UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM 10-K/A
 
 (Amendment
No. 1)
 
 x
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 For
the fiscal year ended: December 31, 2008
 Or
  ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 For
the transition period from
                  
to
 
 Commission
File Number: 0-27554
 Conmed
Healthcare Management, Inc.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                    
                    42-1297992(State
      or other jurisdiction of
                    
                    (IRS
      Employerincorporation
      or organization)
                    
                    Identification
      No.)
 
 7250
      Parkway Dr., Suite 400Hanover, MD
                    
                    21076(Address
      of principal executive offices)
                    
                    (Zip
      code)
 
 410-567-5520(Registrant's telephone number,including area code)
 
 Securities registered under Section 12(b)
of the Act: None
 
 Securities
registered under Section 12(g) of the Act:
 
 Common Stock, $.0001 par
value
 (Title of
class)
 
 Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
 Yes  ̈  
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  ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of 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 oSmaller 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, 2008 was approximately $6,722,103.  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 26, 2009:  12,477,539
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 The
following document is incorporated herein by reference:
 
 Document
                  
                  Parts
      Into Which IncorporatedProxy
      Statement for the Company’s 2009
                    Annual
      Meeting of Stockholders
                  
                  Part III
 
 
  Explanatory
Note
 
 This
Amendment No. 1 on Form 10-K/A filed by Conmed Healthcare Management, Inc. (the
“Company”) amends the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
 
 Subsequent
to the filing of such Annual Report, the Company determined that it did not (i)
provide a comparison of its historical financial statements for the year ended
December 31, 2008 and the 340-day period from January 26, 2007 to December 31,
2007 in the Results of Operations section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations and (ii) provide an
audited statement of operations and an audited statement of cash flows of
Conmed, Inc. for the 25-day period from January 1, 2007 to January 25, 2007 as
part of the Company’s Consolidated Financial Statements.  Accordingly,
the Company has amended and restated Part II, Item 7 (Management’s Discussion
and Analysis of Financial Condition and Results of Operations) and Part II, Item
8 (Financial Statements and Supplementary Data) to reflect these
changes.  In addition, the Company has revised the Liquidity and
Capital Resources section of Part II, Item 7 (Management’s Discussion and
Analysis of Financial Condition and Results of Operations) to provide a more
detailed analysis of the components of the statements of cash flows, removed
references to the use of an independent valuation firm to assist in the
determination of the fair value of acquired intangible assets in Part II, Item 7
(Management’s Discussion and Analysis of Financial Condition and Results of
Operations) and Part II, Item 8 (Financial Statements and Supplementary Data),
and amended and restated Part II, Item 9A(T) (Controls and Procedures) to remove
the reference to the level of assurance of the Company’s disclosure controls and
procedures and certain other disclosure included therein.  In
addition, Part IV, Item 15 (Exhibits and Financial Statement Schedules) is being
amended solely to include a currently dated consent of the independent
accounting firm and currently dated certifications of the Company’s Chief
Executive Officer and Chief Financial Officer pursuant to Section 302 and
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 The
Company has not updated the information in this Amendment No. 1 to speak as of a
date after the filing of the Company’s Annual Report, and this Amendment No. 1
does not amend or update the information in such Annual Report in any way other
than to give effect to the items described above, to the extent
specified.
 
 
  CONMED
HEALTHCARE MANAGMENT, INC.
 2008
FORM 10-K ANNUAL REPORT
 
 TABLE OF
CONTENTS
 
 PagePART
      I.ITEM
      1.
                        Business.
                        1ITEM
      1A.
                        Risk
      Factors.
                        8ITEM
      1B.
                        Unresolved
      Staff Comments.
                        15ITEM
      2.
                        Properties.
                        15ITEM
      3.
                        Legal
      Proceedings.
                        15ITEM
      4.
                        Submission
      of Matters to a Vote of Security Holders.
                        15PART
      II.ITEM
      5.
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                        16ITEM
      6.
                        Selected
      Financial Data.
                        16ITEM
      7.
                        Management's
      Discussion and Analysis or Financial Condition and Results of
      Operations.
                        16ITEM
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk.
                        24ITEM
      8.
                        Financial
      Statements and Supplementary Data.
                        25ITEM
      9.
                        Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                        50ITEM
      9A(T).
                        Controls
      and Procedures.
                        50ITEM
      9B.
                        Other
      Information.
                        50PART
      IIIITEM
      10.
                        Directors,
      Executive Officers and Corporate Governance.
                        51ITEM
      11.
                        Executive
      Compensation.
                        51ITEM
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                        51ITEM
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence.
                        52ITEM
      14.
                        Principal
      Accountant Fees and Services.
                        52PART
      IVITEM
      15.
                        Exhibits
      and Financial Statement Schedules.
                        53SIGNATURES
                        56
 
 
 
 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 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 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. For the fiscal year ended December 31, 2008,
Conmed, Inc. had net revenues primarily from medical services provided to
correctional institutions of $40,550,414.
 
 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. As
of December 31, 2008, we were in contract with, and providing medical services
in thirty-two counties in six states including: Arizona. Kansas, Maryland,
Oregon, Virginia and Washington.
  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
Correctional Healthcare Services
  We
provide the following array of healthcare services for inmates in county
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.
  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
                  
                  ·
                  Mental
      health services·
                  IV
      therapy
                  
                  ·
                  Pharmacy·
                  EKG's
                  
                  ·
                  Physical
      and occupational therapy·
                  Diagnostic
      imaging/radiology
                  
                  ·
                  Dental
      services
 
 1
  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 assures 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 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.
  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, on-site x-rays 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.
  2
  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 facilities in which we provide healthcare
services. 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 14% over the submitted
charges. The TPA is compensated based on a percent of our savings for the
repriced claims.
  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.
 
 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, 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 shall 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, 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 to
      pass through to or reach our employee's clothing, undergarments, skin,
      eyes, mouth, etc.  Other procedures we implement in accordance
      with OSHA include, but are not limited to, 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.
  3
  Sales
and Marketing
  Our sales
and marketing efforts for correctional healthcare services are based on the
following:
  1.
                Market
      Opportunities - We have designated Florida, Georgia, Kansas, Iowa, North
      Carolina, Oklahoma, Oregon, Pennsylvania, South Carolina, 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;
 
 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 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 and Vice President of Strategic Development, as well as a
network of regional consultants to implement our marketing
strategy.
 
 Acquisitions
 
 We are also pursuing a policy of
selective acquisitions to enhance our growth in strategic areas and have
established a pipeline of potential acquisition candidates. In 2008, we
acquired; Emergency Medicine Documentation Consultants, P.C. (“EMDC”), a
provider of medical services in northwest Oregon and Correctional Mental Health
Services, LLC (“CMHS”) a provider of mental health services in
Maryland.
 
 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, it appears this is not their main focus. These
companies, including Prison Health Services, Inc., Correctional Medical
Services, Inc., Correct Care Solutions Inc., Wexford Health Sources, Inc.,
Naphcare, Inc. and Armor Correctional Health Services, are primarily in the
business of providing services to state prisons.
 
 4
 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. There are several small local groups in markets which we
are developing 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.
 
 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 the Company's industries, and the combination of
regulations and orders it faces 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.
  5
 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. Since September 11,
2001, the surety market has sharply contracted and the cost of surety bonds has
substantially increased. In order to avoid the additional costs that performance
bonds add to the contracts, increasingly clients are reducing or eliminating the
need for performance bonds.
 
 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.
 
 U.S. Department of Labor,
Occupational Safety and Health Administration (“OSHA”).  OSHA
Standard 29 CFR 1910 requirements include, but are not limited to, protections
against exposure to blood borne and airborne pathogens (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 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 governmental entities. Our top
three clients generated approximately thirty-five percent (35%) of our total
revenues for the twelve months ended December 31, 2008. 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 (2) years and six (6) months, and BCDC,
at its option, may extend the agreement annually for two (2) additional
three-year terms upon written notice. 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 one hundred percent (100%) of the annual amount of the
awarded contract, as well as a payment bond for approximately twenty-five
percent (25%) of the annual amount of the awarded contract. BCDC may terminate
the agreement upon ninety (90) 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 (23) months retroactive to August 1,
2008.  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 (90) days advance written
notice.
 
 6
 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 (2) years. On June 1, 2007, the agreement
was amended to extend the basic term through December 31, 2009, and Sedgwick
County may, at its option, extend the agreement annually for two (2) additional
one-year terms upon written notice. In addition, the amendment waives the
previous requirement for a performance bond, increases the medical staffing,
raises the base monthly fee, and provides for a cost of living increase in 2009.
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 (30) days
written notice without cause. Either party may immediately terminate the
agreement for a material breach of the agreement subject to certain cure
provisions.
 
 Employees
 
 As of December 31, 2008, we had
approximately 412 full-time and 32 part-time employees and 239 per diem
employees, and 50 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
                      
                      PositionRichard W. Turner, Ph.D.
                      
                      62
                      
                      Chairman, Chief Executive Officer and Director
                        ( Parent and Operating Subsidiaries )Howard M. Haft, MD
                      
                      59
                      
                      Executive Vice President and Chief Medical Officer
                        ( Parent )Thomas W. Fry
                      
                      64
                      
                      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 is currently our Chairman, Chief Executive Officer and a Director. 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
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.
  7
  Thomas
W. Fry - Chief Financial Officer and Secretary of Parent and Operating
Subsidiaries
  Prior to
joining Pace, our predecessor in interest, in September 2006, 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 Systems
Company, Inc. 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 Chesebrough-Ponds International and
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.
 
 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 and acceptance of privatization.
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 seven medical service
contracts with county detention centers generated approximately sixty-two
percent (62%) of our total revenues for the year ended December 31, 2008. These
same clients generated approximately fifty-two percent (52%) 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 (30) and ninety (90) days prior to the termination date, our
business and financial performance may be seriously harmed.
 
 MOST OF OUR CONTRACTS ARE FOR
SHORT-TERMS, 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 nine
percent (9%) of revenue and seventeen percent (17%) of the gross profit,
respectively, for the year ended December 31, 2008.  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.
 8
  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.
 
 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
eighty-eight percent (88%) of our healthcare services' revenues for the year
ended December 31, 2008 are operated under caps which provide limits on the cost
of exposure; however, multiple events with significant costs may exceed budget
targets.
 
 The remaining twelve percent (12%) 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. A successful
claim against us in excess of our insurance coverage could materially harm our
business.
 
 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.
 
 9
 WE UTILIZE THIRD PARTY ADMINISTRATORS
(“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 13% TO 16%.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 14% 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. The trend over the past ten years has been
one of deeper discounting against these charges. If the trend reversed or
slowed, 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;
  ·
              Employee
      Retirement Income Security Act of 1974 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 the Health Insurance Portability and Accountability Act of
1996 (“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.
 
 10
 GOVERNMENT AGENCIES MAY INVESTIGATE
AND AUDIT OUR CONTRACTS AND, IF ANY IMPROPRIETIESARE FOUND, WE MAY BE REQUIRED TO
REFUND REVENUES WE HAVE RECEIVED, REQUIRED TO FOREGO ANTICIPATED REVENUES, AND
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.
 
 11
 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 andChief Executive Officer
and 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 (3) 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 becoming a
public company plus the additional compliance, reporting, corporate governance
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 1 or 2 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.
 
 12
 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. 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. We also carry
directors and officer's liability insurance. As a result of the foregoing,
stockholders may be unable to recover damages against our officers and directors
for actions taken by them which constitute negligence, gross negligence or a
violation of their fiduciary duties 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, 2009. 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 5% 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.
 
 13
 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 Delaware General Corporation Law, which restricts business
combinations with some stockholders once the stockholder acquires 15% 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
OTC Bulletin Board. Approximately 14,751 shares were traded on an average daily
trading basis for the year ended December 31, 2008. 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 is currently traded on the OTC Bulletin Board under the symbol “CMHM.OB”.
The quotation of our common stock on the OTC Bulletin Board does not assure that
a meaningful, consistent and liquid trading market currently exists, and in
recent years such market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many companies like ours.
Our common stock is thus subject to this volatility. Sales of substantial
amounts of our common stock, or the perception that such sales might occur,
could adversely affect prevailing market prices of our common
stock.
 
 The trading price of our common stock
could also be subject to wide fluctuations in response to 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. 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.
 
