##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number: 0-20135
 
 AMERICA SERVICE GROUP INC.
  Delaware
    
    51-0332317(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 105 Westpark Drive, Suite 200Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 373-3100
 þ o
 þ o




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##### Table of Contents



AMERICA SERVICE GROUP INC.
 QUARTERLY REPORT ON FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the quarters and six month periods ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38Signatures
    
    
    39Ex-10.1  Amendment No.3 to Revolving Credit, Term Loan and Security AgreementEx-31.1  Section 302 Certification of the CEOEx-31.2  Section 302 Certification of the CFOEx-32.1  Section 906 Certification of the CEOEx-32.2  Section 906 Certification of the CFO
 2




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##### Table of Contents



PART I:
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 June 30,
    
    December 31,2005
    
    2004(shown in 000s except shareand per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,484
    
    
    $
    7,191Accounts receivable, less allowances of $268 and $162, respectively
    
    
    89,781
    
    
    
    93,111Inventories
    
    
    7,287
    
    
    
    7,639Prepaid expenses and other current assets
    
    
    16,121
    
    
    
    17,186Current deferred tax assets
    
    
    4,641
    
    
    
    9,349Total current assets
    
    
    129,314
    
    
    
    134,476Property and equipment, net
    
    
    6,000
    
    
    
    5,356Goodwill, net
    
    
    43,896
    
    
    
    43,896Contracts, net
    
    
    7,979
    
    
    
    8,793Other intangibles, net
    
    
    960
    
    
    
    1,076Other assets
    
    
    8,396
    
    
    
    12,548Total assets
    
    $
    196,545
    
    
    $
    206,145LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    43,437
    
    
    $
    49,786Accrued medical claims liability
    
    
    28,423
    
    
    
    25,808Accrued expenses
    
    
    50,079
    
    
    
    45,351Deferred revenue
    
    
    1,893
    
    
    
    11,869Loss contract reserve
    
    
    
    
    
    
    6,062Total current liabilities
    
    
    123,832
    
    
    
    138,876Noncurrent portion of accrued expenses
    
    
    8,556
    
    
    
    11,259Noncurrent deferred tax liabilities
    
    
    876
    
    
    
    1,017Total liabilities
    
    
    133,264
    
    
    
    151,152Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at
June 30, 2005 and December 31, 2004; no shares issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 30,000,000 shares authorized at June
30, 2005 and December 31, 2004; 10,880,702 and 10,811,093 shares
issued and outstanding at June 30, 2005 and December 31, 2004,
respectively
    
    
    109
    
    
    
    108Additional paid-in capital
    
    
    56,574
    
    
    
    55,203Deferred compensation
    
    
    (287
    )
    
    
    (143
    )Retained earnings (accumulated deficit)
    
    
    6,885
    
    
    
    (175
    )Total stockholders equity
    
    
    63,281
    
    
    
    54,993Total liabilities and stockholders equity
    
    $
    196,545
    
    
    $
    206,145
 
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##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Quarter ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(shown in 000s except share and per share amounts)Healthcare revenues
    
    $
    160,996
    
    
    $
    148,088
    
    
    $
    314,630
    
    
    $
    289,874Healthcare expenses
    
    
    148,562
    
    
    
    135,048
    
    
    
    289,957
    
    
    
    265,034Gross margin
    
    
    12,434
    
    
    
    13,040
    
    
    
    24,673
    
    
    
    24,840Selling, general, and administrative expenses
    
    
    4,329
    
    
    
    4,465
    
    
    
    8,633
    
    
    
    8,881Discontinued acquisition expenses
    
    
    451
    
    
    
    
    
    
    
    451
    
    
    
    Depreciation and amortization
    
    
    1,000
    
    
    
    959
    
    
    
    1,979
    
    
    
    1,900Charge for settlement of Florida legal matter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,200Income from operations
    
    
    6,654
    
    
    
