activities for the year ended December 31, 2008 used $2,439,869.
The acquisition of CMHS and the purchase of EMDC’s contracts used $1,767,855 and
$245,853, respectively. Purchases of property and equipment primarily related to
the new office facility in Hanover, Maryland used $426,161.
24
Cash
Flows from Financing Activities
Cash flow
from financing activities for the year ended December 31, 2009 used
$156,416. Proceeds from the exercise of warrants and stock options of
$48,812 were offset by $100,000 used to pay off the line of credit we assumed
with the CMHS acquisition and $105,228 used to pay off all other
loans.
Cash flow
from financing activities for the year ended December 31, 2008 used cash of
$35,701. Borrowings on the line of credit of $39,903 were offset by payments on
loans payable of $75,604.
Loans
As of
December 31, 2009, we had no outstanding loans.
Off
Balance Sheet Arrangements
We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of December 31, 2009, we had three
performance bonds totaling $8,042,424 and two payment bonds for $2,855,537,
totaling $10,897,961. The surety issuing the bonds has recourse against our
assets in the event the surety is required to honor the bonds.
Contractual
Obligations
The
following table presents our expected cash requirements for contractual
obligations outstanding as of December 31, 2009:
Total
|
Current
|
2 - 3 years
|
4 - 5 years
|
Thereafter
|
||||||||||||||||
Equipment
leases
|
125,189 | 53,145 | 65,474 | 6,570 | — | |||||||||||||||
Automobile
leases
|
39,996 | 28,388 | 11,608 | — | — | |||||||||||||||
Office
space leased
|
472,113 | 168,344 | 291,417 | 12,352 | — | |||||||||||||||
Total
|
$ | 637,298 | $ | 249,877 | $ | 368,499 | $ | 18,922 | $ | — |
Effects
of Inflation
We do not
believe that inflation and changing prices over the past three years have had a
significant impact on our revenue or results of operations.
Potential
Future Service Contract Revenue
As of
December 31, 2009, we have entered into 58 agreements with county and municipal
governments to provide medical and healthcare services primarily to county and
municipal correctional institutions. Most of these contracts are for multiple
years and include option renewal periods which are, in all cases, at the
county's or municipality’s option. The original terms of the contracts are from
one to nine years. These medical service contracts have potential future service
contract revenue of $162 million as of December 31, 2009, with a
weighted-average term of 3.8 years, of which approximately $60 million relates
to the initial contract period and approximately $102 million relates to the
option renewal periods.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
applicable because the Company is a Smaller Reporting
Company.
25
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
27
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Consolidated
Balance Sheets
|
28
|
Consolidated
Statements of Operations
|
29
|
Consolidated
Statements of Shareholders' Equity
|
30
|
Consolidated
Statements of Cash Flows
|
31
|
Notes
to Consolidated Financial Statements
|
33
|
26
To the
Board of Directors and Shareholders
Conmed
Healthcare Management, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Conmed Healthcare
Management, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements 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 the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Conmed Healthcare
Management, Inc. as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
As
described in Note 5 to the consolidated financial statements, effective January
1, 2009, Conmed Healthcare Management, Inc. adopted the provisions of Accounting
Standards Codification Topic 815-40 and reclassified certain warrants previously
classified as an equity instrument to a liability.
We were
not engaged to examine management’s assessment of the effectiveness of Conmed
Healthcare Management, Inc.’s internal control over financial reporting as of
December 31, 2009, included in the accompanying Annual Report on Form 10-K and,
accordingly, we do not express an opinion thereon.
/s/
McGladrey & Pullen, LLP
Des
Moines, Iowa
March 25,
2010
27
CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 11,056,143 | $ | 7,472,140 | ||||
Accounts
receivable
|
2,278,074 | 2,375,583 | ||||||
Prepaid
expenses
|
865,261 | 291,599 | ||||||
Deferred
taxes
|
102,000 | — | ||||||
Total
current assets
|
14,301,478 | 10,139,322 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
605,578 | 529,304 | ||||||
DEFERRED
TAXES
|
1,381,000 | 645,000 | ||||||
OTHER
ASSETS
|
||||||||
Service
contracts acquired, net
|
984,000 | 2,004,000 | ||||||
Non-compete
agreements, net
|
436,667 | 821,667 | ||||||
Goodwill
|
6,263,705 | 6,254,544 | ||||||
Deposits
|
11,549 | 15,408 | ||||||
Total
other assets
|
7,695,921 | 9,095,619 | ||||||
$ | 23,983,977 | $ | 20,409,245 | |||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 1,489,498 | $ | 1,080,259 | ||||
Accrued
expenses
|
4,146,940 | 3,210,749 | ||||||
Deferred
revenue
|
1,018,645 | 561,734 | ||||||
Notes
payable, current portion
|
— | 170,228 | ||||||
Income
taxes payable
|
550,000 | 432,380 | ||||||
Total
current liabilities
|
7,205,083 | 5,455,350 | ||||||
NOTES
PAYABLE, LONG-TERM
|
— | 35,000 | ||||||
DERIVATIVE
FINANCIAL INSTRUMENTS
|
1,299,450 | — | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Preferred
stock no par value; authorized 5,000,000 shares; issued and outstanding
zero shares as of December 31, 2009 and December 31, 2008
|
— | — | ||||||
Common
stock, $0.0001 par value, authorized 40,000,000 shares; issued and
outstanding 12,629,572 and 12,457,539 shares as of December 31, 2009 and
2008, respectively
|
1,263 | 1,246 | ||||||
Additional
paid-in capital
|
37,829,900 | 36,875,610 | ||||||
Retained
(deficit)
|
(22,351,719 | ) | (21,957,961 | ) | ||||
Total
shareholders' equity
|
15,479,444 | 14,918,895 | ||||||
$ | 23,983,977 | $ | 20,409,245 |
See
Notes to Consolidated Financial Statements.
28
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
Service
contract revenue
|
$ | 52,784,559 | $ | 40,550,414 | ||||
HEALTHCARE
EXPENSES:
|
||||||||
Salaries,
wages and employee benefits
|
29,871,129 | 21,412,861 | ||||||
Medical
expenses
|
10,283,969 | 10,378,753 | ||||||
Other
operating expenses
|
1,940,000 | 1,333,425 | ||||||
Total
healthcare expenses
|
42,095,098 | 33,125,039 | ||||||
Gross
profit
|
10,689,461 | 7,425,375 | ||||||
Selling
and administrative expenses
|
7,720,525 | 6,359,694 | ||||||
Depreciation
and amortization
|
1,971,288 | 2,132,748 | ||||||
Total
operating expenses
|
9,691,813 | 8,492,442 | ||||||
Operating
income (loss)
|
997,648 | (1,067,067 | ) | |||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
80,215 | 154,949 | ||||||
Interest
(expense)
|
(8,294 | ) | (7,149 | ) | ||||
Change
in fair value of derivatives
|
(1,209,715 | ) | — | |||||
Total
other income (expense)
|
(1,137,794 | ) | 147,800 | |||||
Loss
before income taxes
|
(140,146 | ) | (919,267 | ) | ||||
Income
tax (benefit)
|
(113,000 | ) | — | |||||
Net
(loss)
|
$ | (27,146 | ) | $ | (919,267 | ) | ||
(LOSS)
PER COMMON SHARE
|
||||||||
Basic
and diluted
|
$ | (0.00 | ) | (0.08 | ) | |||
WEIGHTED-AVERAGE
SHARES OUTSTANDING
|
||||||||
Basic
and diluted
|
12,566,382 | 12,090,399 |
See
Notes to Consolidated Financial Statements.
29
CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
YEARS
ENDED DECEMBER 31, 2009 AND 2008
Preferred
|
Preferred
|
Common
|
Common
|
Additional
|
Retained
Earnings
|
|||||||||||||||||||||||
Stock
|
Stock
|
Stock
|
Stock
|
Paid-In
|
(Accumulated
|
|||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Total
|
||||||||||||||||||||||
Balance,
December 31, 2007
|
- | $ | - | 11,943,141 | $ | 1,194 | $ | 35,901,874 | $ | (21,038,694 | ) | $ | 14,864,374 | |||||||||||||||
Issuance
of shares for asset purchase of EMDC contracts
|
- | - | 81,081 | 9 | 200,004 | - | 200,013 | |||||||||||||||||||||
Issuance
of shares for stock purchase of CMHS
|
- | - | 81,317 | 8 | 199,992 | - | 200,000 | |||||||||||||||||||||
Exercise
of warrants
|
- | - | 352,000 | 35 | (35 | ) | - | - | ||||||||||||||||||||
Stock
option expense
|
- | - | - | - | 573,775 | - | 573,775 | |||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | (919,267 | ) | (919,267 | ) | |||||||||||||||||||
Balance,
December 31, 2008
|
- | $ | - | 12,457,539 | $ | 1,246 | $ | 36,875,610 | $ | (21,957,961 | ) | $ | 14,918,895 | |||||||||||||||
Cumulative
effect of change in accounting principle
|
||||||||||||||||||||||||||||
January
1, 2009 reclassification of embedded feature of equity-linked financial
instrument to derivative liability
|
- | - | - | - | (2,399,538 | ) | (366,612 | ) | (2,766,150 | ) | ||||||||||||||||||
Exercise
of warrants and options
|
- | - | 172,033 | 17 | 491,733 | - | 491,750 | |||||||||||||||||||||
Stock
option expense
|
- | - | - | - | 628,618 | - | 628,618 | |||||||||||||||||||||
Amended
warrants removing embedded feature of equity-linked financial
instrument
|
- | - | - | - | 2,233,477 | - | 2,233,477 | |||||||||||||||||||||
Net
(loss)
|
- | - | - | - | - | (27,146 | ) | (27,146 | ) | |||||||||||||||||||
Balance,
December 31, 2009
|
- | $ | - | 12,629,572 | $ | 1,263 | $ | 37,829,900 | $ | (22,351,719 | ) | $ | 15,479,444 |
See
Notes to Consolidated Financial Statements.