 PENNY STOCK REGULATIONS MAY IMPOSE
CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR COMMON STOCK.The Securities
and Exchange Commission (the “SEC”) has adopted regulations which generally
define a “penny stock” to be any equity security that has a market price of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. As a result, our common stock, which qualifies as “penny
stock”, is subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the “penny stock” rules may
restrict the ability of broker-dealers to sell our securities and may affect the
ability of investors to sell our securities in the secondary market and the
price at which such purchasers can sell any such securities.
 
 14
 Stockholders
should be aware that, according to the SEC, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. Such patterns
include:
 
 ·
              control
      of the market for the security by one or a few broker-dealers that are
      often related to the promoter or
issuer;
  ·
              manipulation
      of prices through prearranged matching of purchases and sales and false
      and misleading press releases;
  ·
              “boiler
      room” practices involving high pressure sales tactics and unrealistic
      price projections by inexperienced sales
  persons;
  ·
              excessive
      and undisclosed bid-ask differentials and markups by selling
      broker-dealers; and
  ·
              the
      wholesale dumping of the same securities by promoters and broker-dealers
      after prices have been manipulated to a desired level, along with the
      inevitable collapse of those prices with consequent investor
      losses.
 
 Purchasers of penny stocks may have
certain legal remedies available to them in the event the obligations of the
broker-dealer from whom the penny stock was purchased violates or fails to
comply with the above obligations or in the event that other state or federal
securities laws are violated in connection with the purchase and sale of such
securities. Such rights include the right to rescind the purchase of such
securities and recover the purchase price paid for them. Application of these
penny stock regulations to our common stock could adversely affect the market
liquidity of the shares, which in turn may affect the ability of holders of our
common stock to resell the stock.
  ITEM
1B.   UNRESOLVED STAFF COMMENTS.
  Not
applicable because the Company is a Smaller Reporting Company.
  ITEM
2.      PROPERTIES.
  As of December 31, 2008, we had leases for the following
office facilities.
 
 Hanover,
Maryland. In December 2007, we entered into a five (5) 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.
 
 La Plata,
Maryland. In November, 2004, we entered into an office lease agreement for
approximately 2,424 square feet of office space at an annual rent of $29,088 for
2004 and subject to incremental annual increases up to $32,738 in the final year
of the lease, which expires on November 30, 2009, subject to a 5-year renewal
option.
 
 Newberg,
Oregon. In November, 2008, we entered into a sixteen (16) 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 not likely have a
material adverse effect on our consolidated financial position or results of
operations.
  ITEM 4.      SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.
  No
matters were submitted to a vote of the shareholders of the Company in the
fourth quarter of 2008.
 
 15
  PART
II.
  ITEM 5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
  Our
common stock is 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.  Share prices are adjusted to reflect the 1 for 20
reverse stock split effective on March 14, 2007.
 
 Quarter
      ended
                    
                    High
                    
                    
                    Low3/31/07
                    
                    
                    6.60
                    
                    
                    
                    3.006/30/07
                    
                    
                    4.00
                    
                    
                    
                    2.019/30/07
                    
                    
                    4.25
                    
                    
                    
                    2.9012/31/07
                    
                    
                    3.50
                    
                    
                    
                    2.753/31/08
                    
                    
                    2.80
                    
                    
                    
                    1.306/30/08
                    
                    
                    2.40
                    
                    
                    
                    1.559/30/08
                    
                    
                    2.75
                    
                    
                    
                    1.4012/31/08
                    
                    
                    2.80
                    
                    
                    
                    1.75
 
 From January 1, 2009 through March 18,
2009, the high and low sales prices of our common stock were $2.50 and $1.65,
respectively.
 
 On March
18, 2009, the closing price of our common stock was $2.20.
  As of March 18, 2009, there were 75
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.
  ITEM
6.        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” 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 Securities Exchange Act of 1934, 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 the words “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.
 
 16
  General
  Prior to
January 26, 2007, the Company was classified as a shell company and had no
ongoing operations, minimal operating expenses, no employees and operated under
the name Pace Healthcare Management Systems, Inc.
 
 On
January 26, 2007, we acquired Conmed, Inc., a provider of correctional
healthcare services since 1984. 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
pharmacy and out-of-facility healthcare expenses. 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 by December
2006, it had secured contracts in four (4) states. In January 2007, Conmed, Inc.
was in contract with and serviced 18 detention centers and facilities at the
county level in the United States. 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. As of December 31, 2008 the Company was servicing
detention facilities in thirty-two (32) counties and six (6) states. Our
services have expanded to include the mental health offerings of our new
wholly-owned subsidiary CMHS.
  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.  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 significant accounting policies is as follows:
 
 Acquisition
 Acquisitions
are recorded based on Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS
141”), using the purchase method. Under purchase accounting, assets
acquired should be stated on the financial statements at “fair value” (see
definition in Fair Value of Financial Instruments section
below).  SFAS 141 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.  SFAS
141 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.
 
 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 the
other market factors.  The same assumptions were used to record
financial instruments acquired through the business acquisition at fair
value.
 
 Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, Effective Date of FASB
Statement No. 157, which provides a one year deferral of the effective
date of SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually. Therefore, we have adopted the provisions of SFAS 157 with
respect to its financial assets and liabilities only. SFAS 157 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 SFAS 157 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 SFAS 157 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, which are the following:
  17
  ·
              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 SFAS 157 did not have a material impact on our financial
statements.
 
 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 was calculated based on net present value
of estimated earnings at an interest rate of 20%. Operating income streams were
estimated on a contract by contract basis and an overall cost factor was used to
estimate management expenses. Service contracts acquired are amortized over the
life of each individual contract, ranging from approximately one to five
years.
 
 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, approximately two to five years.
 
 Goodwill
 We
recorded goodwill as the excess of purchase price over the fair value of the
identifiable net assets we acquired. SFAS No. 142, Goodwill and Other Intangible
Assets, prescribes a two-step process for impairment testing of goodwill,
which we perform annually, as well as when an event triggering impairment may
occur. The first step tests for impairment, while the second step, if necessary,
measures the impairment. Since creation of the goodwill, there have been no
indicators of impairment. 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 state
and local 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.
During the twelve month period ended December 31, 2008, the 340-day period ended
December 31, 2007 and the 25-day period ended January 25, 2007, we recorded
approximately $473,000, $26,000 and $6,000, respectively, in such adjustments
which were included in 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. During the
twelve month period ended December 31, 2008, the 340-day period ended December
31, 2007 and the 25-day period ended January 25, 2007, we received stop/loss
reimbursements of approximately $1,060,000, $321,000 and $15,000, respectively,
which were included in revenue.
 
 18
  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
 Effective
January 1, 2006, we adopted SFAS No. 123 Revised, Shared-Based Payments(“SFAS
123R”), using the modified prospective transition method. Prior to that date, we
accounted for stock option awards under Accounting Principles Board Opinion No.
25. In accordance with SFAS 123R, 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.
 
 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.
 
 New
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”). This statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets.  Under SFAS
157, fair value measurements are disclosed by level within that
hierarchy.  The requirements of SFAS 157 were first effective for our
fiscal year beginning January 1, 2008.  However, in February 2008, the
FASB decided that an entity need not apply this standard to nonfinancial assets
and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis until the subsequent
year.  Accordingly, our adoption of this standard on January 1, 2008
is limited to financial assets and liabilities and any nonfinancial assets and
liabilities recognized or disclosed at fair value on a recurring
basis.
 
 In
December 2007, the FASB issued SFAS No. 141(Revised), Business Combinations(“SFAS
141R”).  SFAS 141R replaces the original SFAS 141.  This
statement applies to all transactions in which an entity obtains control of one
or more businesses.  SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at their fair values, with limited exceptions, as of the acquisition
date.  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.  This statement is effective for business
combinations for which the acquisition date is on or after January 1,
2009.  We do not expect the adoption of this statement will have a
material impact on our financial position or results of operations.
 
 19
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS 160”).  SFAS 160
requires companies to report ownership interest in subsidiaries held by other
parties (minority interest) be clearly identified, labeled and presented in the
consolidated statement of financial condition separately within the equity
section.  The amount of consolidated net income attributable to the
parent company and to the noncontrolling interest is to be clearly identified
and presented on the face of the consolidated statement of
income.  The statement is effective beginning January 1,
2009.  We do not expect the adoption of this statement will have a
material impact on our financial position or results of operations.
 
 In June
2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock (“EITF 07-5”). EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and Hedging
Activities (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The
Company is currently evaluating the impact that adopting EITF 07-5 will have on
its financial statements.
 
 Presentation
of Share and Per Share Information
 
 All
common stock share and per share information has been adjusted to reflect the 1
for 20 reverse stock split effective on March 14, 2007.
 
 Results
of Operations
 
 Twelve-Months
Ended December 31, 2008 Compared to the 340-Day Period January 26, 2007 to
December 31, 2007
 The
following discussion of financial results below is derived from audited
financial statements for the twelve months ended December 31, 2008 and the
340-Day Period January 26, 2007 to December 31, 2007 (hereafter referred to as
the “340-Day Period”).
 
 Twelve Months Ended
                    December 31, 2008
                  
                  
                  For the 340-Day Period January
                    26, 2007 to December 31, 2007Amount
                  
                  
                  % of
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of
                    RevenueService contract revenue
                  
                  $
                  40,550,414
                  
                  
                  
                  100.0
                  %
                  
                  $
                  24,568,475
                  
                  
                  
                  100.0
                  %HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                  
                  
                  21,412,861
                  
                  
                  
                  52.8
                  %
                  
                  
                  12,810,048
                  
                  
                  
                  52.1
                  %Medical
      expenses
                  
                  
                  10,378,753
                  
                  
                  
                  25.6
                  %
                  
                  
                  6,253,352
                  
                  
                  
                  25.5
                  %Other
      operating expenses
                  
                  
                  1,333,425
                  
                  
                  
                  3.3
                  %
                  
                  
                  861,296
                  
                  
                  
                  3.5
                  %Total
      healthcare expenses
                  
                  
                  33,125,039
                  
                  
                  
                  81.7
                  %
                  
                  
                  19,924,696
                  
                  
                  
                  81.1
                  %Gross
      profit
                  
                  
                  7,425,375
                  
                  
                  
                  18.3
                  %
                  
                  
                  4,643,779
                  
                  
                  
                  18.9
                  %OPERATING
      EXPENSES:Selling,
      general & administrative expenses
                  
                  
                  6,359,694
                  
                  
                  
                  15.7
                  %
                  
                  
                  4,450,939
                  
                  
                  
                  18.1
                  %Depreciation
      and amortization
                  
                  
                  2,132,748
                  
                  
                  
                  5.3
                  %
                  
                  
                  2,090,977
                  
                  
                  
                  8.5
                  %Total
      operating expenses
                  
                  
                  8,492,442
                  
                  
                  
                  20.9
                  %
                  
                  
                  6,541,916
                  
                  
                  
                  26.6
                  %Operating
      (loss)
                  
                  
                  (1,067,067
                  )
                  
                  
                  (2.6
                  )%
                  
                  
                  (1,898,137
                  )
                  
                  
                  (7.7
                  )%Net
      interest income
                  
                  
                  147,800
                  
                  
                  
                  0.4
                  %
                  
                  
                  306,116
                  
                  
                  
                  1.2
                  %Loss
      before income taxes
                  
                  
                  (919,267
                  )
                  
                  
                  (2.3
                  )%
                  
                  
                  (1,592,021
                  )
                  
                  
                  (6.5
                  )%Income
      tax expense
                  
                  
                  —
                  
                  
                  
                  0.0
                  %
                  
                  
                  162,000
                  
                  
                  
                  0.7
                  %Net
      (loss)
                  
                  $
                  (919,267
                  )
                  
                  
                  (2.3
                  )%
                  
                  $
                  (1,754,021
                  )
                  
                  
                  (7.1
                  )%
 
 20
  Revenues
 Net
revenue from medical services provided primarily to correctional institutions
for the twelve months ended December 31, 2008 and the 340-Day Period, was
$40,550,414 and $24,568,475, respectively, which represents an increase of
$15,981,939 or 65.1%. Net loss was $919,267 or 2.3% of revenue and $1,754,021 or
7.1% of revenue for the twelve months ended December 31, 2008 and the 340-Day
Period, respectively, which represented a decreased loss of
$834,754.
 