    7,616
    
    
    
    13,610
    
    
    
    8,859Interest, net
    
    
    205
    
    
    
    453
    
    
    
    433
    
    
    
    964Late fee income
    
    
    249
    
    
    
    
    
    
    
    249
    
    
    
    Income from continuing operations before income
tax provision (benefit)
    
    
    6,698
    
    
    
    7,163
    
    
    
    13,426
    
    
    
    7,895Income tax provision (benefit)
    
    
    2,680
    
    
    
    (5,329
    )
    
    
    5,381
    
    
    
    (4,977
    )Income from continuing operations
    
    
    4,018
    
    
    
    12,492
    
    
    
    8,045
    
    
    
    12,872Loss from discontinued operations, net of taxes
    
    
    (871
    )
    
    
    (8,189
    )
    
    
    (985
    )
    
    
    (8,927
    )Net income
    
    $
    3,147
    
    
    $
    4,303
    
    
    $
    7,060
    
    
    $
    3,945Net income
per common share  basic:Income from continuing operations
    
    $
    0.37
    
    
    $
    1.17
    
    
    $
    0.74
    
    
    $
    1.21Loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.77
    )
    
    
    (0.09
    )
    
    
    (0.84
    )Net income
    
    $
    0.29
    
    
    $
    0.40
    
    
    $
    0.65
    
    
    $
    0.37Net income per common share  diluted:Income from continuing operations
    
    $
    0.36
    
    
    $
    1.13
    
    
    $
    0.72
    
    
    $
    1.17Loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.74
    )
    
    
    (0.09
    )
    
    
    (0.81
    )Net income
    
    $
    0.28
    
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.36Weighted average common shares outstanding:Basic
    
    
    10,873,100
    
    
    
    10,692,357
    
    
    
    10,859,959
    
    
    
    10,647,990Diluted
    
    
    11,123,438
    
    
    
    11,034,272
    
    
    
    11,142,318
    
    
    
    10,982,604
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six months endedJune 30,2005
    
    2004(Amounts shown in
000s)Cash flows from operating activities:Net income
    
    $
    7,060
    
    
    $
    3,945Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,987
    
    
    
    1,965Finance cost amortization
    
    
    291
    
    
    
    297Stock option income tax benefits
    
    
    81
    
    
    
    Deferred income taxes
    
    
    4,567
    
    
    
    (5,255
    )Amortization of deferred compensation
    
    
    31
    
    
    
    Increase in reserve for loss contracts
    
    
    1,295
    
    
    
    6,800Interest on stockholders notes receivable
    
    
    
    
    
    
    (2
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    3,330
    
    
    
    (13,370
    )Inventories
    
    
    352
    
    
    
    26Prepaid expenses and other current assets
    
    
    1,065
    
    
    
    3,492Other assets
    
    
    3,989
    
    
    
    (2,203
    )Accounts payable
    
    
    (6,349
    )
    
    
    10,176Accrued medical claims liability
    
    
    2,615
    
    
    
    5,316Accrued expenses
    
    
    2,025
    
    
    
    2,222Deferred revenue
    
    
    (9,976
    )
    
    
    (4,951
    )Loss contract reserve utilization
    
    
    (7,357
    )
    
    
    (1,430
    )Net cash provided by operating activities
    
    
    5,006
    
    
    
    7,028Cash flows from investing activities:Capital expenditures, net
    
    
    (1,829
    )
    
    
    (1,165
    )Net cash used in investing activities
    
    
    (1,829
    )
    
    
    (1,165
    )Cash flows from financing activities:Net payments on line of credit and term loan
    
    
    
    
    
    
    (1,198
    )Issuance of common stock, net
    
    
    369
    
    
    
    205Exercise of stock options
    
    
    747
    
    
    
    1,533Net cash provided by financing activities
    
    
    1,116
    
    
    
    540Net increase in cash and cash equivalents
    
    
    4,293
    
    
    