30
CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
(loss)
|
$ | (27,146 | ) | $ | (919,267 | ) | ||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities
|
||||||||
Depreciation
|
216,288 | 112,415 | ||||||
Amortization
|
1,755,000 | 2,020,333 | ||||||
Stock-based
compensation
|
628,618 | 573,775 | ||||||
Change
in fair value of derivatives
|
1,209,715 | — | ||||||
Loss
on disposal of property
|
— | 2,257 | ||||||
Deferred
income taxes
|
(838,000 | ) | (555,000 | ) | ||||
Changes
in working capital components
|
||||||||
Decrease
(increase) in accounts receivable
|
97,509 | (623,459 | ) | |||||
(Increase)
in prepaid expenses
|
(573,662 | ) | (75,083 | ) | ||||
Decrease
in deposits
|
3,859 | 45,000 | ||||||
Increase
in accounts payable
|
409,239 | 243,115 | ||||||
Increase
in accrued expenses
|
852,421 | 1,350,865 | ||||||
Increase
in income taxes payable
|
117,620 | 427,380 | ||||||
Increase
in deferred revenue
|
456,911 | 208,659 | ||||||
Net
cash provided by operating activities
|
4,308,372 | 2,810,990 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property and equipment
|
(292,562 | ) | (426,161 | ) | ||||
Stock
purchase of CMHS, LLC
|
(187,891 | ) | (1,767,855 | ) | ||||
Asset
Purchase from EMDC, P.C.
|
— | (245,853 | ) | |||||
Service
contract extensions
|
(87,500 | ) | — | |||||
Net
cash (used in) investing activities
|
(567,953 | ) | (2,439,869 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Borrowings
on line of credit
|
— | 39,903 | ||||||
Payments
on line of credit
|
(100,000 | ) | — | |||||
Payments
on loans payable
|
(105,228 | ) | (75,604 | ) | ||||
Proceeds
from exercise of warrants and stock options
|
48,812 | — | ||||||
Net
cash (used in) financing activities
|
(156,416 | ) | (35,701 | ) | ||||
Net
increase in cash and cash equivalents
|
3,584,003 | 335,420 | ||||||
CASH
AND CASH EQUIVALENTS
|
||||||||
Beginning
|
7,472,140 | 7,136,720 | ||||||
Ending
|
$ | 11,056,143 | $ | 7,472,140 |
31
CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
NON-CASH
INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:
|
||||||||
EMDC
Asset Purchase, common stock 81,081 shares
|
— | 150,000 | ||||||
EMDC
Asset Purchase, promissory note payable
|
— | 132,275 | ||||||
EMDC
Asset Purchase, warrants 80,000 shares
|
— | 50,013 | ||||||
CMHS
Stock Purchase, common stock 81,317 shares
|
— | 200,000 | ||||||
CMHS
Stock Purchase, debt assumed
|
— | 58,333 | ||||||
$ | — | $ | 590,621 | |||||
SUPPLEMENTAL
DISCLOUSURES OF CASH FLOW INFORMATION
|
||||||||
Cash
payments for interest
|
$ | 8,294 | $ | 7,149 | ||||
Income
taxes paid
|
$ | 600,140 | $ | 127,620 |
See
Notes to Consolidated Financial Statements.
32
CONMED
HEALTHCARE MANAGEMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
|
Nature
of Business
|
Nature
of Business
Prior to
January 26, 2007, Conmed Healthcare Management, Inc. (together with its
consolidated subsidiaries, “we”, “us”, “our” or the Company, unless otherwise
specified or the context otherwise requires) the Company, formerly known as Pace
Health Management Systems, Inc. (“Pace”), was classified as a shell company, had
no ongoing operations, minimal operating expenses and no employees.
On
January 26, 2007, we acquired Conmed, Inc. (“Conmed, Inc.”), a privately-owned
provider of correctional healthcare services (the “Acquisition”). Conmed, Inc.
was formed as a corporation on June 10, 1987 in the State of Maryland for the
purpose of providing healthcare services exclusively to county detention centers
located in Maryland. As Conmed, Inc. developed, it accepted more contracts for
additional services including mental health, pharmacy and out-of-facility
healthcare. In 2000, Conmed, Inc. served more than 50% of the county detention
healthcare services market in Maryland. In 2003, Conmed, Inc. elected to seek
contracts outside of Maryland and at the time of the Acquisition operated in
four states: Kansas, Maryland, Virginia and Washington.
As a
result of the Acquisition, Conmed, Inc. is a wholly-owned subsidiary of the
Company and the business of Conmed, Inc. is now our primary business. On March
13, 2007, the Company changed its name to Conmed Healthcare Management, Inc. In
2008, we purchased all of the assets of Emergency Medicine Documentation
Consultants, P.C. (“EMDC”), a provider of medical services in northwest Oregon,
and we purchased all of the stock of Correctional Mental Health Services, LLC
(“CMHS”), a provider of mental health services in Maryland. As of
December 31, 2009, we were in contract with, and providing medical services in
thirty-six counties in seven states including: Arizona, Kansas, Maryland,
Oklahoma, Oregon, Virginia and Washington.
NOTE
2.
|
Significant
Accounting Policies
|
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported revenues and expenses during the period. Actual results
could differ from those estimates.
A summary
of our significant accounting policies is as follows:
Accounting Estimates and
Assumptions
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our methods of revenue recognition from contracts
are based primarily on estimates as are accrued expenses. Actual results could
differ from those estimates.
Acquisition
Acquisitions
are recorded as required by business combination accounting standards using the
purchase method. Under purchase accounting, assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree should be stated on the
financial statements at “fair value” (see definition in Fair Value of Financial
Instruments section below), with limited exceptions, as of the acquisition
date. This standard requires that intangible assets be recognized as
assets apart from goodwill if they meet one of two criteria, (1) the
contractual-legal criterion, or (2) the separability criterion. This
standard also requires disclosure of the primary reasons for business
combination and the allocation of the purchase price paid to the assets acquired
and the liabilities assumed by major balance sheet caption. Goodwill is to be
recognized as a residual. If the acquisition-date fair value exceeds the
consideration transferred, a gain is to be recognized. The statement generally
requires that acquisition costs be expensed as incurred. This standard is
effective for business combinations for which the acquisition date is on or
after January 1, 2009.
33
Service
Contracts Acquired
There are
material costs in obtaining a customer list, especially customers with recurring
revenue streams. The value of service contracts acquired is represented by the
future revenue streams, therefore, the income approach is the most applicable
fair value measurement approach to value these assets. The operating income
streams of service contracts acquired are calculated based on the net present
value of estimated earnings. Operating income streams are estimated on a
contract by contract basis and an overall cost factor is used to estimate
management expenses. Service contracts acquired are amortized over
the life of each individual contract.
Non-Compete
Agreements
Non-compete
agreements are generally acquired as part of our acquisition
agreements. Key considerations in estimating the value of non-compete
agreements include consideration of the potential losses resulting from such
competition, the enforceability of the terms of the agreement, and the
likelihood of competition in the absence of the agreement. Non-compete
agreements are amortized over the lives of the agreements.
Goodwill
We record
as goodwill the excess of purchase price over the fair value of the identifiable
net assets acquired. Annually, as well as when an event triggering
impairment may have occurred, the Company is required to perform a two-step
impairment test on goodwill. The first step tests for impairment, while the
second step, if necessary, measures the impairment. There have been no
indicators of impairment for any of the goodwill. We have elected to perform our
annual analysis during the fourth quarter of each fiscal year.
Cash
and Cash Equivalents
We
consider all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. At December 31, 2009, cash
equivalents consisted of interest-bearing money market accounts at a commercial
bank. At December 31, 2008, cash equivalents consisted of
interest-bearing money market accounts and certificates of deposit at a
commercial bank.
Concentration
of Credit Risk
We
maintain cash in bank deposit accounts that at times may exceed federally
insured limits. We have not experienced any losses in such
accounts.