 A portion
of the revenue increase, $1,504,565 or 9.4%, was attributable to the 25-day
period from January 1 through January 25, 2008, which corresponding 25-day
period was not included in the results for the prior year.  The
remainder of the increase in revenue for the twelve months ended December 31,
2008 compared to the 340-Day Period resulted primarily from the addition of new
medical service contracts which were acquired after January 26, 2007. Together
these new contracts accounted for approximately $11,502,689 or 72.0% of the
increase in revenue for the period. This increase includes approximately
$7,703,380 in additional revenue from new contracts obtained in 2008 with
Caroline County, MD; City of Chesapeake, VA; Douglas County, OR and Pima County
AZ; plus approximately $3,271,993 in increased revenue reflecting the full
year’s 2008 impact from medical service contracts acquired in 2007. Additional
revenue resulting from the contracts purchased from EMDC and the acquisition of
CMHS, which occurred on February 28, 2008 and November 4, 2008, respectively,
accounted for $527,315 of the increase. Revenue increases totaling approximately
$2,081,413, or 13.0% of the increase, resulted primarily from expansion of the
services provided plus other volume related activities under a number of our
existing contracts in which we were providing services prior to 2007. Price
increases related to existing service requirements totaled approximately
$893,272 or 5.6% of the increase.
  Healthcare
Expenses
 Salaries
and employee benefits
 Salaries
and employee benefits for healthcare employees were $21,412,861 or 52.8% of
revenue for the twelve month period ended December 31, 2008, compared to
$12,810,048 or 52.1% of revenue for the 340-Day Period in 2007. A portion of the
revenue increase, $842,575 or 9.8%, was attributable to the 25-day period from
January 1 through January 25, 2008, which corresponding 25-day period was not
included in the results for the prior year.  The remainder of the
increase in spending for salaries and related employee benefits of $7,760,238 or
60.6% is primarily due to the addition of new healthcare employees required to
support the increased staffing requirements resulting from our new medical
service contracts and expansions in some of our existing
agreements.
  Medical
expenses
 Medical
expenses for the year ended December 31, 2008 and the 340-Day Period in 2007
were $10,378,753 or 25.6% of revenue and $6,253,352 or 25.5% of revenue,
respectively, which represented an increase of $4,125,401 or 66.0%. A portion of
the revenue increase, $439,206 or 10.6%, was attributable to the 25-day period
from January 1 through January 25, 2008, which corresponding 25-day period was
not included in the results for the prior year.  The remainder of the
increase in spending for medical expenses of $3,686,195, or 58.9%, primarily
reflects increases for medical services care resulting primarily from the
increase in medical service contracts. As a percentage of revenue increased
expenditures for pharmacy and out of facility medical services were partially
offset by reduced spending on contracted medical services in facility plus
reduced expenditures on laboratory fees and medical supplies.
 
 Other
operating expenses
 Other
operating expenses were $1,333,425, or 3.3% of revenue, for the twelve months
ended December 31, 2008, compared to $861,296, or 3.5% of revenue, for the
340-Day Period in 2007. A portion of the revenue increase, $45,552 or 9.6%, was
attributable to the 25-day period from January 1 through January 25, 2008, which
corresponding 25-day period was not included in the results for the prior
year.  The remainder of the increase of $426,577 is directly related
to the increase in the number of inmates served as a result of the new service
contracts. The decrease in other operating expenses as a percentage of revenue
reflects reduced expenditures for employment advertising and surety bond fees
partially offset by increased professional services and travel primarily related
to the start up at Pima County.
 
 Operating
Expenses
 Selling,
general and administrative expenses
 Selling,
general and administrative expenses for the year ended December 31, 2008 and the
340-Day Period in 2007 were $6,359,694 or 15.7% of revenue and $4,450,939 or
18.1% of revenue, respectively. A portion of the revenue increase, $92,264 or
6.1%, was attributable to the 25-day period from January 1 through January 25,
2008, which corresponding 25-day period was not included in the results for the
prior year.  The remaining increase of $1,816,491 or 40.8% primarily
reflects investment in additional management and administrative personnel
required to support the Company due to the increase in medical service
contracts, higher legal accounting and other professional fees as well as
additional costs associated with our new headquarters at Hanover,
Maryland.  Equity based compensation for the twelve month period ended
December 31, 2008 and the 340-Day Period in 2007was $573,775 and $556,449,
respectively.
 
 21
  Depreciation
and amortization
 Depreciation and amortization reflects
the amortization of intangible assets related to the acquisition of Conmed, Inc.
and CMHS in January 2007 and November 2008, respectively, and the purchase of
medical service contracts from EMDC in February 2008. Amortization of service
contracts acquired for the twelve months ended December 31, 2008 was $1,693,000,
compared to $1,801,000 for the 340-Day Period in 2007. The reduced amortization
reflects certain individual medical service contracts acquired in the
Acquisition that have become fully amortized partially offset by amortization of
the service contracts acquired in 2008 from CMHS and EMDC as well as the
comparison of the twelve month period ended December 31, 2008 to the 340-Day
Period in 2007. Amortization of non-compete agreements was $327,333 and $251,000
for the twelve months ended December 31, 2008 and the 340-Day Period in 2007,
respectively reflecting additional amortization resulting from the acquisition
of EMDC and CMHS as well as the comparison of the twelve month period ended
December 31, 2008 to the 340-Day Period in 2007. Depreciation expense increased
to $112,415 for the twelve months ended December 31, 2008, compared to $38,977
for the 340-Day Period in 2007 due primarily to capital expenditures associated
with the new corporate office in Hanover, Maryland as well as the comparison of
the twelve month period ended December 31, 2008 to the 340-Day Period in
2007.
 
 Interest
income
 Interest income for the year ended
December 31, 2008 and the 340-Day Period in 2007 was $154,949 and $312,964,
respectively, reflecting lower short-term average interest rates for the current
period that were partially offset by higher average cash balances.
 
 Interest
expense
 Interest expense for the year ended
December 31, 2008 increased to $7,149 compared to $6,848 for the 340-Day Period
in 2007.
 
 Income
tax expense
 Management
applied a valuation allowance against certain deferred tax assets because of a
limited history of taxable income, the long-term nature of the deferred tax
asset and certain limitations regarding the utilization of the net operating
loss carryforwards. We have recorded a current tax payable for the amount of tax
that is expected to be paid for the current year and we have recognized a
deferred tax asset limited to tax paid or expected to be paid. As a result, we
have an effective tax rate of zero and there is no tax expense shown in the
financial statements for the twelve months ended December 31, 2008.
 
 Liquidity
and Capital Resources
  Financing
is generally provided by funds generated from our operating activities. Current
working capital balances and funds used to acquire Conmed, Inc. in January 2007
were provided by the private placement of $15,000,000 of units of Series B
Convertible Preferred Stock and warrants completed on January 26, 2007 (the
“Private Placement”).  Funds used to acquire the EMDC contracts and
CMHS were provided by working capital.
 
 Cash
Flow for the year ended December 31, 2008 compared to the 340-Day Period January
26, 2007 to December 31, 2007
 Cash as
of December 31, 2008 and December 31, 2007 was $7,472,140 and $7,136,720,
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 flow
from operations 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 last year as well as the accrued hold back
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 flow from
operations for the 340-Day Period in 2007 totaled $1,368,954, reflecting a net
loss of $1,754,021 offset by $2,719,984 in adjustments for non-cash expenses
such as amortization and stock-based compensation and $402,991 in changes in
working capital components because of increases in accrued expenses and deferred
revenue and a decrease in prepaid expenses partially offset by an increase in
accounts receivable and a decrease in accounts payable.  The increase
in accrued expenses, accounts receivable and deferred revenue resulted primarily
from the increase in revenue and related expenses.  The decrease in
accounts payable resulted primarily from the additional cash available from the
private placement that was used to pay vendors as well as the increase in
accrued expenses.  The decrease in prepaid expenses resulted primarily
from expenses related to the Acquisition.
 
 22
 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. Cash flow from
investing activities for the 340-Day Period in 2007 used $8,002,784. The
Acquisition used $7,794,597 and purchases of computer and office equipment used
$208,187.
 
 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.  Cash flow from financing activities for the
340-Day Period in 2007 provided cash of $13,108,245. Net cash proceeds from the
Private Placement were $12,916,997, and a short-term loan to finance the
purchase of an insurance policy added $289,368 partially offset by payments on
an automobile loan and the short-term loan of $296,120. Proceeds from the
exercise of 120,000 warrants totaled $36,000.
 
 Loans
 As of
December 31, 2008, we had a note outstanding for a vehicle in the amount of
$5,443 and two short-term notes payable for $44,785 and $55,000,
respectively.
 
 Line
of Credit
 As of
December 31, 2008, we had $100,000 outstanding on a $100,000 line of credit
related to the CMHS acquisition. The line of credit expires on December 31,
2009.
  Off
Balance Sheet Arrangements
 We are
required to provide performance and payment guarantee bonds to county
governments under certain contracts. As of December 31, 2008, we have three
performance bonds totaling $7,845,325 and two payment bonds for $2,785,281,
totaling $10,630,606. 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, 2008:
  Total
                      
                      
                      Current
                      
                      
                      2
      - 3 years
                      
                      
                      4
      - 5 years
                      
                      
                      ThereafterAutomobile
      loan
                      
                      $
                      5,443
                      
                      
                      $
                      5,443
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Notes
      payable
                      
                      
                      101,244
                      
                      
                      
                      66,244
                      
                      
                      
                      35,000
                      
                      
                      
                      —
                      
                      
                      
                      —Line
      of credit
                      
                      
                      100,000
                      
                      
                      
                      100,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Office
      equipment leases
                      
                      
                      189,650
                      
                      
                      
                      57,643
                      
                      
                      
                      84,487
                      
                      
                      
                      47,520
                      
                      
                      
                      —Automobile
      leases
                      
                      
                      74,535
                      
                      
                      
                      34,538
                      
                      
                      
                      39,997
                      
                      
                      
                      —
                      
                      
                      
                      —Office
      space leased & other facility leases
                      
                      
                      681,993
                      
                      
                      
                      222,978
                      
                      
                      
                      298,801
                      
                      
                      
                      160,214
                      
                      
                      
                      —Total
                      
                      $
                      1,152,865
                      
                      
                      $
                      486,846
                      
                      
                      $
                      458,285
                      
                      
                      $
                      207,734
                      
                      
                      $
                      —
  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, 2008, we have entered into 48 agreements with county governments to
provide medical and healthcare services primarily to county correctional
institutions. Most of these contracts are for multiple years and include option
renewal periods which are, in all cases, at the county'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 $160 million as of
December 31, 2008, with a weighted-average term of 4.5 years, of which
approximately $45 million relates to the initial contract period and
approximately $115 million relates to the option renewal
periods.
  23
  ITEM
7A.            
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Not
applicable because the Company is a Smaller Reporting Company.
  24
  ITEM
8.          FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.
 
 CONTENTS
 
 REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                    26CONSOLIDATED
      FINANCIAL STATEMENTSConsolidated
      Balance Sheets
                    27Consolidated
      Statements of Operations
                    28Consolidated
      Statements of Shareholders' Equity
                    29Consolidated
      Statements of Cash Flows
                    30Notes
      to Consolidated Financial Statements
                    32
  25
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  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, 2008 and 2007 (successor),
and the related consolidated statements of operations, shareholders' equity and
cash flows for the twelve months ended December 31, 2008 (successor), the 340
day period January 26, 2007 to December 31, 2007 (successor) and the 25 day
period January 1, 2007 to January 25, 2007 (predecessor). 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, 2008 and 2007 (successor), and the results
of their operations and their cash flows for the twelve months ended December
31, 2008 (successor), the 340 day period January 26, 2007 to December 31, 2007
(successor) and the 25 day period January 1, 2007 to January 25, 2007
(predecessor) in conformity with U.S. generally accepted accounting
principles.
 
 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, 2008 and 2007, included in the accompanying Annual Report on Form
10-K and, accordingly, we do not express an opinion thereon.
 