    6,403Cash and cash equivalents at beginning of period
    
    
    7,191
    
    
    
    1,157Cash and cash equivalents at end of period
    
    $
    11,484
    
    
    $
    7,560
 
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AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
 1. Basis of Presentation
   2. Description of Business
  3. Recently Issued Accounting Pronouncements
 Share-Based Payment Accounting for Stock-Based Compensation
   6




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Accounting for Stock Issued to
Employees,
 4. Settlement of Florida Legal Matter
    5. Stock Options
   2005
    
    2004Volatility
    
    
    0.85
    
    
    
    0.84Interest rate
    
    
    3-4
    %
    
    
    3-4
    %Expected life (years)
    
    
    4.5
    
    
    
    4Dividend yields
    
    
    0.0
    %
    
    
    0.0
    %
  7




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Quarter ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Income from continuing operations as reported
    
    $
    4,018
    
    
    $
    12,492
    
    
    $
    8,045
    
    
    $
    12,872Add: Stock based compensation expense included in reported
net income
    
    
    17
    
    
    
    
    
    
    
    31
    
    
    
    Deduct: Stock based compensation expense determined under
SFAS No. 123, net of taxes
    
    
    (508
    )
    
    
    (203
    )
    
    
    (905
    )
    
    
    (466
    )Pro forma income from continuing operations
    
    
    3,527
    
    
    
    12,289
    
    
    
    7,171
    
    
    
    12,406Loss from discontinued operations, net of taxes
    
    
    (871
    )
    
    
    (8,189
    )
    
    
    (985
    )
    
    
    (8,927
    )Pro forma net income attributable to common shares
    
    $
    2,656
    
    
    $
    4,100
    
    
    $
    6,186
    
    
    $
    3,479As reported net income per common share  basic:As reported income from continuing operations
    
    $
    0.37
    
    
    $
    1.17
    
    
    $
    0.74
    
    
    $
    1.21As reported loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.77
    )
    
    
    (0.09
    )
    
    
    (0.84
    )As reported net income
    
    $
    0.29
    
    
    $
    0.40
    
    
    $
    0.65
    
    
    $
    0.37Pro forma net income per common share  basic:Pro forma income from continuing operations
    
    $
    0.32
    
    
    $
    1.15
    
    
    $
    0.66
    
    
    $
    1.17Pro forma loss from discontinued operations
    
    
    (0.08
    )
    
    
    (0.77
    )
    
    
    (0.09
    )
    
    
    (0.84
    )Pro forma net income
    
    $
    0.24
    
    
    $
    0.38
    
    
    $
    0.57
    
    
    $
    0.33As reported net income per common share  diluted:As reported income from continuing operations
    
    $
    0.36
    
    
    $
    1.13
    
    
    $
    0.72
    
    
    $
    1.17As reported loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.74
    )
    
    
    (0.09
    )
    
    
    (0.81
    )As reported net income
    
    $
    0.28
    
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.36Pro forma net income per common share  diluted:Pro forma income from continuing operations
    
    $
    0.32
    
    
    $
    1.11
    
    
    $
    0.65
    
    
    $
    1.13Pro forma loss from discontinued operations
    
    
    (0.08
    )
    
    
    (0.74
    )
    
    
    (0.09
    )
    
    
    (0.81
    )Pro forma net income
    
    $
    0.24
    
    
    $
    0.37
    
    
    $
    0.56
    
    
    $
    0.32
  6. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Healthcare revenues
    
    $
    14,781
    
    
    $
    24,568
    
    
    $
    30,741
    
    
    $
    51,087Healthcare expenses
    
    
    14,935
    
    
    
    25,926
    
    
    
    31,080
    
    
    
    53,132Increase in reserve for loss contracts
    
    
    1,295
    
    
    
    6,800
    
    
    
    1,295
    
    
    
    6,800Gross margin
    
    
    (1,449
    )
    