Fair
Value of Financial Instruments
Financial
instruments include cash, receivables, accounts payable, accrued expenses,
deferred revenue and long-term debt. We believe the fair value of each of these
instruments approximates their carrying value in the balance sheet as of the
balance sheet date. The fair value of current assets and current liabilities is
estimated to approximate carrying value due to the short-term nature of these
instruments. The fair value of the long-term debt is estimated based on
anticipated interest rates which we believe would currently be available to us
for similar issues of debt, taking into account our current credit risk and
other market factors. The same assumptions are used to record
financial instruments acquired through acquisition at fair value.
Effective
January 1, 2008, we adopted the new accounting guidance on fair value
measurements. The fair value measurement guidance defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under the fair value measurement guidance as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under the fair
value measurement guidance must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value, as
follows:
|
·
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of the fair value measurement guidance did not have a material impact
on our financial statements. Details related to our adoption of this
standard are discussed in Note 6, “Fair Value Measurements”.
34
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and our
wholly owned subsidiaries, Conmed, Inc, Conmed Oregon, Inc and Correctional
Mental Health Services, LLC (“CMHS”). All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue
Recognition
Our
principal source of revenue is contracts to provide medical assistance to county
and municipal correctional facilities. Deferred revenue represents amounts that
may be paid in advance of delivery under these contracts.
Most of
our contracts call for a fixed monthly fee. In addition, most contracts have
incremental charges based on the average daily population (“ADP”) of the
correctional facility or a contractual fee adjustment based on the ADP. Revenues
from contracts are recognized ratably for fixed fees, or monthly for contracts
with variable charges based on ADP. We have one contract that partially operates
on a cost plus basis. The timing of each payment varies per contract. Credit
terms are not more than 30 days from the date of invoice.
Certain
contracts provide for monthly fee adjustments to reflect any missed hours of
work required under terms of the contract. In addition, we may incur liquidated
damages related to specific performance measurements required under the contract
that we have failed to meet. Reductions in monthly fees resulting from staffing
adjustments and liquidated damages are recorded by us as reductions to
revenue.
Certain
contracts include “stop/loss” limits, which create a ceiling to our financial
responsibility for an individual inmate's care or a maximum amount in the
aggregate for certain categories of medical expenses, whereby we are protected
from catastrophic medical losses. In circumstances where a stop/loss is reached,
we are reimbursed for any costs incurred over the predetermined stop/loss
amount. Any reimbursement received by us is recorded as revenue.
Accounts
Receivables
Receivables
are carried at original invoice amount less payment received and an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Receivables are generally considered past due 30 days after
invoice date. We determine the allowance for doubtful amounts by regularly
evaluating individual receivables and considering a creditor's financial
condition, credit history and current economic conditions. Receivables are
written off when deemed uncollectible. Recoveries of receivables previously
written off are recorded when received.
Property,
Equipment and Software
Property,
equipment and software are recorded at cost. Depreciation is provided using the
straight-line and accelerated methods of depreciation over the estimated useful
lives of three to seven years. It is our policy to capitalize purchases of
equipment, fixtures and software that benefit future periods. Repairs and
maintenance costs are expensed when incurred.
Accrued
Medical Claims Liability
Medical
expenses include the costs associated with medical services provided by off-site
medical providers; pharmacy, laboratory and radiology fees; professional and
general liability insurance as well as other generally related medical expenses.
The cost of medical services provided, administered or contracted for are
recognized in the period in which they are provided based in part on estimates
for unbilled medical services rendered through the balance sheet date. The
Company estimates an accrual for unbilled medical services using available
utilization data including hospitalization, one-day surgeries, physician visits
and emergency room and ambulance visits and other related costs, which are
estimated. Additionally, Company personnel review certain inpatient hospital
stays and other high cost medical procedures and expenses in order to attempt to
identify costs in excess of the historical average rates. Once identified,
reserves are determined which take into consideration the specific facts
available at that time.
Actual
payments and future reserve requirements will differ from the Company’s current
estimates. The differences could be material 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 estimates and actual claims payments are recognized in the
period in which the estimates are changed or the payments are made.
35
Stock
Compensation
Compensation
expense for stock-based awards is recorded over the vesting period at the fair
value of the award at the time of grant. The recording of such compensation
began on January 1, 2006 for shares not yet vested as of that date and for all
new grants subsequent to that date. The exercise price of options granted under
our incentive plans is equal to the fair market value of the underlying stock at
the grant date. We assume no projected forfeitures on stock-based compensation,
since actual historical forfeiture rates on our stock-based incentive awards
have been negligible.
Fair
Value of Derivative Financial Instruments
Effective
January 1, 2009, we adopted derivative accounting on warrants that are indexed
to an entity’s own stock. Details related to our adoption of this standard and
its impact on our financial position and results of operations are discussed in
Note 5, “Fair Value of Warrants”.
Income
Taxes
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss carryforwards
and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
Basic
and Diluted Earnings (Loss) Per Share
We have
adopted guidance on earnings per share which requires us to present basic and
diluted income (loss) per share amounts. Basic income (loss) per share is based
on the weighted-average number of common shares outstanding during the period.
Diluted income (loss) per share is based on the weighted-average number of
common shares and dilutive potential common shares outstanding during the
period. Dilutive potential common shares consist of stock options and warrants
(using the treasury stock method) and convertible preferred stock (using the
if-converted method).
New
Accounting Pronouncements
Effective
with the quarter ended June 30, 2009, we adopted guidance on interim disclosures
about fair value of financial instruments and it did not have a material impact
on our financial position or results of operations. This guidance
requires disclosures about fair value of financial instruments in interim and
annual financial statements.
Effective
with the quarter ended September 30, 2009, we adopted The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. The FASB Accounting Standards Codification
(“Codification”) became the source of authoritative U.S. GAAP recognized by the
Financial
Accounting Standards Board (“FASB”) to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date the Codification
superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification became non-authoritative. This
standard was effective for financial statements issued for interim and annual
periods ending after September 15, 2009. In the FASB’s view, the
issuance of the Codification will not change GAAP, except for those nonpublic
nongovernmental entities that must now apply the American Institute of Certified
Public Accountants Technical Inquiry Service Section 5100, “Revenue
Recognition”, paragraphs 38-76.
NOTE
3.
|
Business
Combination
|
Asset
Purchase of EMDC
EMDC
owned contracts to provide primarily physician services in six counties in
Northwestern Oregon that were serviced by Dr. Robert Tilley. The contracts
offered significant growth opportunities since they fit well with the Company’s
geographic expansion strategy and overall business model to expand services with
existing accounts and leverage the Company’s expertise in providing full on-site
staffing, acute care, mental health, pharmacy and management of out-of-facility
services.
The
purchase of all of the assets of EMDC that occurred on February 29, 2008 (the
“Asset Purchase”), was recorded using business combination accounting standards
using the purchase method. The allocated cost of the assets acquired was based
on their fair value as of that date. The purchase price exceeded the fair value
of EMDC’s net assets acquired with the excess amount recorded as goodwill. The
results of EMDC’s operations are included in our consolidated financial
statements since the date of acquisition.
The
purchase price, including related acquisition costs, totaled
$555,148. The purchase price of EMDC was largely determined on the
basis of management’s expectations of future earnings and cash flows, resulting
in the recognition of goodwill. Based on management’s estimate, the
acquisition of EMDC resulted in $193,148 of goodwill, $242,000 of service
contract intangibles having a 1.7 year weighted average amortization period and
$120,000 of non-compete agreements having a 2.0 year weighted average
amortization period. This purchase was financed with funds provided
by working capital.
36
The
following table details the net assets of EMDC acquired:
Service
contracts acquired
|
$ | 242,000 | ||
Non-compete
agreements acquired
|
120,000 | |||
Goodwill
|
193,148 | |||
Total
|
$ | 555,148 |
The
following table details the purchase price of EMDC:
EMDC
purchase price
|
||||
Cash
purchase price
|
$ | 228,472 | ||
Deal
expenses
|
17,381 | |||
Net,
cash purchase price
|
245,853 | |||
Promissory
note
|
132,275 | |||
Performance
adjustment on promissory note
|
(22,993 | ) | ||
Warrants
issued
|
50,013 | |||
Common
stock issued
|
150,000 | |||
Total
purchase price
|
$ | 555,148 |
Substantially
all of the goodwill and intangible assets listed above will be deductible for
income tax purposes in future periods.
Acquisition
of CMHS
The
purchase of all of the stock of CMHS that occurred on November 4, 2008 (the
“Stock Purchase”) accelerated the expansion of the Company’s national behavioral
healthcare strategy by creating a preeminent behavioral health platform in
Maryland. As a result of the Stock Purchase, the Company obtained the needed
additional clinical infrastructure required to provide behavioral health
services to the Company’s current Maryland contracts at the standard of care the
Company’s customers have come to expect.