 /s/
McGladrey & Pullen, LLP
 McGladrey
& Pullen, LLP
 Des
Moines, Iowa
 July
13, 2009
  26
  CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
 
 SUCCESSOR
                        December 31, 2008
                      
                      
                      SUCCESSOR
                        December 31, 2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      7,472,140
                      
                      
                      $
                      7,136,720Accounts
      receivable
                      
                      
                      2,375,583
                      
                      
                      
                      1,622,424Prepaid
      expenses
                      
                      
                      291,599
                      
                      
                      
                      214,834Total
      current assets
                      
                      
                      10,139,322
                      
                      
                      
                      8,973,978PROPERTY
      AND EQUIPMENT, NET
                      
                      
                      529,304
                      
                      
                      
                      212,815DEFERRED
      TAXES
                      
                      
                      645,000
                      
                      
                      
                      90,000OTHER
      ASSETSService
      contracts acquired, net
                      
                      
                      2,004,000
                      
                      
                      
                      2,699,000Non-compete
      agreements, net
                      
                      
                      821,667
                      
                      
                      
                      749,000Goodwill
                      
                      
                      6,254,544
                      
                      
                      
                      4,852,338Deposits
                      
                      
                      15,408
                      
                      
                      
                      58,698Total
      other assets
                      
                      
                      9,095,619
                      
                      
                      
                      8,359,036$
                      20,409,245
                      
                      
                      $
                      17,635,829LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      1,080,259
                      
                      
                      $
                      837,144Accrued
      expenses
                      
                      
                      3,210,749
                      
                      
                      
                      1,563,020Deferred
      revenue
                      
                      
                      561,734
                      
                      
                      
                      353,075Notes
      payable, current portion
                      
                      
                      170,228
                      
                      
                      
                      7,798Income
      taxes payable
                      
                      
                      432,380
                      
                      
                      
                      5,000Total
      current liabilities
                      
                      
                      5,455,350
                      
                      
                      
                      2,766,037NOTES
      PAYABLE, LONG-TERM
                      
                      
                      35,000
                      
                      
                      
                      5,418SHAREHOLDERS'
      EQUITYPreferred
      stock no par value; authorized 5,000,000 shares; issued and outstanding
      zero shares as of December 31, 2008 and December 31, 2007
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $0.0001 par value, authorized 40,000,000 shares; issued and
      outstanding 12,457,539 and 11,943,141  shares as of December 31,
      2008 and 2007, respectively
                      
                      
                      1,246
                      
                      
                      
                      1,194Additional
      paid-in capital
                      
                      
                      36,875,610
                      
                      
                      
                      35,901,874Retained
      (deficit)
                      
                      
                      (21,957,961
                      )
                      
                      
                      (21,038,694
                      )Total
      shareholders' equity
                      
                      
                      14,918,895
                      
                      
                      
                      14,864,374$
                      20,409,245
                      
                      
                      $
                      17,635,829
  See
Notes to Consolidated Financial Statements.
  27
  CONMED
HEALTHCARE MANAGEMENT, INC.  AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 SUCCESSOR
                                                    For the Twelve
                                                    Months Ended
                                                    December 31,
                                                    2008
                                                  
                                                  
                                                  SUCCESSOR
                                                    For the 340-Day
                                                    Period January
                                                    26,2007 to
                                                    December31,
                                                    2007
                                                  
                                                  
                                                  PREDECESSOR
                                                    For the 25-Day
                                                    Period January1,
                                                    2007 toJanuary
                                                    25, 2007Service
      contract revenue
                                                  
                                                  $
                                                  40,550,414
                                                  
                                                  
                                                  $
                                                  24,568,475
                                                  
                                                  
                                                  $
                                                  1,504,565HEALTHCARE
      EXPENSES:Salaries,
      wages and employee benefits
                                                  
                                                  
                                                  21,412,861
                                                  
                                                  
                                                  
                                                  12,810,048
                                                  
                                                  
                                                  
                                                  842,575Medical
      expenses
                                                  
                                                  
                                                  10,378,753
                                                  
                                                  
                                                  
                                                  6,253,352
                                                  
                                                  
                                                  
                                                  439,206Other
      operating expenses
                                                  
                                                  
                                                  1,333,425
                                                  
                                                  
                                                  
                                                  861,296
                                                  
                                                  
                                                  
                                                  45,552Total
      healthcare expenses
                                                  
                                                  
                                                  33,125,039
                                                  
                                                  
                                                  
                                                  19,924,696
                                                  
                                                  
                                                  
                                                  1,327,333Gross
      profit
                                                  
                                                  
                                                  7,425,375
                                                  
                                                  
                                                  
                                                  4,643,779
                                                  
                                                  
                                                  
                                                  177,232Selling
      and administrative expenses
                                                  
                                                  
                                                  6,359,694
                                                  
                                                  
                                                  
                                                  4,450,939
                                                  
                                                  
                                                  
                                                  92,264Depreciation
      and amortization
                                                  
                                                  
                                                  2,132,748
                                                  
                                                  
                                                  
                                                  2,090,977
                                                  
                                                  
                                                  
                                                  1,698Total
      operating expenses
                                                  
                                                  
                                                  8,492,442
                                                  
                                                  
                                                  
                                                  6,541,916
                                                  
                                                  
                                                  
                                                  93,962Operating
      income (loss)
                                                  
                                                  
                                                  (1,067,067
                                                  )
                                                  
                                                  
                                                  (1,898,137
                                                  )
                                                  
                                                  
                                                  83,270INTEREST
      INCOME (EXPENSE)Interest
      income
                                                  
                                                  
                                                  154,949
                                                  
                                                  
                                                  
                                                  312,964
                                                  
                                                  
                                                  
                                                  287Interest
      (expense)
                                                  
                                                  
                                                  (7,149
                                                  )
                                                  
                                                  
                                                  (6,848
                                                  )
                                                  
                                                  
                                                  (93
                                                  )Total
      interest income
                                                  
                                                  
                                                  147,800
                                                  
                                                  
                                                  
                                                  306,116
                                                  
                                                  
                                                  
                                                  194(Loss)
      before income taxes
                                                  
                                                  
                                                  (919,267
                                                  )
                                                  
                                                  
                                                  (1,592,021
                                                  )
                                                  
                                                  
                                                  83,464Income
      tax expense
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  162,000
                                                  
                                                  
                                                  
                                                  —Net
      (loss)
                                                  
                                                  $
                                                  (919,267
                                                  )
                                                  
                                                  $
                                                  (1,754,021
                                                  )
                                                  
                                                  $
                                                  83,464(LOSS)
      PER COMMON SHAREBasic
      and diluted
                                                  
                                                  $
                                                  (0.08
                                                  )
                                                  
                                                  
                                                  (0.17
                                                  )WEIGHTED-AVERAGE
      SHARES OUTSTANDINGBasic
      and diluted
                                                  
                                                  
                                                  12,090,399
                                                  
                                                  
                                                  
                                                  10,310,994
  See
Notes to Consolidated Financial Statements.
  28
  CONMED
HEALTHCARE MANAGEMENT, INC.  AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 YEARS
ENDED DECEMBER 31, 2008 AND 2007
 
 Preferred
                                  
                                  
                                  Preferred
                                  
                                  
                                  Preferred
                                  
                                  
                                  Preferred
                                  
                                  
                                  Preferred
                                  
                                  
                                  Preferred
                                  
                                  
                                  Common
                                  
                                  
                                  Common
                                  
                                  
                                  Additional
                                  
                                  
                                  Retained
                                    EarningsStock A
                                  
                                  
                                  Stock A
                                  
                                  
                                  Stock B
                                  
                                  
                                  Stock B
                                  
                                  
                                  Stock C
                                  
                                  
                                  Stock C
                                  
                                  
                                  Stock
                                  
                                  
                                  Stock
                                  
                                  
                                  Paid-In
                                  
                                  
                                  (AccumulatedShares
                                  
                                  
                                  Amount
                                  
                                  
                                  Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Deficit)
                                  
                                  
                                  TotalPredecessorBalance,
      December 31, 2006
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  300
                                  
                                  
                                  $
                                  300
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  8,355
                                  
                                  
                                  $
                                  8,655Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  83,464
                                  
                                  
                                  
                                  83,464Balance,
      January 25, 2007
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  300
                                  
                                  
                                  $
                                  300
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  91,819
                                  
                                  
                                  $
                                  92,119SuccessorBalance,
      January 26, 2007
                                  
                                  
                                  2,875,000
                                  
                                  
                                  $
                                  2,875,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  415,804
                                  
                                  
                                  $
                                  42
                                  
                                  
                                  $
                                  17,748,580
                                  
                                  
                                  $
                                  (19,284,673
                                  )
                                  
                                  $
                                  1,338,949Sale
      of Series B Preferred Stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  12,916,997
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  12,916,997Issuance
      of Series C Preferred Stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,000
                                  
                                  
                                  
                                  1,608,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,608,000Conversion
      of Series A Preferred Stock
                                  
                                  
                                  (2,875,000
                                  )
                                  
                                  
                                  (2,875,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,584,222
                                  
                                  
                                  
                                  458
                                  
                                  
                                  
                                  2,874,542
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Conversion
      of Series B Preferred Stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (15,000
                                  )
                                  
                                  
                                  (12,916,997
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,000,000
                                  
                                  
                                  
                                  600
                                  
                                  
                                  
                                  12,916,397
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Conversion
      of Series C Preferred Stock
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8,000
                                  )
                                  
                                  
                                  (1,608,000
                                  )
                                  
                                  
                                  800,000
                                  
                                  
                                  
                                  80
                                  
                                  
                                  
                                  1,607,920
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Exercise
      of warrants, including tax benefit of $162,000
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  143,115
                                  
                                  
                                  
                                  14
                                  
                                  
                                  
                                  197,986
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  198,000Stock
      option expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  556,449
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  556,449Net
      (loss)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,754,021
                                  )
                                  
                                  
                                  (1,754,021
                                  )Balance,
      December 31, 2007
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  11,943,141
                                  
                                  
                                  $
                                  1,194
                                  
                                  
                                  $
                                  35,901,874
                                  
                                  
                                  $
                                  (21,038,694
                                  )
                                  
                                  $
                                  14,864,374Issuance
      of shares for asset purchase of EMDC contracts
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  81,081
                                  
                                  
                                  
                                  9
                                  
                                  
                                  
                                  200,004
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  200,013Issuance
      of shares for stock purchase of CMHS
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  81,317
                                  
                                  
                                  
                                  8
                                  
                                  
                                  
                                  199,992
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  200,000Exercise
      of warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  352,000
                                  
                                  
                                  
                                  35
                                  
                                  
                                  
                                  (35
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Stock
      option expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  573,775
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  573,775Net
      (loss)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (919,267
                                  )
                                  
                                  
                                  (919,267
                                  )Balance,
      December 31, 2008
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  
                                  12,457,539
                                  
                                  
                                  $
                                  1,246
                                  
                                  
                                  $
                                  36,875,610
                                  
                                  
                                  $
                                  (21,957,961
                                  )
                                  
                                  $
                                  14,918,895
 
 See
Notes to Consolidated Financial Statements.
  29
  CONMED
HEALTHCARE MANAGEMENT, INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 SUCCESSOR
                                            For the Twelve
                                            Months Ended
                                            December 31,
                                            2008
                                          
                                          
                                          SUCCESSOR
                                            For the 340-Day
                                            Period January26,
                                            2007 toDecember
                                            31,2007
                                          
                                          
                                          PREDECESSOR
                                            For the 25-Day
                                            Period January 1,
                                            2007 to January
                                            25, 2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                                          
                                          $
                                          (919,267
                                          )
                                          
                                          $
                                          (1,754,021
                                          )
                                          
                                          $
                                          83,464Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activitiesDepreciation
                                          
                                          
                                          112,415
                                          
                                          
                                          
                                          39,535
                                          
                                          
                                          
                                          1,698Amortization
                                          
                                          
                                          2,020,333
                                          
                                          
                                          
                                          2,052,000
                                          
                                          
                                          
                                          —Stock-based
      compensation
                                          
                                          
                                          573,775
                                          
                                          
                                          
                                          556,449
                                          
                                          
                                          
                                          —Loss
      on disposal of property
                                          
                                          
                                          2,257
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Deferred
      income taxes
                                          
                                          
                                          (555,000
                                          )
                                          
                                          
                                          (90,000
                                          )
                                          
                                          
                                          —Income
      tax benefit for warrant exercises
                                          
                                          
                                          —
                                          
                                          
                                          
                                          162,000
                                          
                                          
                                          
                                          —Changes
      in working capital componentsDecrease
      (increase) in accounts receivable
                                          
                                          
                                          (623,459
                                          )
                                          
                                          
                                          (512,785
                                          )
                                          