    
    (8,158
    )
    
    
    (1,634
    )
    
    
    (8,845
    )Depreciation and amortization
    
    
    3
    
    
    
    27
    
    
    
    8
    
    
    
    65Loss from discontinued operations before taxes
    
    
    (1,452
    )
    
    
    (8,185
    )
    
    
    (1,642
    )
    
    
    (8,910
    )Income tax provision (benefit)
    
    
    (581
    )
    
    
    4
    
    
    
    (657
    )
    
    
    17Loss from discontinued operations, net of taxes
    
    $
    (871
    )
    
    $
    (8,189
    )
    
    $
    (985
    )
    
    $
    (8,927
    )
 8




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7. Accounts Receivable
  June 30,
    
    December 31,2005
    
    2004Billed accounts receivable
    
    $
    54,529
    
    
    $
    60,691Unbilled accounts receivable
    
    
    34,681
    
    
    
    31,723Other accounts receivable
    
    
    839
    
    
    
    85990,049
    
    
    
    93,273Less: Allowances
    
    
    (268
    )
    
    
    (162
    )$
    89,781
    
    
    $
    93,111
  8. Prepaid Expenses and Other Current Assets
  June 30,
    
    December 31,2005
    
    2004Prepaid insurance
    
    $
    8,699
    
    
    $
    10,979Prepaid cash
deposits for estimated professional
liability claims losses
    
    
    6,900
    
    
    
    5,700Prepaid performance bonds
    
    
    39
    
    
    
    230Prepaid other
    
    
    483
    
    
    
    277$
    16,121
    
    
    $
    17,186
 9. Property and Equipment
  June 30,
    
    December 31,
    
    Estimated2005
    
    2004
    
    Useful LivesLeasehold improvements
    
    $
    1,230
    
    
    $
    1,200
    
    
    5 yearsEquipment and furniture
    
    
    9,376
    
    
    
    8,519
    
    
    5 yearsComputer software
    
    
    2,849
    
    
    
    1,436
    
    
    3-5 yearsMedical equipment
    
    
    2,598
    
    
    
    2,559
    
    
    5 yearsAutomobiles
    
    
    63
    
    
    
    32
    
    
    5 yearsManagement information systems under development
    
    
    357
    
    
    
    1,076
    
    
    
    16,473
    
    
    
    14,822Less: Accumulated depreciation
    
    
    (10,473
    )
    
    
    (9,466
    )$
    6,000
    
    
    $
    5,356
  Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
 9




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##### Table of Contents



10. Other Assets
  June 30,
    
    December 31,2005
    
    2004Deferred financing costs
    
    $
    1,698
    
    
    $
    1,695Less: Accumulated amortization
    
    
    (1,504
    )
    
    
    (1,212
    )194
    
    
    
    483Prepaid cash
deposits for estimated professional liability claims losses
    
    
    1,280
    
    
    
    4,674Excess deposits for professional liability claims
    
    
    6,851
    
    
    
    7,321Other refundable deposits
    
    
    71
    
    
    
    70$
    8,396
    
    
    $
    12,548
 11. Contracts and Other Intangible Assets
  June 30,
    
    December 31,2005
    
    2004Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (7,891
    )
    
    
    (7,077
    )$
    7,979
    
    
    $
    8,793Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (1,440
    )
    
    
    (1,324
    )$
    960
    
    
    $
    1,076
  12. Accounts Payable and Accrued Expenses
  June 30,
    
    December 31,2005
    
    2004Trade payables
    
    $
    43,437
    
    
    $
    48,095Payable to Health Cost Solutions, Inc.
    