The Stock
Purchase was recorded using business combination accounting standards using the
purchase method. The allocated cost of the assets and liabilities was based on
their fair value as of that date. The purchase price exceeded the fair value of
CMHS's net assets acquired with the excess amount recorded as goodwill. The
results of CMHS’s operations are included in our consolidated financial
statements since the date of acquisition.
The
purchase price, including related acquisition costs, totaled
$2,159,223. The purchase price of CMHS was largely determined on the
basis of management’s expectations of future earnings and cash flows, resulting
in the recognition of goodwill. Based on management’s estimate, the
acquisition of CMHS resulted in $1,218,219 of goodwill, $756,000 of service
contract intangibles having a 2.3 year weighted average amortization period and
$280,000 of non-compete agreements having a 5 year weighted average amortization
period. This purchase was financed with funds provided by working
capital. In 2009, we recorded $9,161 in additional acquisition costs
and paid $178,730 as a purchase price adjustment.
37
The
following table details the opening fair value balance sheet for the CMHS
acquisition:
CMHS
net assets acquired
|
||||
CURRENT
ASSETS
|
||||
Cash
and cash equivalents
|
$ | 3,477 | ||
Accounts
receivable
|
129,700 | |||
Prepaid
expenses
|
1,682 | |||
Total
current assets
|
134,859 | |||
PROPERTY
AND EQUIPMENT, NET
|
5,000 | |||
OTHER
ASSETS
|
||||
Service
contracts acquired
|
756,000 | |||
Non-compete
agreements acquired
|
280,000 | |||
Goodwill
|
1,218,219 | |||
Deposits
|
1,710 | |||
Total
other assets
|
2,255,929 | |||
Total
assets
|
2,395,788 | |||
CURRENT
LIABILITIES ASSUMED
|
||||
Accrued
expenses
|
118,135 | |||
Notes
payable
|
118,430 | |||
Total
current liabilities
|
236,565 | |||
CMHS
net assets acquired
|
2,159,223 |
The
following table details the purchase price of CMHS:
CMHS
purchase price
|
||||
Cash
purchase price
|
$ | 1,800,000 | ||
Post
closing adjustments
|
53,320 | |||
Deal
expenses
|
105,903 | |||
Less:
CMHS cash acquired
|
(3,477 | ) | ||
Net,
cash purchase price at December 31, 2009
|
1,955,746 | |||
Add
back: CMHS cash acquired
|
3,477 | |||
Common
stock issued
|
200,000 | |||
Total
purchase price
|
$ | 2,159,223 |
The
former shareholder of CMHS was required to make an election under Internal
Revenue Code (“IRC”) Section 338 (h)(10) to treat the sale as an asset purchase
for income tax purposes. This election created additional tax basis in the
goodwill and intangible assets. Substantially all of the goodwill and
intangible assets listed above will be deductible for income tax purposes in
future periods.
The
following selected pro forma information from the statements of operations is
prepared assuming we had acquired EMDC and CMHS at the beginning of
2008:
2008
|
||||
Revenue
|
$ | 41,751,667 | ||
Net
(loss)
|
(851,302 | ) | ||
Basic
and diluted (loss) per share
|
$ | (0.07 | ) |
The pro
forma net loss reflects adjustments made for depreciation and amortization. The
pro forma basic and diluted net loss per share have been calculated assuming the
common shares issued in connection with the Asset Purchase and Stock Purchase
were issued at the beginning of 2008.
38
Other
Acquisitions Subsequent to December 31, 2009
In
January 2010, we purchased all of the assets of a small mobile imaging company
to expand the base of services that we provide to our customers, which were
previously subcontracted, and we do not expect this acquisition to have a
material impact on our financial position or results of operations.
NOTE
4.
|
Common
Stock Warrants
|
On
January 26, 2007, in a transaction which closed simultaneously with the
Acquisition, we completed a private placement (“Private Placement”) of
$15,000,000 of units of Series B Convertible Preferred Stock and warrants, of
which approximately $8,000,000 of the proceeds of the Private Placement were
paid directly to the Conmed, Inc. stockholders as consideration for the sale of
Conmed Inc.'s capital stock. In connection with the Private
Placement, we sold to certain “accredited investors” 150 units, each unit
consisting of (i) 100 shares of its Series B Convertible Preferred Stock, (ii) a
common stock purchase warrant entitling the holder to purchase up to 10,000
shares of its common stock at an exercise price equal to $0.30 per share and
(iii) a common stock purchase warrant entitling the holder to purchase up to
3,333 shares of its common stock at an exercise price equal to $2.50 per share
(such units, the “Units”). In connection with the sale of the Units, we retained
Maxim Group LLC, a NASD member broker-dealer as our exclusive placement agent
(the “Placement Agent”). The Placement Agent received a warrant to purchase 5%
of the common stock issuable upon conversion of the Units, at an exercise price
equal to $2.75 per share of common stock (an aggregate of 300,000
shares).
Pre-Acquisition
Warrants @ $0.30 per share
On
October 24, 2005, Pace issued 37,500 warrants to purchase common stock, as
adjusted for the 1 for 20 reverse stock split. Of these warrants, 30,000 were
issued to John Pappajohn, Pace's sole director and acting chairman, and the
remaining 7,500 warrants were issued to his designees. The warrants were issued
as compensation for past services rendered and all warrants were immediately
vested. The warrants had an exercise price of $10.00, which exceeded the market
price of Pace's common stock at the time of issuance. The value of the warrants
was separately estimated at $0.20 per share or $10,000 based on the
Black-Scholes valuation of the call option associated with a five-year warrant.
As part of the negotiations for the Private Placement, Mr. Pappajohn
relinquished the 30,000 warrants that were issued to him, and the remaining
7,500 warrants issued to his designees were adjusted to 250,000 warrants to
purchase common stock exercisable at $0.30 per share, expiring October 23,
2010.
As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 225,000
shares of common stock. During the year ended December 31, 2009,
warrants to purchase 2,000 shares of common stock were exercised by cashless
exercise and as a result, a total of 1,854 shares of common stock were
issued. As of December 31, 2009, we had outstanding warrants to
purchase an aggregate of 223,000 shares of common stock. During the
year ended December 31, 2008, no warrants were exercised.
Investor
Warrants @ $0.30 per share
In
connection with the Private Placement, each investor received a warrant to
purchase up to a number of shares of common stock equal to 25% of such
investor's subscription amount, divided by the conversion price of the Series B
Convertible Preferred Stock, with an exercise price equal to $0.30. As a result,
we issued to investors warrants to purchase an aggregate of 1,500,000 shares of
common stock, exercisable at $0.30 per share, expiring March 13,
2012.
As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 980,000
shares of common stock. During the year ended December 31, 2009,
warrants to purchase 40,000 shares of common stock were exercised for cash and
warrants to purchase 127,000 shares of common stock were exercised by cashless
exercise and as a result, a total of 153,018 shares of common stock were
issued. As of December 31, 2009, we had outstanding warrants to
purchase an aggregate of 813,000 shares of common stock. During the
year ended December 31, 2008, 400,000 warrants were exercised using the cashless
exercise function and as a result, 352,000 shares of common stock were
issued.
Investor
Warrants @ $2.50 per share
In
connection with the Private Placement, each investor received a warrant to
purchase up to a number of shares of common stock equal to 8.3% of such
investor's subscription amount, divided by the conversion price of the Series B
Convertible Preferred Stock, with an exercise price equal to $2.50 per share. As
a result, we issued to investors warrants to purchase an aggregate of 500,000
shares of common stock, exercisable at $2.50 per share, expiring March 13,
2012.
As of
January 1, 2009, we had outstanding warrants to purchase an aggregate of 500,000
shares of common stock. During the year ended December 31, 2009,
warrants to purchase 3,333 shares of common stock were exercised by cashless
exercise and as a result, a total of 911 shares of common stock were
issued. As of December 31, 2009, we had outstanding warrants to
purchase an aggregate of 496,667 shares of common stock. During the
year ended December 31, 2008, no warrants were exercised.
39
Placement
Agent Warrants @ $2.75 per share
In
connection with the Private Placement, we issued to the Placement Agent, a
warrant to purchase 300,000 shares of common stock, or 5% of the common stock
issuable upon conversion of the Series B Convertible Preferred Stock, at an
exercise price equal to $2.75 per share and expiring January 26,
2012.
As of
December 31, 2009 and 2008, no warrants have been exercised and we had
outstanding warrants to purchase an aggregate of 300,000 shares of common
stock.
Consultant
Warrants @ $1.65 per share
In
connection with a consulting agreement dated January 28, 2008, we issued to a
consultant a warrant to purchase 120,000 shares of common stock at an exercise
price of $1.65 per share expiring February 24, 2013. The warrant vests over four
(4) years and is contingent upon the continued service to the Company of the
warrant holder. One-quarter of the warrant vested on February 24, 2009 and one
thirty-sixth of the warrant will vest on the 24th day of
each calendar month thereafter for the following 36 months or until such time as
the warrant holder is no longer providing service for the Company. The warrant
was valued at $66,909 as of the date of grant using the fair value method which
will be recorded as stock-based compensation over the vesting
period.