                                          
                                          197,327Decrease
      (increase) in prepaid expenses
                                          
                                          
                                          (75,083
                                          )
                                          
                                          
                                          329,035
                                          
                                          
                                          
                                          30,687Increase
      (decrease) in deposits
                                          
                                          
                                          45,000
                                          
                                          
                                          
                                          (56,274
                                          )
                                          
                                          
                                          —Increase
      (decrease) in accounts payable
                                          
                                          
                                          243,115
                                          
                                          
                                          
                                          (415,917
                                          )
                                          
                                          
                                          258,562Increase
      (decrease) in accrued expenses
                                          
                                          
                                          1,350,865
                                          
                                          
                                          
                                          937,375
                                          
                                          
                                          
                                          (469,320
                                          )Increase
      (decrease) in income taxes payable
                                          
                                          
                                          427,380
                                          
                                          
                                          
                                          (157,000
                                          )
                                          
                                          
                                          —Increase
      (decrease) in deferred revenue
                                          
                                          
                                          208,659
                                          
                                          
                                          
                                          278,557
                                          
                                          
                                          
                                          (29,155
                                          )Net
      cash provided by operating activities
                                          
                                          
                                          2,810,990
                                          
                                          
                                          
                                          1,368,954
                                          
                                          
                                          
                                          73,263CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                          
                                          
                                          (426,161
                                          )
                                          
                                          
                                          (208,187
                                          )
                                          
                                          
                                          —Stock
      purchase of CMHS, LLC
                                          
                                          
                                          (1,767,855
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Asset
      Purchase from EMDC, P.C.
                                          
                                          
                                          (245,853
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Acquisition
      of Conmed, Inc., net of cash acquired
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (7,794,597
                                          )
                                          
                                          
                                          —Net
      cash (used in) investing activities
                                          
                                          
                                          (2,439,869
                                          )
                                          
                                          
                                          (8,002,784
                                          )
                                          
                                          
                                          —CASH
      FLOWS FROM FINANCING ACTIVITIESBorrowings
      on line of credit
                                          
                                          
                                          39,903
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Short-term
      borrowings
                                          
                                          
                                          —
                                          
                                          
                                          
                                          289,368
                                          
                                          
                                          
                                          —Payments
      in loans payable
                                          
                                          
                                          (75,604
                                          )
                                          
                                          
                                          (296,120
                                          )
                                          
                                          
                                          (594
                                          )Net
      proceeds from Private Placement
                                          
                                          
                                          —
                                          
                                          
                                          
                                          12,916,997
                                          
                                          
                                          
                                          —Proceeds
      from exercise of warrants
                                          
                                          
                                          —
                                          
                                          
                                          
                                          36,000
                                          
                                          
                                          
                                          —Income
      tax benefit from warrant exercise
                                          
                                          
                                          —
                                          
                                          
                                          
                                          162,000
                                          
                                          
                                          
                                          —Net
      cash provided by (used in) financing activities
                                          
                                          
                                          (35,701
                                          )
                                          
                                          
                                          13,108,245
                                          
                                          
                                          
                                          (594
                                          )Net
      increase in cash and cash equivalents
                                          
                                          
                                          335,420
                                          
                                          
                                          
                                          6,474,415
                                          
                                          
                                          
                                          72,669CASH
      AND CASH EQUIVALENTSBeginning
                                          
                                          
                                          7,136,720
                                          
                                          
                                          
                                          662,305
                                          
                                          
                                          
                                          122,269Ending
                                          
                                          $
                                          7,472,140
                                          
                                          
                                          $
                                          7,136,720
                                          
                                          
                                          $
                                          194,938
  30
  CONMED
HEALTHCARE MANAGEMENT, INC.  AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 SUCCESSOR
                                For the Twelve
                                Months Ended
                                December 31,
                                2008
                              
                              
                              SUCCESSOR
                                For the 340-Day
                                Period January
                                26, 2007 to
                                December 31,
                                2007
                              
                              
                              PREDECESSOR
                                For the 25-Day
                                Period January 1,
                                2007 to January
                                25, 2007NON-CASH
      INVESTING AND FINANCING ACTIVITIES WERE AS FOLLOWS:Escrow
      payments on Acquisition in prior periods
                              
                              $
                              —
                              
                              
                              $
                              500,000
                              
                              
                              $
                              —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
                              
                              
                              
                              —
                              
                              
                              
                              —Acquisition
      expenses paid in prior periods
                              
                              
                              —
                              
                              
                              
                              239,935
                              
                              
                              
                              —Private
      Placement expenses paid in prior periods
                              
                              
                              —
                              
                              
                              
                              148,652
                              
                              
                              
                              —$
                              590,621
                              
                              
                              $
                              888,587
                              
                              
                              $
                              —SUPPLEMENTAL
      DISCLOUSURES OF CASH FLOW INFORMATIONCash
      payments for interest
                              
                              $
                              7,149
                              
                              
                              $
                              6,848
                              
                              
                              $
                              93Income
      taxes paid
                              
                              $
                              127,620
                              
                              
                              $
                              85,000
                              
                              
                              $
                              —
 
 See
Notes to Consolidated Financial Statements.
  31
  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) formerly known as Pace Health
Management Systems, Inc. (“Pace”) traded under the symbol “PCES”, was classified
as a public shell, had no ongoing operations, minimal operating expenses and no
employees.
 
 On
January 26, 2007, the Company acquired Conmed, Inc. (“Conmed, Inc.”) a 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
expenses. 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.
 
 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. As
of December 31, 2008, we were in contract with, and currently providing medical
services in thirty-two counties in six states including:  Arizona,
Kansas, Maryland, Oregon, Virginia and Washington.
  Stock
Purchase Agreement
 On August
2, 2006, we entered into a Stock Purchase Agreement (“Agreement”) with Conmed,
Inc., a Maryland corporation and all of the stockholders of Conmed, Inc., (the
“Conmed, Inc. Stockholders”), pursuant to which we agreed to purchase all the
issued and outstanding capital stock of Conmed, Inc. from the Conmed, Inc.
Stockholders. We previously reported the execution of the Agreement in a Form
8-K filed on August 8, 2006, and its extension in a Form 8-K filed on January
17, 2007.
 
 We paid
to Conmed, Inc., a non-refundable cash deposit of $250,000 upon execution of the
Agreement, which was released to the Conmed, Inc. Stockholders upon expiration
of the original agreement on October 31, 2006. Thereafter, an amendment to the
Agreement was executed on January 12, 2007 to extend the closing date to January
31, 2007. As a result of such extension, and upon execution of such amendment,
we paid to Conmed, Inc. an additional non-refundable cash deposit of $250,000,
which was deducted from the $8,000,000 cash payment paid to the Conmed, Inc.
Stockholders at the closing of the Acquisition.
 
 On
January 26, 2007, the Acquisition was completed and under the terms of the
Agreement, we paid to the Conmed, Inc. Stockholders consideration consisting of:
(i) $8,000,000 in cash, plus the initial cash deposit of $250,000 and an
adjustment of $30,602 representing an adjustment for shortfall in the minimum
equity requirement of Conmed, Inc. and (ii) 8,000 shares of Pace's Series C
Convertible Preferred Stock, which was subsequently converted into 800,000
shares of common stock effective March 14, 2007.
 
 The
amounts shown in the Consolidated Statements of Operations and Cash Flows for
the 25-day period from January 1, 2007 to January 25, 2007 are all Conmed, Inc.
pre-Acquisition amounts and hence are designated as PREDECESSOR amounts. The
amounts for the periods after January 25, 2007 are after the Acquisition and
reflect the combined activities of Conmed, Inc. and Conmed Healthcare
Management, Inc. from the date of Acquisition and, as a result, these amounts
are designated as SUCCESSOR amounts. The Consolidated Balance Sheet includes the
consolidated amounts of Conmed Healthcare Management, Inc., Conmed, Inc., Conmed
Oregon, Inc. and Correctional Mental Health Services LLC as of December 31, 2008
and December 31, 2007 and, as a result, are designated as SUCCESSOR
amounts.
 
 Private
Placement
 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.
  32
  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 (“Series B 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 a
private offering pursuant to an exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder. Each Unit was sold for $100,000, for an aggregate
purchase price of $15,000,000. The proceeds from the sale of the Units were used
to purchase all the issued and outstanding capital stock of Conmed, Inc. and to
provide working capital following such purchase. The fair value of the 1,500,000
and 500,000 warrants issued using the Black-Scholes pricing model was $2,628,347
and $289,664, respectively
  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 the following compensation: (i) a cash fee of 10%
of the gross proceeds (an aggregate of $1,500,000) and (ii) 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). In addition, we reimbursed the Placement Agent for its accountable
expenses in the amount of $50,000, as well as filing fees associated with Blue
Sky filings, in the amount of $5,000. The fair value of the 300,000 warrants
issued using the Black-Scholes pricing model was $154,940.
 
 Plan
of Recapitalization
 On March
13, 2007, at a special shareholders meeting, our shareholders approved the Plan
of Recapitalization (the “Plan of Recapitalization”) and implemented the
following actions, effective as of the close of business on March 14,
2007:
 
 o
                Reincorporate the
      Company into the State of Delaware pursuant to the Merger
      Agreement. Created a subsidiary (the “Merger Sub”) under the
      laws of the State of Delaware and merged the Company into the Merger Sub.
      All of the liabilities and assets of the Company existing prior to the
      reincorporation were transferred, assumed and assigned to the Delaware
      entity. The certificate of incorporation and bylaws of the Delaware entity
      became our new Certificate of Incorporation and Bylaws, and reflect the
      Plan of Recapitalization.
 
 o
                Change in name.
      Changed our name from Pace Health Management Systems, Inc. to Conmed
      Healthcare Management, Inc.
 
 o
                Reverse stock
      split. Enacted a reverse stock split on a 1 for 20 basis; thereby
      reducing the number of outstanding shares to 415,830 shares of common
      stock from the 8,316,074 shares of common stock outstanding at that
      time.
 
 o
                Change in authorized
      shares. Increased the number of authorized common shares to
      40,000,000.
 
 o
                Conversion of Series A
      Preferred Stock. Converted the Series A Preferred Stock (and the
      waiver of all accrued and unpaid dividends and liquidation rights on the
      Series A Preferred Stock after conversion of 50% of such accrued and
      unpaid dividends into shares of common stock in connection with the
      transactions contemplated by the Plan of Recapitalization) into 4,584,196
      shares of common stock on a post-reverse split
  basis.
 
 As a
result of the approval of the Plan of Recapitalization by our shareholders, in
addition to the conversion of Series A Preferred Stock, the 15,000 shares of
Series B Preferred Stock and the 8,000 shares of Series C Preferred Stock
converted into 6,000,000 and 800,000 shares of common stock, respectively,
following the reverse stock split. As a result of the reverse stock split and
the conversion of all the outstanding preferred stock, the total number of
shares of Conmed, Inc. common stock outstanding was approximately 11,800,000 and
no preferred shares remained outstanding.
 .
 A
certificate of merger and articles of merger were filed with the Secretary of
State of the States of Delaware and Iowa, respectively, on March 13, 2007, and
each became effective as of the close of business on March 14,
2007.
  33
  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.  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 the Company's 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 based on Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS
141”), using the purchase method. Under purchase accounting, assets
acquired should be stated on the financial statements at “fair value” (see
definition in Fair Value of Financial Instruments section
below).  SFAS 141 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.  SFAS
141 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.
 
 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 was calculated based on net present value
of estimated earnings at an interest rate of 20%. Operating income streams were
estimated on a contract by contract basis and an overall cost factor was used to
estimate management expenses. Service contracts acquired are amortized over the
life of each individual contract, ranging from approximately one to five
years.
 
 Projected
amortization of service contracts at December 31, 2008 is as
follows:
 
 2009
                            
                            
                            1,370,0002010
                            
                            
                            434,0002011
                            
                            
                            159,0002012
                            
                            
                            30,0002013
                            
                            
                            11,000$
                            2,004,000
 
 Accumulated
amortization of service contracts as of December 31, 2008 and 2007 was
$3,494,000 and $1,801,000, respectively.
  Service
contract amortization expense recognized was $1,693,000, $1,801,000 and $0 for
the twelve months ended December 31, 2008, the 340-day period ended December 31,
2007 and the 25-day period ended January 25, 2007, respectively.
 