    
    
    
    
    
    1,691$
    43,437
    
    
    $
    49,786
  June 30,
    
    December 31,2005
    
    2004Salaries and employee benefits
    
    $
    24,098
    
    
    $
    20,461Professional liability claims
    
    
    17,356
    
    
    
    18,659Accrued workers compensation claims
    
    
    6,790
    
    
    
    6,557Other
    
    
    10,391
    
    
    
    10,93358,635
    
    
    
    56,610Less: Noncurrent portion of professional liability claims
    
    
    (8,556
    )
    
    
    (11,259
    )$
    50,079
    
    
    $
    45,351
 10




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13. Reserve for Loss Contracts
       11




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##### Table of Contents



14. Banking Arrangements
       12




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##### Table of Contents



15. Income Taxes
 Accounting for Income Taxes
    16. Professional and General Liability Self-insurance Retention
  13




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##### Table of Contents



17. Commitments and Contingencies
 Catastrophic Limits
  Litigation and Claims
 Professional Liability Suit.
 EMSA lease matter. th
 14




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Other matters.
 Performance Bonds
  18. Net Income Per Share
 Earnings Per
Share,
 Quarter ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Numerator:Income from continuing operations
    
    $
    4,018
    
    
    $
    12,492
    
    
    $
    8,045
    
    
    $
    12,872Loss from discontinued operations, net of taxes
    
    
    (871
    )
    
    
    (8,189
    )
    
    
    (985
    )
    
    
    (8,927
    )Numerator for basic and diluted net income
    
    $
    3,147
    
    
    $
    4,303
    
    
    $
    7,060
    
    
    $
    3,945Denominator:Denominator for basic net income per share 
weighted average shares
    
    
    10,873,100
    
    
    
    10,692,357
    
    
    
    10,859,959
    
    
    
    10,647,990Effect of dilutive securities:Employee stock options
    
    
    250,338
    
    
    
    341,915
    
    
    
    282,359
    
    
    
    334,614Denominator for diluted net income per share 
adjusted weighted average shares and assumed
conversions
    
    
    11,123,438
    
    
    
    11,034,272
    
    
    
    11,142,318
    
    
    
    10,982,604Net income per common share  basic:Income from continuing operations
    
    $
    0.37
    
    
    $
    1.17
    
    
    $
    0.74
    
    
    $
    1.21Loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.77
    )
    
    
    (0.09
    )
    
    
    (0.84
    )Net income
    
    $
    0.29
    
    
    $
    0.40
    
    
    $
    0.65
    
    
    $
    0.37Net income per common share  diluted:Income from continuing operations
    
    $
    0.36
    
    
    $
    1.13
    
    
    $
    0.72
    
    
    $
    1.17Loss from discontinued operations, net of taxes
    
    
    (0.08
    )
    
    
    (0.74
    )
    
    
    (0.09
    )
    
    
    (0.81
    )Net income
    
    $
    0.28
    
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.36
  15




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##### Table of Contents



Quarter ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    563,712
    
    
    
    
    
    
    
    294,356
    
    
    
    378,956Weighted average exercise price of excluded options
    
    $
    23.49
    
    
    $
    
    
    
    $
    23.58
    
    
    $
    9.59
 19. Comprehensive Income
  20. Segment Data
   Correctional
    
    Pharmaceutical
    
    Elimination ofHealthcare
    
    Distribution
    
    IntersegmentServices
    
    Services
    
    Sales
    
    ConsolidatedQuarter ended June 30, 2005:Healthcare revenues
    
    $
    149,535
    
    
    $
    23,524
    
    
    $
    (12,063
    )
    
    $
    160,996Healthcare expenses
    
    
    138,556
    
    
    
    22,069
    
    
    
    (12,063
    )
    
    
    148,562Gross margin
    
    $
    10,979
    
    
    $
    1,455
    
    
    $
    
    
    
    $
    12,434Depreciation and amortization expense
    
    $
    748
    
    
    $
    252
    
    
    $
    
    
    
    $
    1,000Quarter ended June 30, 2004:Healthcare revenues
    
    $
    137,952
    
    
    $
    20,805
    
    
    $
    (10,669
    )
    