As of
December 31, 2008, the warrant holder was no longer providing service for the
Company and the warrant to purchase 120,000 shares was forfeited. Expense of
$14,197 that was recorded in the first and second quarters of 2008 was reversed
in the third quarter of 2008.
Consultant
Warrants @ $1.85 per share
In
connection with the Asset Purchase, we issued warrants to two consultants to
purchase an aggregate of 80,000 shares of common stock at an exercise price of
$1.85 per share. The warrants vested immediately and expire February 28, 2013.
The warrants were valued at $50,013 as of the date of grant using the fair value
method. This expense has been included in acquisition costs.
As of
December 31, 2009 and 2008, no warrants have been exercised and we had
outstanding warrants to purchase an aggregate of 80,000 shares of common
stock.
Summary
As of
December 31, 2009, we have outstanding warrants to purchase an aggregate of
1,912,667 shares of common stock at an average exercise price of $1.32 and have
reserved shares of our common stock for issuance in connection with the
potential exercise thereof. During the year ended December 31, 2009, warrants to
purchase 40,000 shares of common stock were exercised for cash and warrants to
purchase 132,333 shares of common stock were exercised by cashless exercise and
as a result, a total of 155,783 shares of common stock were
issued. During the year ended December 31, 2008, warrants to purchase
200,000 shares of our common stock were issued, 400,000 warrants were exercised
resulting in the issuance of 352,000 shares of common stock and a warrant to
purchase 120,000 shares of our common stock was forfeited.
NOTE
5.
|
Fair
Value of Warrants
|
As a
result of adopting derivative accounting for warrants, effective January 1,
2009, 1,705,000 of our issued and outstanding common stock purchase warrants
previously treated as equity were no longer afforded equity
treatment. As a result, on January 1, 2009, we recorded a cumulative
adjustment to reclassify $2,399,538 from additional paid-in capital and $366,612
from retained earnings and recorded a $2,766,150 long-term warrant liability to
recognize the fair value of such warrants on such date. These common
stock purchase warrants do not trade in an active securities market, and as
such, we estimate the fair value of these warrants using the Black-Scholes
option pricing model and the assumptions we use are set forth
below. The risk-free interest rate for periods within the contractual
life of the warrant is based on the U.S. Treasury yield curve and the expected
life is based on our estimate of warrant exercises since historical data is not
available. All changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised,
amended or expire.
Pre-Acquisition
Warrants @ $0.30 per share
Black-Scholes assumptions
|
January 1, 2009
|
|||
Expected
life (years)
|
0.9 | |||
Expected
volatility
|
82.51 | % | ||
Risk-free
interest rate
|
0.8 | % | ||
Expected
dividend yield
|
0.0 | % |
40
As of
December 31, 2009, all warrants subject to fair value accounting were exercised
or amended to remove the provisions that resulted in liability treatment and all
such amended warrants are now treated as equity. As such, no
remaining liability exists for these warrants.
Investor
Warrants @ $0.30 per share
Black-Scholes assumptions
|
December 31, 2009
|
January 1, 2009
|
||||||
Expected
life (years)
|
1.5 | 2.0 | ||||||
Expected
volatility
|
79.59 | % | 82.51 | % | ||||
Risk-free
interest rate
|
1.4 | % | 1.1 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % |
Investor
Warrants @ $2.50 per share
Black-Scholes assumptions
|
December 31, 2009
|
January 1, 2009
|
||||||
Expected
life (years)
|
1.5 | 2.0 | ||||||
Expected
volatility
|
79.59 | % | 82.51 | % | ||||
Risk-free
interest rate
|
1.4 | % | 1.1 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % |
The
following table summarizes the warrant activity subject to fair value accounting
for the year ended December 31, 2009:
Pre-
Acquisition
Warrants
|
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
|||||||||||||
Warrants
outstanding subject to fair value accounting as of January 1,
2009
|
225,000 | 980,000 | 500,000 | 1,705,000 | ||||||||||||
Warrants
exercised
|
(2,000 | ) | (167,000 | ) | (3,333 | ) | (172,333 | ) | ||||||||
Warrants
amended
|
(223,000 | ) | (591,570 | ) | - | (814,570 | ) | |||||||||
Warrants
outstanding subject to fair value accounting as of December 31,
2009
|
- | 221,430 | 496,667 | 718,097 |
Pre-
Acquisition
Warrants
|
Investor
Warrants @
$0.30 per
share
|
Investor
Warrants @
$2.50 per
share
|
Total
|
|||||||||||||
Fair
value of warrants outstanding as of January 1, 2009
|
$ | 428,221 | $ | 1,882,701 | $ | 455,228 | $ | 2,766,150 | ||||||||
Realized
loss on warrants
|
142,017 | 638,364 | 7,473 | 787,854 | ||||||||||||
Unrealized
loss on warrants
|
— | 189,885 | 231,976 | 421,861 | ||||||||||||
Fair
value of warrants transferred to equity upon amendment
|
(562,653 | ) | (1,670,824 | ) | - | (2,233,477 | ) | |||||||||
Fair
value of warrants exercised
|
(7,585 | ) | (424,846 | ) | (10,507 | ) | (442,938 | ) | ||||||||
Fair
value of warrants outstanding as of December 31, 2009
|
$ | — | $ | 615,280 | $ | 684,170 | $ | 1,299,450 |
As of
December 31, 2009, we had outstanding warrants to purchase an aggregate of
1,912,667 shares of common stock, of which warrants to purchase 718,097 shares
of common stock were subject to derivative accounting for warrants, at an
average exercise price of $1.82 and have reserved shares of our common stock for
issuance in connection with the potential exercise thereof.
NOTE
6.
|
Fair
Value Measurements
|
As a
result of the adoption of derivative accounting for warrants, the Company is
also required to disclose the fair value measurements required by the fair value
measurement guidance. The derivative financial instruments recorded
at fair value in the balance sheet as of December 31, 2009 are categorized based
upon the level of judgment associated with the inputs used to measure their fair
value.
41
The
following table summarizes the financial liabilities measured at fair value on a
recurring basis as of December 31, 2009, segregated by the level of valuation
inputs within the fair value hierarchy utilized to measure fair
value:
Total
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
Significant other
observable inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
|||||||||||||
Derivative
financial instruments
|
$ | 1,299,450 | $ | — | $ | — | $ | 1,299,450 |
Equity-linked
financial instruments consist of stock warrants issued by the Company that
contain a strike price adjustment feature. In accordance with
derivative accounting for warrants, we calculated the fair value of warrants
using the Black-Scholes option pricing model and the assumptions used are
described in Note 5, “Fair Value of Warrants”. During the year ended
December 31, 2009, we recognized a $421,861 unrealized loss and a $787,853
realized loss related to the change in fair value of the financial instruments
which is included in Other Income on the Statement of Operations.
The
following table reflects the activity for liabilities measured at fair value
using Level 3 inputs for the year ended December 31, 2009:
Initial
recognition of equity-linked financial instruments as of January 1,
2009
|
$ | 2,766,150 | ||
Transfers
into level 3
|
— | |||
Transfers
out of level 3
|
(2,233,477 | ) | ||
Sales
of equity-linked financial instruments
|
(442,938 | ) | ||
Realized
loss related to the change in fair value
|
787,854 | |||
Unrealized
loss related to the change in fair value
|
421,861 | |||
Balance
as of December 31, 2009
|
$ | 1,299,450 |
NOTE
7.
|
Common
Stock Options
|
Common
Stock Options
The Board
of Directors has adopted, and our stockholders have approved, the 2007 Stock
Option Plan (the “2007 Plan”). The 2007 Plan provides for the grant of up to
2,350,000 incentive stock options, nonqualified stock options, restricted stock,
stock bonuses and stock appreciation rights. The 2007 Plan is administered by
the Board of Directors, which has the authority and discretion to determine: the
persons to whom the options will be granted; when the options will be granted;
the number of shares subject to each option; the price at which the shares
subject to each option may be purchased; and when each option will become
exercisable. The options generally vest over three to four years and expire no
later than ten years from the date of grant.
The table
below reflects option activity for the period indicated:
Number of
Shares
|
Weighted-
Average
Exercise Price
per Share
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding,
December 31, 2008
|
2,013,167 | $ | 2.20 | — | — | |||||||||||
Granted
|
101,500 | 3.06 | ||||||||||||||
Forfeited
|
(95,500 | ) | 2.74 | |||||||||||||
Cancelled
|
— | — | ||||||||||||||
Exercised
|
(16,250 | ) | 2.27 | |||||||||||||
Outstanding,
December 31, 2009
|
2,002,917 | $ | 2.21 | 7.46 | $ | 1,759,198 | ||||||||||
Exercisable
at December 31, 2009
|
1,305,462 | $ | 2.17 | 7.22 | $ | 1,198,761 | ||||||||||
Remaining
shares available for grant
|
330,833 |
42
During
the years ended December 31, 2009 and 2008, we recorded stock-based compensation
expense net of reversals for forfeited options totaling $628,618 and $573,775,
respectively.