 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, approximately two to five years.
  34
  Projected
amortization of non-compete agreements at December 31, 2008 is as
follows:
 
 2009
                          
                          
                          385,0002010
                          
                          
                          266,0002011
                          
                          
                          68,0002012
                          
                          
                          56,0002013
                          
                          
                          46,667$
                          821,667
 
 Accumulated
amortization of non-compete agreements as of December 31, 2008 and 2007 was
$578,333 and $251,000, respectively.
 
 Non-compete
amortization expense recognized was $327,333, $251,000 and $0 for the twelve
months ended December 31, 2008, the 340-day period ended December 31, 2007 and
the 25-day period ended January 25, 2007, respectively.
 
 Goodwill
 We
recorded as goodwill the excess of purchase price over the fair value of the
identifiable net assets acquired.  SFAS No. 142, Goodwill and Other Intangible
Assets, prescribes a two-step process for impairment testing of goodwill,
which is performed annually, as well as when an event triggering impairment may
have occurred. The first step tests for impairment, while the second step, if
necessary, measures the impairment. Since creation of the goodwill there have
been no indicators of impairment. 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 a maturity of three
months or less to be cash equivalents. At December 31, 2008 and December 31,
2007, cash equivalents consisted of an interest-bearing money market account 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 the
other market factors.  The same assumptions were used to record
financial instruments acquired through the business acquisition at fair
value.  See the disclosure concerning business combinations in Note
3.
 
 Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements
(“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, Effective Date of FASB
Statement No. 157, which provides a one year deferral of the effective
date of SFAS 157 for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value
at least annually. Therefore, we have adopted the provisions of SFAS 157 with
respect to its financial assets and liabilities only. SFAS 157 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 SFAS 157 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 SFAS 157 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, which are the following:
  ·
                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.
  35
  ·
                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 SFAS 157 did not have a material impact on our financial
statements.
 
 Principles
of Consolidation
 The
consolidated financial statements include the accounts of the Company and our
wholly owned subsidiaries, Conmed, Inc, Conmed Oregon, Inc and 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 state
and local 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.
During the twelve month period ended December 31, 2008, the 340-day period ended
December 31, 2007 and the 25-day period ended January 25, 2007, we recorded
approximately $473,000, $26,000 and $6,000, respectively, in such adjustments
which were included in 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. During the
twelve month period ended December 31, 2008, the 340-day period ended December
31, 2007 and the 25-day period ended January 25, 2007, we received stop/loss
reimbursements of approximately $1,060,000, $321,000 and $15,000, respectively,
which were included in 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. As of December 31, 2008 and December 31,
2007, there was no allowance for doubtful receivables. There was no bad debt
expense for the twelve months ended December 31, 2008, the 340-day period ended
December 31, 2007 and the 25-day period ended January 25, 2007.
 
 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.
  36
  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
 Effective
January 1, 2006, we adopted SFAS No. 123 Revised, Shared-Based Payments(“SFAS
123R”), using the modified prospective transition method. Prior to that date, we
accounted for stock option awards under Accounting Principles Board Opinion No.
25. In accordance with SFAS 123R, 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.
 
 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 Loss Per Share
 We have
adopted SFAS No. 128, Earnings
per Share ("SFAS 128"), 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
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
157”). This statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets.  Under SFAS
157, fair value measurements are disclosed by level within that
hierarchy.  The requirements of SFAS 157 were first effective for our
fiscal year beginning January 1, 2008.  However, in February 2008, the
FASB decided that an entity need not apply this standard to nonfinancial assets
and liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis until the subsequent
year.  Accordingly, our adoption of this standard on January 1, 2008
is limited to financial assets and liabilities and any nonfinancial assets and
liabilities recognized or disclosed at fair value on a recurring
basis.
 
 In
December 2007, the FASB issued SFAS No. 141(Revised), Business Combinations (“SFAS
141R”). SFAS 141R replaces the original SFAS No. 141. This statement applies to
all transactions in which an entity obtains control of one or more businesses.
SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at their fair values,
with limited exceptions, as of the acquisition date. 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. SFAS 141R is effective for business
combinations for which the acquisition date is on or after January 1, 2009. We
do not expect the adoption of SFAS 141R will have a material impact on our
financial position or results of operations.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS 160”). SFAS 160 requires
companies to report ownership interest in subsidiaries held by other parties
(minority interest) be clearly identified, labeled and presented in the
consolidated statement of financial condition separately within the equity
section. The amount of consolidated net income attributable to the parent
company and to the noncontrolling interest is to be clearly identified and
presented on the face of the consolidated statement of income. SFAS 160 is
effective beginning January 1, 2009. We do not expect the adoption of this
statement will have a material impact on our financial position or results of
operations.
  37
 
 In June
2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock (“EITF 07-5”). EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133, Accounting for Derivatives and Hedging
Activities (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The
Company is currently evaluating the impact that adopting EITF 07-5 will have on
its financial statements.
 
 Presentation
of Share and Per Share Information
 All
common stock shares and per share information has been adjusted to reflect the 1
for 20 reverse stock split effective on March 14, 2007.
  NOTE
      3.
                Business
      Combination
  Acquisition
of Conmed, Inc.
 Prior to
the Acquisition, the Company was classified as a shell company. At the time of
the acquisition, Conmed, Inc. was in contract with and serviced 18 detention
centers and facilities at the county level in the United States. The Acquisition
provided the Company with an entry into the correctional market, made available
established relationships and contracts with county correctional institutions,
offered a portfolio of medical service offerings and employed experienced
professional and management, thus the Acquisition provided the Company with a
platform for significant growth opportunities in the correctional healthcare
market.
 
 The
Acquisition that occurred on January 26, 2007, was recorded using purchase
accounting in accordance with SFAS 141. The cost of Conmed, Inc. to our
consolidated assets and liabilities is based on their fair value as of that
date. The purchase price exceeded the fair value of Conmed, Inc.'s net assets
acquired with the excess amount recorded as goodwill. The results of Conmed,
Inc.’s operations are included in our consolidated financial statements since
the date of acquisition.
 
 The
purchase price, including related acquisition costs, totaled
$10,337,471.  The purchase price of Conmed, Inc. 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 Conmed, Inc. resulted in $4,852,338 of
goodwill, $4,500,000 of service contract intangibles having a 3.2 year weighted
average amortization period and $1,000,000 of non-compete agreements having a
3.8 year weighted average amortization period.  This purchase was
financed with funds obtained in the Private Placement discussed in Note
4.
  38
  
 The
following table details the net assets of Conmed, Inc., acquired:
 
 Conmed,
      Inc. net assets acquiredCURRENT
      ASSETSCash
      and cash equivalents
                              
                              $
                              194,938Accounts
      receivable
                              
                              
                              1,106,866Prepaid
      expenses
                              
                              
                              195,943Total
      current assets
                              
                              
                              1,497,747PROPERTY
      AND EQUIPMENT, NET
                              
                              
                              44,163OTHER
      ASSETSService
      contracts acquired
                              
                              
                              4,500,000Non-compete
      agreements acquired
                              
                              
                              1,000,000Goodwill
                              
                              
                              4,852,338Deposits
                              
                              
                              2,424Total
      other assets
                              
                              
                              10,354,762Total
      assets
                              
                              
                              11,896,672CURRENT
      LIABILITIESAccounts
      payable
                              
                              
                              839,070Accrued
      expenses
                              
                              
                              625,645Deferred
      revenue
                              
                              
                              74,518Notes
      payable, current portion
                              
                              
                              7,362Total
      current liabilities
                              
                              
                              1,546,595NOTES
      PAYABLE, LONG-TERM
                              
                              
                              12,606Total
      liabilities
                              
                              
                              1,559,201Conmed,
      Inc. net assets acquired
                              
                              
                              10,337,471
 
 The
following table details the purchase price of Conmed, Inc:
 
 Conmed,
      Inc. purchase priceCash
      purchase price
                            
                            $
                            8,000,000Equity
      adjustment at closing
                            
                            
                            30,602Escrow
      deposit forfeited
                            
                            
                            250,000§338
      tax election
                            
                            
                            110,000Deal
      expenses
                            
                            
                            338,869Less:
      Conmed, Inc. cash acquired
                            
                            
                            (194,938
                            )Net,
      cash purchase price
                            
                            
                            8,534,533Add
      back: Conmed, Inc. cash acquired
                            
                            
                            194,938Common
      stock issued to Conmed, Inc.'s shareholders
                            
                            
                            1,608,000Total
      purchase price
                            
                            $
                            10,337,471
 
 The
goodwill amount includes the original escrow deposit of $250,000, which was
forfeited when the Acquisition did not close by October 31, 2006, an estimated
$338,869 in third party acquisition costs, and 800,000 shares of common stock
valued at $1,608,000 at the time of the closing of the Acquisition. An equity
adjustment of $30,602 was made at the time of closing resulting from the minimum
contractual equity requirement of $400,000 at the time of
closing.  The purchase price was adjusted during the fourth quarter of
2007 to reflect additional costs of approximately $560,000 associated with the
Acquisition.
 
 The
former shareholders of Conmed, Inc. made an election under Section 338 (h)(10)
("Section 338(h)(10)”) of the Internal Revenue Code (the “IRC”) 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.
  39
  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 purchase accounting in accordance with
SFAS 141. The cost of EMDC to our consolidated assets and liabilities is 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.
 
 The
following table details the net assets of EMDC acquired:
 
 Service
      contracts acquired
                        
                        $
                        242,000Non-compete
      agreements acquired
                        
                        
                        120,000Goodwill
                        
                        
                        193,148Total
                        
                        $
                        555,148
 
 The
following table details the purchase price of EMDC:
 
 EMDC
      purchase priceCash
      purchase price
                        
                        $
                        228,472Deal
      expenses
                        
                        
                        17,381Net,
      cash purchase price
                        
                        
                        245,853Promissory
      note
                        
                        
                        132,275Performance
      adjustment on promissory note
                        
                        
                        (22,993
                        )Warrants
      issued
                        
                        
                        50,013Common
      stock issued
                        
                        
                        150,000Total
      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 purchase accounting in accordance with SFAS 141. The
cost of CMHS to our consolidated assets and liabilities is 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
$2,150,062.  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 $1,209,058 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.
  40
  The
following table details the opening fair value balance sheet for the CMHS
acquisition:
 
 CMHS
      net assets acquiredCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          3,477Accounts
      receivable
                          
                          
                          129,700Prepaid
      expenses
                          
                          
                          1,682Total
      current assets
                          
                          
                          134,859PROPERTY
      AND EQUIPMENT, NET
                          
                          
                          5,000OTHER
      ASSETSService
      contracts acquired
                          
                          
                          756,000Non-compete
      agreements acquired
                          
                          
                          280,000Goodwill
                          
                          
                          1,209,058Deposits
                          
                          
                          1,710Total
      other assets
                          
                          
                          2,246,768Total
      assets
                          
                          
                          2,386,627CURRENT
      LIABILITIES ASSUMEDAccrued
      expenses
                          
                          
                          118,135Notes
      payable
                          
                          
                          118,430Total
      current liabilities
                          
                          
                          236,565CMHS
      net assets acquired
                          
                          
                          2,150,062
 
 The
following table details the purchase price of CMHS:
 
 CMHS
      purchase priceCash
      purchase price
                        
                        $
                        1,800,000Post
      closing adjustments
                        
                        
                        53,320Deal
      expenses
                        
                        
                        96,742Less:
      CMHS cash acquired
                        
                        
                        (3,477
                        )Less:
      hold back of payment
                        
                        
                        (178,730
                        )Net,
      cash purchase price at December 31, 2008
                        
                        
                        1,767,855Add
      back: CMHS cash acquired
                        
                        
                        3,477Add
      back: hold back of payment after December 31, 2008
                        
                        
                        178,730Common
      stock issued
                        
                        
                        200,000Total
      purchase price
                        
                        $
                        2,150,062
 
 The
former shareholder of CMHS is required to make an election under 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 Conmed, Inc., EMDC and CMHS at the beginning
of 2007:
 
 2008
                        
                        
                        2007Revenue
                        
                        $
                        41,751,667
                        
                        
                        $
                        27,663,492Net
      loss
                        
                        
                        (851,302
                        )
                        
                        
                        (2,346,241
                        )Basic
      and diluted loss per share
                        
                        $
                        (0.07
                        )
                        
                        $
                        (0.22
                        )
  41
  The
pro forma net loss reflects adjustments made for depreciation and amortization
and income taxes. The pro forma basic and diluted net loss per share have been
calculated assuming the common shares issued in connection with the Acquisition,
Asset Purchase and Stock Purchase were issued at the beginning of
2007.
  NOTE
      4.
                Private
      Placement
  The
following table details the net cash received from the Private Placement after
the payment of fees and related expenses.
 