As of
December 31, 2009, stock-based compensation expense not yet recognized in income
totaled $846,895, which is expected to be recognized over a weighted-average
remaining period of 1.2 years. The total grant date fair value of stock options
vested during the years ended December 31, 2009 and 2008 was $717,659 and
$935,836, respectively.
Management
intends to issue new shares of common stock upon the exercise of
options.
For
purposes of estimating the fair value of each option on the date of grant, we
utilize the Black-Scholes option-pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of our employee
stock options.
The
following table presents the weighted-average assumptions, used to estimate the
fair values of the stock options granted to employees, using the Black-Scholes
option pricing formula: the risk-free interest rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life is based on our estimate of
option exercises since we don’t have historical data.
The fair
value of our stock-based awards was estimated assuming no expected dividends and
the following weighted-average assumptions for the years ended December 31, 2009
and 2008:
2009
|
2008
|
|||||||
Expected
life (years)
|
6.0 | 6.0 | ||||||
Expected
volatility
|
75.03 | % | 52.34 | % | ||||
Risk-free
interest rate
|
2.3 | % | 2.9 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % | ||||
Weighted-average fair
value of options granted during the period
|
$ | 2.05 | $ | 1.19 |
The
following table summarizes additional information about stock options
outstanding and exercisable as of December 31, 2009:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Exercise Price
Range
|
Options
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Price
|
Shares
Exercisable
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
$1.50
- $1.99
|
34,750 |
8.15
|
$ | 1.71 | 15,928 | $ | 1.71 | |||||||||||||
$2.00
- $2.49
|
1,691,000 |
7.36
|
$ | 2.07 | 1,121,435 | $ | 2.04 | |||||||||||||
$2.50
- $2.99
|
44,500 |
7.38
|
$ | 2.59 | 38,230 | $ | 2.57 | |||||||||||||
$3.00
- $3.49
|
232,667 |
8.08
|
$ | 3.23 | 129,869 | $ | 3.22 | |||||||||||||
2,002,917 |
7.46
|
$ | 2.21 | 1,305,462 | $ | 2.17 |
43
NOTE
8.
|
Property
and Equipment
|
A summary
of property and equipment is as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Furniture
|
$ | 245,388 | $ | 214,299 | ||||
Equipment
|
147,976 | 106,078 | ||||||
Computers
|
448,574 | 342,879 | ||||||
Vehicles
|
200,355 | 36,087 | ||||||
Construction
in progress
|
— | 50,804 | ||||||
Total
|
1,042,293 | 750,147 | ||||||
Accumulated
depreciation and amortization
|
(436,715 | ) | (220,843 | ) | ||||
Property
and equipment, net
|
$ | 605,578 | $ | 529,304 |
NOTE
9.
|
Accrued
Expenses
|
A summary
of accrued expenses is as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Accrued
salaries and employee benefits
|
$ | 2,458,087 | $ | 2,002,230 | ||||
Accrued
medical claims liability
|
995,624 | 927,718 | ||||||
CMHS
acquisition holdback liability
|
— | 178,730 | ||||||
Other
|
693,229 | 102,071 | ||||||
Total
accrued expenses
|
$ | 4,146,940 | $ | 3,210,749 |
NOTE
10.
|
Earnings
Per Share
|
The
following table sets forth the computation of basic and diluted (loss) per-share
for the years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Numerator
for basic and diluted earnings per share:
|
||||||||
Net
(loss)
|
$ | (27,146 | ) | $ | (919,267 | ) | ||
Denominator:
|
||||||||
Weighted-average
basic shares outstanding
|
12,566,382 | 12,090,399 | ||||||
(Loss)
per common share:
|
||||||||
Basic
and diluted
|
$ | (0.00 | ) | $ | (0.08 | ) |
Common
stock warrants and options outstanding totaling 3,915,584 and 4,098,167 shares,
respectively, are not included in diluted earnings per common share for the
years ended December 31, 2009 and 2008, respectively, as they would have an
antidilutive effect upon earnings per common share.
NOTE
11.
|
401(k)
Plan
|
We offer
a 401(k) plan for the benefit of substantially all of the employees of Conmed,
Inc. and Conmed Oregon, Inc. The contributions to the plan include employee
voluntary salary reductions, which can be no greater than the maximum deduction
allowable for federal income tax reporting purposes. We offer a safe harbor
matching contribution of each participant's contribution up to 4% of eligible
compensation. We also can provide a profit sharing contribution at our
discretion. Expenses related to this plan totaled $181,592 and $120,552 for the
years ended December 31, 2009 and 2008, respectively.
44
We offer
a Simple IRA plan for the benefit of substantially all of the employees of
CMHS. The contributions to the plan include employee voluntary salary
reductions, which can be no greater than the maximum deduction allowable for
federal income tax reporting purposes. We offer a safe harbor matching
contribution of each participant's contribution up to 3% of eligible
compensation. In lieu of a matching contribution, we can provide a
nonelective contribution equal to 2% of calendar year
compensation. Expenses related to this plan totaled approximately
$27,412 and $2,932 for the years ended December 31, 2009 and 2008,
respectively.
NOTE
12.
|
Operating
Leases
|
We lease
office space and various equipment under certain noncancelable operating leases,
which expire at various dates through 2014.
Future
minimum annual lease payments at December 31, 2009 are as follows:
Year
ending December 31,:
|
||||
2010
|
$ | 249,877 | ||
2011
|
192,718 | |||
2012
|
175,781 | |||
2013
|
17,110 | |||
2014
|
1,812 | |||
Total
|
$ | 637,298 |
Operating
lease expense was $325,207 and $278,187 for the years ended December 31, 2009
and 2008, respectively.
NOTE
13.
|
Major
Customers and Commitments
|
During
the years ended December 31, 2009 and 2008 we had approximate sales with major
customers and related approximate receivables (payables) as
follows:
For the Year Ended
December 31, 2009
|
For the Year Ended
December 31, 2008
|
|||||||||||||||
Revenue
|
Receivable
(Payable)
|
Revenue
|
Receivable
|
|||||||||||||
Company
A
|
$ | 6,076,000 | $ | 77,000 | $ | 6,084,000 | $ | 15,000 | ||||||||
Company
B
|
9,651,000 | (25,000 | ) | 4,216,000 | 152,000 | |||||||||||
Company
C
|
4,465,000 | 367,000 | 4,085,000 | 327,000 |
In
connection with our normal contract activities, we are required to acquire
performance and payment bonds for certain service contracts. The surety issuing
the bonds has recourse against certain assets in the event the surety is
required to honor the bonds. The lengths of our bond contracts vary. Most
contracts are one year or less, but periodically contracts are obtained which
exceed one year. At December 31, 2009, the Company had $10,897,961 in
outstanding bonds.
NOTE
14.
|
Amortization
Expense
|
Service
Contracts Acquired
Projected
amortization of service contracts for the next five years:
Year ending
December 31,:
|
Amortization
|
|||
2010
|
521,500 | |||
2011
|
334,000 | |||
2012
|
117,500 | |||
2013
|
11,000 | |||
2014
|
— | |||
$ | 984,000 |
45
Accumulated
amortization of service contracts as of December 31, 2009 and 2008 was
$4,864,000 and $3,494,000, respectively.
Service
contract amortization expense recognized was $1,370,000 and $1,693,000 for the
years ended December 31, 2009 and 2008, respectively.
Non-Compete
Agreements
Projected
amortization of non-compete agreements for the next five years:
Year ending
December 31,:
|
Amortization
|
|||
2010
|
266,000 | |||
2011
|
68,000 | |||
2012
|
56,000 | |||
2013
|
46,667 | |||
2014
|
— | |||
$ | 436,667 |
Accumulated
amortization of non-compete agreements as of December 31, 2009 and 2008 was
$963,333 and $578,333, respectively.
Non-compete
amortization expense recognized was $385,000 and $327,333 for the years ended
December 31, 2009 and 2008, respectively.
NOTE
15.
|
Revenue
Recognition
|
Following
is a reconciliation of our service contract revenue to net revenue reflecting
adjustments related to minimum staffing requirements and liquidated damages as
well as stop/loss reimbursements for the years ended December 31,:
2009
|
2008
|
|||||||
Service
contract revenue
|
$ | 52,152,000 | $ | 39,963,000 | ||||
Staffing
adjustments and liquidated damages
|
(623,000 | ) | (473,000 | ) | ||||
Stop/loss
reimbursements
|
1,256,000 | 1,060,000 | ||||||
Net
revenue
|
$ | 52,785,000 | $ | 40,550,000 |
NOTE
16.
|
Income
Tax Matters
|
The
components of income tax expense for the years ended December 31, 2009 and 2008
from continuing operations are as follows:
2009
|
2008
|
|||||||
Current
tax expense
|
$ | 725,000 | $ | 555,000 | ||||
Deferred
tax (benefit)
|
(838,000 | ) | (555,000 | ) | ||||
Income
tax (benefit)
|
$ | (113,000 | ) | — |
46
Approximate
deferred taxes consist of the following components as of December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Deferred
tax asset
|
||||||||
Intangible
assets
|
$ | 1,805,000 | 1,300,000 | |||||
Other
timing differences
|
233,000 | 495,000 | ||||||
2,038,000 | 1,795,000 | |||||||
Less:
valuation allowance
|
— | 709,000 | ||||||
Net
deferred tax asset
|
2,038,000 | 1,086,000 | ||||||
Deferred
tax liability
|
||||||||
Goodwill
|
(412,000 | ) | (322,000 | ) | ||||
Depreciation
|
(143,000 | ) | (119,000 | ) | ||||
Deferred
tax asset
|
$ | 1,483,000 | 645,000 |
The
Company’s ability to utilize its net operating loss carryforwards (“NOLs”) and
research and development credit carryforwards (“RDCs”) is currently limited due
to limitations on change of control under Section 382 (“Section 382”) of the
IRC. As of December 31, 2009, management has decided to write-off,
for presentation purposes, the deferred tax assets related to NOLs
and RDCs of $5,253,000 and $391,000, respectively, and their associated
valuation allowances of $5,253,000 and $391,000, respectively, as the Company
cannot utilize these future benefits under current tax law. As such,
those amounts are not presented in the above table. Additionally, we
have retroactively restated, for this presentation, the approximate deferred
taxes as of December 31, 2008 and as such, the above table does not include
deferred tax assets related to NOLs and RDCs of $6,057,000 and $391,000,
respectively, and their associated valuation allowances of $6,057,000 and
$391,000, respectively.
As of
December 31, 2009, management has evaluated all available evidence, both
negative and positive, and has determined that it is more likely than not that
all of the deferred tax asset, excluding NOLs and RDCs, will be realized and the
remaining valuation allowance is no longer required based upon the
following:
|
·
|
the
Company’s history of generating taxable
income;
|
|
·
|
taxable
income has been increasing year over year during the Company’s history;
and
|
|
·
|
management
projects taxable income continuing to increase and believes that it is
more likely than not that the Company can continue to generate taxable
income in the foreseeable future.
|
As of
December 31, 2008, we recorded a valuation allowance of $709,000 against
deferred tax assets at December 31, 2008 to reduce the total to an amount that
management believes will more likely than not be realized. Management
applied a valuation allowance against certain deferred tax assets because of a
limited history of taxable income and the long-term nature of the deferred tax
asset. We recognized $645,000 of deferred tax assets in 2008 for the amount we
estimate will be realized in the short term.
The Stock
Purchase in November 2008 is being treated as an asset acquisition for federal
income tax purposes under IRC Section 338(h)(10), which allows the Company to
capitalize and amortize intangible assets for federal income tax purposes over a
15-year period.
47
The
provision for income taxes for the years ended December 31, 2009 and 2008
differs from the approximate amount of income tax benefit determined by applying
the U.S. Federal income tax rate to pre-tax loss, due to the
following:
2009
|
2008
|
|||||||
Computed
federal income tax benefit
|
$ | (48,000 | ) | $ | (313,000 | ) | ||
State
income taxes
|
102,000 | 45,000 | ||||||
Other,
including permanent differences
|
(42,000 | ) | (6,000 | ) | ||||
Permanent
difference related to stock options
|
173,000 | 142,000 | ||||||
Permanent
difference related to derivative financial instruments
|
411,000 | — | ||||||
Change
in valuation allowance
|
(709,000 | ) | 132,000 | |||||
Total
tax (benefit) shown in financial statements
|
$ | (113,000 | ) | $ | — |
The
Company adopted guidance on accounting for uncertainty in income taxes effective
January 1, 2007. Our Federal, Arizona, Iowa, Kansas, Maryland, Oregon
and Virginia tax returns remain open for examination for years subsequent to
2005. The Company currently has not recorded a liability for
uncertain tax positions.
NOTE
17.
|
Related
Party Transactions
|
During
the fourth quarter of 2009, we recorded a $29,633 accrued liability to Equity
Dynamics, Inc., an entity wholly owned by John Pappajohn, a director of the
Company, for acquisition advisory services.
48
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM
9A(T).
|
CONTROLS
AND PROCEDURES.
|
Evaluation of Disclosure Controls
and Procedures. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of the end of the period covered by this report were
effective such that the information required to be disclosed by us in reports
filed under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and
(ii) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding disclosure.
Management's Report on Internal
Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) and 15(d)-15(f) under the
Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes of
accounting principles generally accepted in the United States.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives.
Our
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company's internal control
over financial reporting as of December 31, 2009. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework. Based on this evaluation, our management, with the participation of
the Chief Executive Officer and Chief Financial Officer, concluded that, as of
December 31, 2009, our internal control over financial reporting was
effective.
This
Annual Report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management's report in this Annual
Report.
Changes in Internal Control Over
Financial Reporting. During the most recently completed fiscal quarter,
there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION.
|
None.
49
PART
III.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
We have
adopted a Code of Conduct and Ethics (the “Code”) that applies to all of our
officers, directors and employees (including our Chief Executive Officer, Chief
Financial Officer and Principal Accounting Officer) and have posted the Code on
our website at www.conmedinc.com. In the
event that we have any amendments to or waivers from any provision of the Code
applicable to our Chief Executive Officer, Chief Financial Officer and Principal
Accounting Officer, we intend to satisfy the disclosure requirement under Item
5.05 of Form 8-K by posting such information on our website.
Information
relating to our executive officers is included in Part I of this Annual Report
on Form 10-K, as permitted by General Instruction G(3). The other
information required by this item is incorporated by reference to our definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31, 2009. If
such proxy statement is not filed on or before April 30, 2010, the information
called for by this item will be filed as part of an amendment to this Annual
Report on Form 10-K on or before such date, in accordance with General
Instruction G(3).
EXECUTIVE
COMPENSATION.
|
The
information required by this item is incorporated by reference to our definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31, 2009. If
such proxy statement is not filed on or before April 30, 2010, the information
called for by this item will be filed as part of an amendment to this Annual
Report on Form 10-K on or before such date, in accordance with General
Instruction G(3).
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Equity
Compensation Plan Information
The
following table provides information about the shares of our common stock that
may be issued upon the exercise of stock options, warrants and other stock
rights under all of our equity compensation plans as of December 31,
2009.
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights (3)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|||||
(a)
|
(b)
|
(c)
|
||||||
Equity
compensation plans approved by security holders (1)
|
2,002,917
|
$
|
2.21
|
330,833
|
||||
Equity
compensation plans not approved by security holders (2)
|
603,000
|
1.72
|
—
|
|||||
Total
|
2,605,917
|
$
|
2.10
|
330,833
|
(1)
|
The
“Equity compensation plans approved by security holders” consist of the
2007 Stock Option Plan.
|
(2)
|
The
“Equity compensation plans not approved by security holders” consist of
consultant warrants issued in 2008 to two employees of Equity Dynamics,
Inc. in connection with the Asset Purchase, placement agent warrants
issued in 2007 to Maxim Group LLC in connection with the Private Placement
and warrants issued in 2005 to certain designees of John
Pappajohn.
|
50
Consultant
Warrants. On February 29, 2008, in connection with the Asset
Purchase, we issued warrants to purchase an aggregate of 80,000 shares of common
stock at an exercise price of $1.85 per share to two employees of Equity
Dynamics, Inc., an entity wholly owned by John Pappajohn, a director of the
Company. The warrants vested immediately and expire February 28,
2013. As of December 31, 2009, 80,000 warrants remain outstanding.
Placement Agent
Warrants. In connection with the Private Placement, we issued
to the Maxim Group LLC, a warrant to purchase 300,000 shares of common stock, or
5% of the common stock issuable upon conversion of the Series B Convertible
Preferred Stock, at an exercise price equal to $2.75 per share and expiring
January 26, 2012. As of December 31, 2009, 300,000 warrants remain
outstanding.
Pre-Acquisition
Warrants. On October 24, 2005, Pace issued 37,500 warrants to
purchase common stock, as adjusted for the 1 for 20 reverse stock split. Of
these warrants, 30,000 were issued to John Pappajohn, Pace's sole director and
acting chairman, and the remaining 7,500 warrants were issued to his designees.
The warrants were issued as compensation for past services rendered and all
warrants were immediately vested. The warrants had an exercise price of $10.00,
which exceeded the market price of Pace's common stock at the time of issuance.
The value of the warrants was separately estimated at $0.20 per share or $10,000
based on the Black-Scholes valuation of the call option associated with a
five-year warrant. As part of the Private Placement, Mr. Pappajohn relinquished
the 30,000 warrants that were issued to him, and the remaining 7,500 warrants
issued to his designees were adjusted to 250,000 warrants to purchase common
stock exercisable at $0.30 per share, expiring October 23, 2010. As
of December 31, 2009, 223,000 warrants remain outstanding.