 Acquisition
      financed by:Cash
      received from sale of preferred stock
                        
                        $
                        15,000,000Stock
      issuance costs
                        
                        
                        (2,237,943
                        )Net
      proceeds from sales of preferred stock
                        
                        
                        12,762,057Add-back
      non-cash banker warrant expense
                        
                        
                        154,940Net
      cash received from sale of securities
                        
                        $
                        12,916,997
  NOTE
      5.
                Common
      Stock Warrants and Options
  Common
Stock Warrants
 
 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 Private Placement negotiations, 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 (post-Plan of
Recapitalization) to purchase common stock exercisable at $0.30 per share,
expiring October 23, 2010.
 
 During
the twelve months ended December 31, 2008 no warrants were exercised and during
the 340-day period ended December 31, 2007, 25,000 warrants were exercised using
the cashless exercise function and as a result, 23,115 shares of common stock
were issued.  During the 25-day period ended January 25, 2007 no
warrants were exercised.  As of December 31, 2008, 225,000 warrants
remain outstanding.
 
 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
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.
 
 During
the twelve months 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 and during the 340-day period ended December 31, 2007, 120,000
warrants were exercised generating net proceeds of $36,000.  During
the 25-day period ended January 25, 2007 no warrants were
exercised.  As of December 31, 2008, 980,000 warrants remain
outstanding.
 
 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
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
December 31, 2008, no warrants have been exercised and 500,000 warrants remain
outstanding.
  42
 Placement Agent Warrants @
$2.75 per share
 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 Preferred Stock, at an exercise price
equal to $2.75 per share and expiring January 26, 2012.
 
 As of
December 31, 2008, no warrants have been exercised and 300,000 warrants remain
outstanding.
 
 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 is no longer providing service for the
Company and the warrant to purchase 120,000 shares has been forfeited. Expense
of $14,197 that was recorded in the first and second quarters of 2008 were
reversed in the third quarter.
 
 Consultant Warrants @ $1.85
per share
 In
connection with the Asset Purchase, we issued to two consultants warrants 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, 2008, no warrants have been exercised and the warrants remain
outstanding.
 
 Summary
 During
the twelve months ended December 31, 2008, the 340-day period ended December 31,
2007 and the 25-day period ended January 25, 2007, we recorded stock-based
compensation expense net of reversals for forfeited warrants totaling $0, $0 and
$0, respectively.
 
 As of
December 31, 2008, we have outstanding warrants to purchase an aggregate of
2,085,000 shares of common stock at an average exercise price of $1.24 and have
reserved shares of our common stock for issuance in connection with the
potential exercise thereof. During the twelve months 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.  During the 340-day period ended December 31, 2007, 145,000
warrants were exercised resulting in the issuance of 143,115 shares of common
stock and generating net proceeds of $36,000.  During the 25-day
period ended January 25, 2007 no warrants were exercised.
 
 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 (post-Plan of Recapitalization) 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.
  43
 
 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
                          ValueOutstanding,
      December 31, 2007
                        
                        
                        1,598,667
                        
                        
                        $
                        2.16
                        
                        
                        
                        —
                        
                        
                        
                        —Granted
                        
                        
                        478,000
                        
                        
                        
                        2.40Forfeited
                        
                        
                        (62,750
                        )
                        
                        
                        2.82Cancelled
                        
                        
                        (750
                        )
                        
                        
                        3.30Exercised
                        
                        
                        —
                        
                        
                        
                        —Outstanding,
      December 31, 2008
                        
                        
                        2,013,167
                        
                        
                        $
                        2.20
                        
                        
                        
                        8.39
                        
                        
                        $
                        138,395Exercisable
      at December 31, 2008
                        
                        
                        823,968
                        
                        
                        $
                        2.16
                        
                        
                        
                        8.08
                        
                        
                        $
                        63,539Remaining
      shares available for grant
                        
                        
                        336,833
  During
the twelve months ended December 31, 2008, the 340-day period ended December 31,
2007 and the 25-day period ended January 25, 2007 we recorded stock-based
compensation expense net of reversals for forfeited options totaling
approximately $574,000, $556,000 and $0, respectively.
 
 As of
December 31, 2008, stock-based compensation expense not yet recognized in income
totaled $1,383,609, which is expected to be recognized over a weighted-average
remaining period of 2.2 years. The total grant date fair value of stock options
vested during the twelve months ended December 31, 2008, the 340-day period
ended December 31, 2007 and the 25-day period ended January 25, 2007 was
$935,836, $117,205 and $0 , 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. Expected volatility is
based on the average reported volatility of the vesting period of a
representative sample of six comparable companies in healthcare services niches
with market capitalizations between $45 million and $1.5
billion.
  44
  The fair
value of our stock-based awards was estimated assuming no expected dividends and
the following weighted-average assumptions:
 
 SUCCESSOR
                      For the Twelve
                      Months Ended
                      December 31,
                      2008
                    
                    
                    SUCCESSOR
                      For the 340-Day
                      Period January
                      26, 2007 to
                      December 31,
                      2007
                    
                    
                    PREDECESSOR
                      For the 25-Day
                      Period January
                      1, 2007 to
                      January 25, 2007Expected
      life (years)
                    
                    
                    6.0
                    
                    
                    
                    6.0
                    
                    
                    
                    —Expected
      volatility
                    
                    
                    52.34
                    %
                    
                    
                    57.15
                    %
                    
                    
                    —Risk-free
      interest rate
                    
                    
                    2.9
                    %
                    
                    
                    4.7
                    %
                    
                    
                    —Expected
      dividend yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %
                    
                    
                    —Weighted-average  fair
      value of options granted during the period
                    
                    $
                    1.19
                    
                    
                    $
                    1.25
                    
                    
                    
                    —
 
 The
following table summarizes additional information about stock options
outstanding and exercisable as of December 31, 2008:
 
 Options Outstanding
                    
                    
                    Options ExercisableExercise Price
                      Range
                    
                    Options
                      Outstanding
                    
                    
                    Weighted-
                      Average
                      Remaining
                      Contractual
                      Life
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price
                    
                    
                    Shares
                      Exercisable
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price$1.50
      - $1.99
                    
                    
                    43,500
                    
                    
                    
                    9.15
                    
                    
                    $
                    1.74
                    
                    
                    
                    —
                    
                    
                    $
                    0$2.00
      - $2.49
                    
                    
                    1,700,667
                    
                    
                    
                    8.36
                    
                    
                    $
                    2.07
                    
                    
                    
                    705,986
                    
                    
                    $
                    2.01$2.50
      - $2.99
                    
                    
                    102,500
                    
                    
                    
                    8.49
                    
                    
                    $
                    2.79
                    
                    
                    
                    39,271
                    
                    
                    $
                    2.71$3.00
      - $3.49
                    
                    
                    166,500
                    
                    
                    
                    8.41
                    
                    
                    $
                    3.21
                    
                    
                    
                    78,711
                    
                    
                    $
                    3.232,013,167
                    
                    
                    
                    8.39
                    
                    
                    $
                    2.20
                    
                    
                    
                    823,968
                    
                    
                    $
                    2.16
  NOTE
      6.
              Property
      and Equipment
  A summary
of property and equipment is as follows:
 
 December 31,
                      2008
                    
                    
                    December 31,
                      2007Furniture
                    
                    $
                    214,299
                    
                    
                    $
                    19,548Equipment
                    
                    
                    106,078
                    
                    
                    
                    30,693Computers
                    
                    
                    342,879
                    
                    
                    
                    141,178Vehicles
                    
                    
                    36,087
                    
                    
                    
                    36,802Construction
      in progress
                    
                    
                    50,804
                    
                    
                    
                    93,022Total
                    
                    
                    750,147
                    
                    
                    
                    321,243Accumulated
      depreciation and amortization
                    
                    
                    (220,843
                    )
                    
                    
                    (108,428
                    )Property
      and equipment, net
                    
                    $
                    529,304
                    
                    
                    $
                    212,815
  NOTE
      7.
              Notes
      Payable
  The
Company has a note payable for $5,443 and $13,216 at December 31, 2008 and
December, 31, 2007, respectively. The note requires monthly payments of $695
including interest at 5.9%. The note is collateralized by a
vehicle.
 
 The
Company has an adjustable note payable issued on February 28, 2008 in connection
with the Asset Purchase in the principal amount of $140,000.  The
balance as of December 31, 2008 was $44,785.  The note requires
monthly payments of $5,833 including interest at 0%, as such, the note is
recorded at its present value, using an imputed 6% interest rate, of
$132,275.  At December 31, 2008, we decreased the note by $22,993
based on the performance of the Company’s Northwest Operating
Territory.
  45
 
 The
Company has a note payable issued on March 16, 2006 in connection with the Stock
Purchase on November 4, 2008 in the principal amount of $100,000.  The
balance as of December 31 was $55,000.  The note requires monthly
payments of $1,667 including interest at 7.38%.  The bank has a
continuing lien on and security interest in any and all deposits or other sums
at any time credited by or due from the bank or its affiliates.
 
 The
Company has a $100,000 line of credit in connection with the Stock Purchase on
November 4, 2008.  The balance as of December 31, 2008 was
$100,000.
  NOTE
      8.
              Accrued
      Expenses
  A summary
of accrued expenses is as follows:
 
 December 31,
                      2008
                    
                    
                    December 31,
                      2007Accrued
      salaries and employee benefits
                    
                    $
                    2,002,230
                    
                    
                    $
                    1,005,852Accrued
      medical claims liability
                    
                    
                    927,718
                    
                    
                    
                    542,975CMHS
      acquisition holdback liability
                    
                    
                    178,730
                    
                    
                    
                    —Other
                    
                    
                    102,071
                    
                    
                    
                    14,193Total
      accrued expenses
                    
                    $
                    3,210,749
                    
                    
                    $
                    1,563,020
  NOTE
      9.
              Earnings
      Per Share
  The
following table sets forth the computation of basic and diluted (loss)
per-share:
 
 For the Twelve
                            Months Ended
                            December 31,
                            2008
                          
                          
                          For the 340-Day
                            Period January
                            26, 2007 to
                            December 31,
                            2007Numerator
      for basic and diluted earnings per share:Net
      (loss)
                          
                          $
                          (919,267
                          )
                          
                          $
                          (1,754,021
                          )Denominator:Weighted-average
      basic shares outstanding
                          
                          
                          12,090,399
                          
                          
                          
                          10,310,994(Loss)
      per common share:Basic
      and diluted
                          
                          $
                          (0.08
                          )
                          
                          $
                          (0.17
                          )
 
 Common
stock warrants and options outstanding totaling 4,098,167 and 4,003,667 shares,
respectively, are not included in diluted earnings per common share for the
twelve-month and 340 day periods ended December 31, 2008 and 2007, respectively,
as they would have an antidilutive effect upon earnings per common
share.
  NOTE
      10.
              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 approximately $121,000,
$100,000 and $6,000 for the twelve months ended December 31, 2008, the 340-day
period ended December 31, 2007 and the 25-day period ended January 25, 2007,
respectively.
  46
  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
$3,000, $0 and $0 for the twelve months ended December 31, 2008, the 340-day
period ended December 31, 2007 and the 25-day period ended January 25, 2007,
respectively.
  NOTE
      11.
              Operating
      Leases
  We lease
office space and various equipment under certain noncancelable operating leases,
which expire at various dates through 2013.
 
 Future
minimum annual lease payments at December 31, 2008 are as follows:
 
 Twelve
      months ending December 31:2009
                    
                    $
                    315,0002010
                    
                    
                    233,0002011
                    
                    
                    190,0002012
                    
                    
                    172,0002013
                    
                    
                    36,000Total
                    
                    $
                    946,000
 
 Operating
lease expense was approximately $280,000, $83,000 and $3,000 for the twelve
months ended December 31, 2008, the 340-day period ended December 31, 2007 and
the 25-day period ended January 25, 2007, respectively.
  NOTE
      12.
              Major
      Customers and Commitments
  During
the twelve months ended December 31, 2008, the 340-day period ended December 31,
2007 and the 25-day period ended January 25, 2007 we had approximate sales with
major customers and related approximate receivables as follows:
 
 SUCCESSOR
                      For the Twelve MonthsEnded
                      December 31, 2008
                    
                    
                    SUCCESSOR
                      For the 340-Day PeriodJanuary
                      26, 2007 to December
                      31, 2007
                    
                    
                    PREDECESSOR
                      For the 25-Day Period January
                      1, 2007 to January 25, 2007Revenue
                    
                    
                    Accounts Receivable
                    
                    
                    Revenue
                    
                    
                    Accounts
                      Receivable
                    
                    
                    Revenue
                    
                    
                    Accounts
                      ReceivableCompany
      A
                    
                    $
                    6,084,000
                    
                    
                    $
                    15,000
                    
                    
                    $
                    5,386,000
                    
                    
                    $
                    55,000
                    
                    
                    $
                    374,000
                    
                    
                    $
                    26,000Company
      B
                    
                    
                    4,216,000
                    
                    
                    
                    152,000
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Company
      C
                    
                    
                    4,085,000
                    
                    
                    
                    327,000
                    
                    
                    
                    3,244,000
                    
                    
                    
                    286,000
                    
                    
                    
                    240,000
                    
                    
                    
                    —
 
 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, 2008, the Company had $10,630,606 in
outstanding bonds.
  NOTE
      13.
              Income
      Tax Matters
  The
components of income tax expense from continuing operations are as
follows:
 
 As of
                      December 31,
                      2008
                    
                    
                    As of
                      December 31,
                      2007Current
      tax expense
                    
                    $
                    555,000
                    
                    
                    $
                    252,000Deferred
      tax benefit
                    
                    
                    (555,000
                    )
                    
                    
                    (90,000
                    )Income
      tax expense from continuing operations
                    
                    $
                    —
                    
                    
                    
                    162,000
  47
  Approximate
deferred taxes consist of the following components:
 
 As of
                                December 31,
                                2008
                              
                              
                              As of
                                December 31,
                                2007Deferred
      tax assetNet
      operating loss carryforwards
                              
                              $
                              6,057,000
                              
                              
                              $
                              6,498,000Research
      and development credit carryforwards
                              
                              
                              391,000
                              
                              
                              
                              391,000Intangible
      assets
                              
                              
                              1,300,000
                              
                              
                              
                              640,000Other
      timing differences
                              
                              
                              495,000
                              
                              
                              
                              143,0008,243,000
                              
                              
                              
                              7,672,000Less:
      valuation allowance
                              
                              
                              7,157,000
                              
                              
                              
                              7,466,000Net
      deferred tax asset
                              
                              
                              1,086,000
                              
                              
                              
                              206,000Deferred
      tax liabilityGoodwill
                              
                              
                              (322,000
                              )
                              
                              
                              (116,000
                              )Depreciation
                              
                              
                              (119,000
                              )
                              
                              
                              —Deferred
      tax asset
                              
                              $
                              645,000
                              
                              
                              $
                              90,000
 
 We have
recorded a valuation allowance of $7,157,000 and $7,466,000 against deferred tax
assets at December 31, 2008 and December 31, 2007, respectively, 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, the
long-term nature of the deferred tax asset and certain limitations regarding the
utilization of the net operating loss carryforwards. We recognized $645,000 of
deferred tax assets for the amount we estimate will be realized in the short
term. The net operating loss carryforwards will expire in years 2009 through
2026.  Realization of deferred tax assets is dependent upon sufficient
future taxable income during the period that deductible temporary differences
and carryforwards are expected to be available to reduce taxable
income.
 
 The
Company’s ability to utilize its net operating loss carryforwards and research
and development credit is currently limited due to limitations on change of
control under Section 382 (“Section 382”) of the IRC.  Accordingly, we
have applied a valuation allowance of $6,057,000 and $391,000 against the net
operating loss carryforwards and research and development credit, respectively,
as we do not expect to derive any future benefit from them.
 
 The
Acquisition in January 2007 is being treated as an asset acquisition for federal
income tax purposes under Section 338(h)(10), which allows the Company to
capitalize and amortize intangible assets for federal income tax purposes over a
15-year period.
 
 The Stock
Purchase in November 2008 is being treated as an asset acquisition for federal
income tax purposes under Section 338(h)(10), which allows the Company to
capitalize and amortize intangible assets for federal income tax purposes over a
15-year period.
  48
  The
provision for income taxes 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:
  For the Twelve
                            Months Ended
                            December 31,
                            2008
                          
                          
                          For the 340-Day
                            Period Ended
                            December 31,
                            2007Computed
      federal income tax benefit
                          
                          $
                          (313,000
                          )
                          
                          $
                          (541,000
                          )State
      income taxes
                          
                          
                          45,000
                          
                          
                          
                          38,000Other,
      including permanent differences
                          
                          
                          57,000
                          
                          
                          
                          (156,000
                          )Permanent
      difference related to stock options
                          
                          
                          142,000
                          
                          
                          
                          194,000Expiration
      of net operating losses
                          
                          
                          378,000
                          
                          
                          
                          143,000Change
      in valuation allowance
                          
                          
                          (309,000
                          )
                          
                          
                          484,000Current
      income tax expense as shown in the statement of operations
                          
                          
                          —
                          
                          
                          
                          162,000Tax
      benefit of warrant exercises separated in additional paid in
      capital
                          
                          
                          —
                          
                          
                          
                          (162,000
                          )Total
      tax expense shown in financial statements
                          
                          $
                          —
                          
                          
                          $
                          —
 
 No
amounts have been presented for the 25-day period ended January 25, 2007 as the
Predecessor was an S-corporation and as such, not subject to corporate level
income taxes.
 
 The
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) effective January 1, 2007.  Major jurisdictions
including Federal, Iowa, Kansas, Maryland, Oregon and Virginia remain open for
examination for years subsequent to 2004.  The Company currently has
not recorded a liability for uncertain tax positions under FIN 48.
  NOTE
      14.
              Related
      Party Transactions
  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.
 
 During
the fourth quarter of 2008, we paid $75,000 to Equity Dynamics, Inc., an entity
wholly owned by John Pappajohn, a director of the Company, for acquisition
advisory services related to the Stock Purchase.
  49
  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, 2008. 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, 2008, 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.
  50
  PART
III.
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
  We have
adopted a Code of Conduct (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 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31, 2008. If
such proxy statement is not filed on or before April 30, 2009, 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
      11.
              EXECUTIVE
      COMPENSATION.
  The
information required by this item is incorporated by reference to our definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31, 2008. If
such proxy statement is not filed on or before April 30, 2009, 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,
2008.
  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)
                      
                      
                      2,013,167
                      
                      
                      $
                      2.20
                      
                      
                      
                      336,833Equity
      compensation plans not approved by security holders (2)
                      
                      
                      605,000
                      
                      
                      
                      1.72
                      
                      
                      
                      —Total
                      
                      
                      2,618,167
                      
                      
                      $
                      2.09
                      
                      
                      
                      336,833
 
 (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.
 
 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, 2008, 80,000 warrants remain
outstanding.
  51
  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 Preferred Stock,
at an exercise price equal to $2.75 per share and expiring January 26, 2012. As
of December 31, 2008, 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 (post-Plan of
Recapitalization) to purchase common stock exercisable at $0.30 per share,
expiring October 23, 2010.  As of December 31, 2008, 225,000 warrants
remain outstanding.
 
 The other
information required by this item is incorporated by reference to our definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2008.  If such proxy statement is not filed on or before April 30,
2009, 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 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2008.  If such proxy statement is not filed on or before April 30,
2009, 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 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of the fiscal year ended December 31,
2008.  If such proxy statement is not filed on or before April 30,
2009, 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).
  52
  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
                  
                  Description2.1
                  
                  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
                  
                  Bylaws
      (which Bylaws were amended and restated on May 28, 2009 and filed as an
      exhibit to a Current Report on Form 8-K on June 3, 2009)
    (5)4.1
                  
                  Amendment
      to Certificate of Incorporation defining rights of Series B 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)
 
  53
  
 10.9
                              
                              Employment
      Letter Agreement dated August 21, 2006, by and between Thomas Fry and Pace
      Health Management Systems, Inc. (7)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
                              
                              Office
      Lease Agreement dated November 15, 2004, by and between Susan D. Moxley
      and Richard R. Olson (dba ConMed, Inc.) (7)10.13
                              
                              Consulting
      Agreement dated January 26, 2007, by and between Yankee Partners LLC and
      Pace Health Management Systems, Inc. (8)10.14
                              
                              Services
      Agreement, dated January 31, 2005, by and between The Board of County
      Commissioners of Sedgwick County, Kansas and ConMed, Inc., as
      amended (8)10.15
                              
                              Health
      Services Agreement, dated March 14, 2002, by and between Sheriff of
      Harford County and ConMed, Inc., as amended (8)10.16
                              
                              Medical
      Services Agreement, dated January 1, 2006, by and between the Board of
      County Commissioners of Frederick County and ConMed, Inc., as
      amended (8)10.17
                              
                              Agreement
      dated April 25, 2005, by and between Howard County and ConMed, Inc., as
      amended (8)10.18
                              
                              Medical
      Services Agreement, dated July 1, 2004, by and between the Sheriff of
      Cecil County and ConMed, Inc., as amended (8)10.19
                              
                              Agreement
      for Service, dated July 1, 2005, by and between the County of Loudoun and
      ConMed, Inc., as amended (8)10.20
                              
                              Agreement,
      dated August 12, 2006, by and between the Board of County Commissioners
      for Yakima County, Washington and ConMed, Inc. (8)10.21
                              
                              Medical
      Services Agreement, by and among Conmed, Inc. and Baltimore County,
      Maryland, dated March 26, 2007 (9)10.22
                              
                              Medical
      Services Agreement, by and among Conmed, Inc. and Henrico County Virginia,
      dated May 7, 2007 (9)10.23
                              
                              Amendment
      to Medical Services Agreement, by and among Conmed, Inc. and Yakima
      County, Washington, dated April 3, 2007 (10)10.24
                              
                              Contract
      Renewal Agreement, by and among Conmed, Inc. and Yakima County,
      Washington, dated September 4, 2007 (10)10.25
                              
                              Amendment
      to Medical Services Agreement, by and among Conmed, Inc. and Yakima
      County, Washington, dated September 4, 2007 (10)10.26
                              
                              First Amendment to
      Services Agreement, by and among Conmed, Inc. and Sedgwick County, Kansas,
      dated June 1, 2007 (10)10.27
                              
                              Medical
      Services Agreement, by and among Conmed, Inc. and Yakima County,
      Washington, dated October 2, 2007 (10)10.28
                              
                              Office
      Lease Agreement by and between Conmed, Inc, and 7250 Limited Partners,
      LLLP dated December 10, 2007
(11)
 
  54
  
 10.29
                
                Inmate
      Healthcare Services Agreement, dated March 19, 2008, by and between
      Conmed, Inc. and the City of Chesapeake, Virginia Sheriff’s Department
      (12)10.30
                
                Medical
      Service Agreement with Charles County, Maryland dated July 2, 2008
      (13)10.31
                
                Professional
      Services Contract with Pima County, Arizona dated August 1, 2008
      (13)21
                
                Subsidiaries
      *23.1
                
                Consent
      of McGladrey & Pullen, LLP dated July
      13,
      2009*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. *
 
 *
              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 on
      August 14, 2007(10)
              Incorporated
      by reference to the Company’s Quarterly Report on Form 10-QSB filed on
      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
  55
  SIGNATURES
 
 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.July
      14, 2009By:
                /s/ Richard W. TurnerRichard
      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.
  July
14, 2009
 By
                /s/ Richard W. TurnerRichard
      Turner, Chairman and Chief Executive Officer and Director (Principal
      Executive Officer)By
                /s/ Thomas W. FryThomas
      W. Fry, Chief Financial Officer and Secretary (Principal Financial Officer
      and Principal Accounting Officer)By
                /s/ John PappajohnJohn
      Pappajohn, DirectorBy
                /s/ Edward B. BergerEdward
      B. Berger, DirectorBy
                /s/ Terry E. BranstadTerry
      E. Branstad, DirectorBy
                /s/ John W. CollotonJohn
      W. Colloton,
Director