The other
information required by this item is incorporated by reference to our definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2009. If such proxy statement is not filed on or before April 30,
2010, the information called for by this item will be filed as part of an
amendment to this Annual Report on Form 10-K on or before such date, in
accordance with General Instruction G(3).
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
|
The
information required by this item is incorporated by reference to our definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2009. If such proxy statement is not filed on or before April 30,
2010, the information called for by this item will be filed as part of an
amendment to this Annual Report on Form 10-K on or before such date, in
accordance with General Instruction G(3).
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The
information required by this item is incorporated by reference to our definitive
proxy statement for our 2010 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2009. If such proxy statement is not filed on or before April 30,
2010, the information called for by this item will be filed as part of an
amendment to this Annual Report on Form 10-K on or before such date, in
accordance with General Instruction G(3).
51
PART
IV.
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
(a) (1)
and (2). Financial Statements and Financial Statements Schedule.
See index
to Consolidated Financial Statements under Item 8 in Part II hereof where these
documents are listed.
(a) (3). Exhibits.
Exhibit
Number
|
Description
|
|
2.1
|
Agreement
and Plan of Merger dated February 14, 2007 (4)
|
|
3.1
|
Certificate
of Incorporation of Conmed Healthcare Management, Inc.
(4)
|
|
3.1.1
|
Certificate
of Merger effective as of March 14, 2007 (5)
|
|
3.1.2
|
Articles
of Merger effective as of March 14, 2007 (5)
|
|
3.2
|
Amended
and Restated Bylaws (15)
|
|
4.1
|
Amendment
to Certificate of Incorporation defining rights of Series B Convertible
Preferred Stock (3)
|
|
4.2
|
Amendment
to Certificate of Incorporation defining rights of Series C Preferred
Stock (3)
|
|
4.3
|
Form
of Investor Warrant ($.30) (3)
|
|
4.4
|
Form
of Investor Warrant ($2.50) (3)
|
|
4.5
|
Form
of Common Stock Certificate (6)
|
|
10.1
|
Stock
Purchase Agreement by and among Pace, Conmed and the Conmed Stockholders
set forth therein, dated August 2, 2006 (1)
|
|
10.2
|
Side
letter by and among Pace, Conmed and the Conmed Stockholders set forth
therein, dated as of January 12, 2007 (2)
|
|
10.3
|
Form
of Subscription Agreement dated January 26, 2007, with Registration
Rights, by and among Pace and certain investors in the Private Placement
(3)
|
|
10.4
|
Placement
Agency Agreement dated January 16, 2007, by and between Pace and Maxim
Group LLC (3)
|
|
10.5
|
Form
of Securities Purchase Agreement dated January 26, 2007, by and among Pace
and certain investors in the Private Placement (3)
|
|
10.6
|
Form
of Registration Rights Agreement dated January 26, 2007 by and among Pace
and certain investors in the Private Placement (3)
|
|
10.7
|
Employment
Agreement dated January 26, 2007, by and between Richard W. Turner and
Pace Health Management Systems, Inc. (7) *
|
|
10.8
|
Employment
Agreement dated January 26, 2007 by and between Howard M. Haft and Pace
Health Management Systems, Inc.(7) *
|
|
10.9
|
Employment
Letter Agreement dated August 21, 2006, by and between Thomas Fry and Pace
Health Management Systems, Inc. (7)
*
|
52
10.10
|
Form
of Employment Letter Agreement dated January 24, 2007, by and between
Larry Doll and Conmed Healthcare Management, Inc. (7) *
|
|
10.11
|
2007
Stock Option Plan of Conmed Healthcare Management, Inc.(4)
*
|
|
10.12
|
Amendment
No. 1 to the 2007 Stock Option Plan (16) *
|
|
10.13
|
Consulting Agreement
dated January 26, 2007, by and between Yankee Partners LLC and Pace Health
Management Systems, Inc. (8)
|
|
10.14
|
Health Services
Agreement, dated March 14, 2002, by and between Sheriff of Harford County
and Conmed, Inc., as amended
(8)
|
|
10.15
|
Medical
Services Agreement, dated January 1, 2006, by and between the Board of
County Commissioners of Frederick County and Conmed, Inc., as amended (8)
|
|
10.16
|
Agreement
dated April 25, 2005, by and between Howard County and Conmed, Inc., as
amended (8)
|
|
10.17
|
Medical
Services Agreement, dated July 1, 2004, by and between the Sheriff of
Cecil County and ConMed, Inc., as amended (8)
|
|
10.18
|
Agreement
for Service, dated July 1, 2005, by and between the County of Loudoun and
Conmed, Inc., as amended (8)
|
|
10.19
|
Agreement,
dated August 12, 2006, by and between the Board of County Commissioners
for Yakima County, Washington and Conmed, Inc. (8)
|
|
10.20
|
Medical
Services Agreement, by and among Conmed, Inc. and Baltimore County,
Maryland, dated March 26, 2007 (9)
|
|
10.21
|
Medical
Services Agreement, by and among Conmed, Inc. and Henrico County Virginia,
dated May 7, 2007 (9)
|
|
10.22
|
Amendment
to Medical Services Agreement, by and among Conmed, Inc. and Yakima
County, Washington, dated April 3, 2007 (10)
|
|
10.23
|
Contract
Renewal Agreement, by and among Conmed, Inc. and Yakima County,
Washington, dated September 4, 2007 (10)
|
|
10.24
|
Amendment
to Medical Services Agreement, by and among Conmed, Inc. and Yakima
County, Washington, dated September 4, 2007 (10)
|
|
10.25
|
First Amendment to
Services Agreement, by and among Conmed, Inc. and Sedgwick County, Kansas,
dated June 1, 2007 (10)
|
|
10.26
|
Medical
Services Agreement, by and among Conmed, Inc. and Yakima County,
Washington, dated October 2, 2007 (10)
|
|
10.27
|
Office
Lease Agreement by and between Conmed, Inc, and 7250 Limited Partners,
LLLP dated December 10, 2007 (11)
|
|
10.28
|
Inmate
Healthcare Services Agreement, dated March 19, 2008, by and between
Conmed, Inc. and the City of Chesapeake, Virginia Sheriff’s Department
(12)
|
53
10.29
|
Medical
Service Agreement with Charles County, Maryland dated July 2, 2008
(13)
|
|
10.30
|
Professional
Services Contract with Pima County, Arizona dated August 1, 2008
(13)
|
|
10.31
|
Inmate
Health Services Agreement, effective as of February 1, 2009, by and
between Conmed, Inc. and the Western Virginia Regional Jail Authority
(14)
|
|
21
|
Subsidiaries
**
|
|
23.1
|
Consent
of McGladrey & Pullen, LLP dated March 25, 2010 **
|
|
31.1
|
Certification
of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
**
|
|
31.2
|
Certification
of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
**
|
|
32.1
|
Certification
of Registrant’s Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. **
|
|
32.2
|
Certification
of Registrant’s Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350. **
|
*
|
Management
contract or compensatory plan or arrangement.
|
**
|
Filed
herewith
|
(1)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on August
8, 2006
|
(2)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on January
17, 2007
|
(3)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on February
1, 2007
|
(4)
|
Incorporated
by reference to the Company’s Definitive Proxy Statement on Schedule 14A
filed on February 27, 2007
|
(5)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on March
19, 2007
|
(6)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB filed on March
29, 2007
|
(7)
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 filed on
April 3, 2007
|
(8)
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2/A filed
on May 10, 2007
|
(9)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-QSB filed August
14, 2007
|
(10)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-QSB filed
November 14, 2007
|
(11)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-KSB filed on March
31, 2008
|
(12)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q filed on May
14, 2008
|
(13)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q filed on
November 13, 2008
|
(14)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q filed on May
15, 2009
|
(15)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on June 3,
2009
|
(16)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on July 17,
2009
|
54
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Conmed
Healthcare Management, Inc.
|
||
March
25, 2010
|
||
By:
|
/s/ Richard W. Turner
|
|
Richard
W. Turner, Chairman 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 on behalf of the registrant and in the
capacity and on the dates indicated.
March 25,
2010
By
|
/s/ Richard W. Turner
|
Richard
W. Turner, Chairman and Chief Executive Officer
and
Director (Principal Executive Officer)
|
|
By
|
/s/ Thomas W. Fry
|
Thomas
W. Fry, Chief Financial Officer and Secretary
(Principal
Financial Officer and Principal Accounting Officer)
|
|
By
|
/s/ John Pappajohn
|
John
Pappajohn, Director
|
|
By
|
/s/ Edward B. Berger
|
Edward
B. Berger, Director
|
|
By
|
/s/ Terry E. Branstad
|
Terry
E. Branstad, Director
|
|
By
|
/s/ John W. Colloton
|
John
W. Colloton, Director
|
55