    $
    148,088Healthcare expenses
    
    
    126,420
    
    
    
    19,297
    
    
    
    (10,669
    )
    
    
    135,048Gross margin
    
    $
    11,532
    
    
    $
    1,508
    
    
    $
    
    
    
    $
    13,040Depreciation and amortization expense
    
    $
    721
    
    
    $
    238
    
    
    $
    
    
    
    $
    959Six month period ended June 30, 2005:Healthcare revenues
    
    $
    292,211
    
    
    $
    45,824
    
    
    $
    (23,405
    )
    
    $
    314,630Healthcare expenses
    
    
    270,271
    
    
    
    43,091
    
    
    
    (23,405
    )
    
    
    289,957Gross margin
    
    $
    21,940
    
    
    $
    2,733
    
    
    $
    
    
    
    $
    24,673Depreciation and amortization expense
    
    $
    1,474
    
    
    $
    505
    
    
    $
    
    
    
    $
    1,979Six month period ended June 30, 2004:Healthcare revenues
    
    $
    270,209
    
    
    $
    39,861
    
    
    $
    (20,196
    )
    
    $
    289,874Healthcare expenses
    
    
    248,055
    
    
    
    37,175
    
    
    
    (20,196
    )
    
    
    265,034Gross margin
    
    $
    22,154
    
    
    $
    2,686
    
    
    $
    
    
    
    $
    24,840Depreciation and amortization expense
    
    $
    1,428
    
    
    $
    472
    
    
    $
    
    
    
    $
    1,900
 16




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##### Table of Contents



Correctional
    
    PharmaceuticalHealthcare
    
    DistributionServices
    
    Services
    
    ConsolidatedAs of June 30, 2005:Inventories
    
    $
    3,814
    
    
    $
    3,473
    
    
    $
    7,287Property and equipment, net
    
    $
    3,163
    
    
    $
    2,837
    
    
    $
    6,000Goodwill, net
    
    $
    40,771
    
    
    $
    3,125
    
    
    $
    43,896Total assets
    
    $
    179,350
    
    
    $
    17,195
    
    
    $
    196,545As of December 31, 2004:Inventories
    
    $
    4,410
    
    
    $
    3,229
    
    
    $
    7,639Property and equipment, net
    
    $
    3,118
    
    
    $
    2,238
    
    
    $
    5,356Goodwill, net
    
    $
    40,771
    
    
    $
    3,125
    
    
    $
    43,896Total assets
    
    $
    190,323
    
    
    $
    15,822
    
    
    $
    206,145
 21. Subsequent Events
   17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
      Forward-Looking Statements
  
    
    the Companys ability to retain existing client contracts and obtain new contracts;
    
    whether or not government agencies continue to privatize correctional healthcare services;
    
    the possible effect of adverse publicity regarding the Companys business;
    
    increased competition for new contracts and renewals of existing contracts;
    
    the Companys ability to comply with government regulations and/or orders of judicial authorities;
 18




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##### Table of Contents




    
    the Companys ability to execute its expansion strategies;
    
    the Companys ability to limit its exposure for
catastrophic illnesses, injuries or medical malpractice claims in
excess of amounts covered under contracts or insurance coverage;
    
    the outcome of pending litigation;
    
    the Companys dependence on key personnel; and
    
    the Companys determination whether to repurchase shares under the stock repurchase program.
  Critical Accounting Policies And Estimates
   
    
    revenue and cost recognition (including estimated medical claims);
    
    allowance for doubtful accounts;
    
    loss contracts;
    
    professional and general liability self-insurance retention;
    
    other self-funded insurance reserves;
    
    legal contingencies;
    
    impairment of intangible assets and goodwill; and
    
    income taxes.
   19




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Revenue and Cost Recognition
       20




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Allowance for Doubtful Accounts
  Loss Contracts
      21




---



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Professional and General Liability Self-Insurance Retention
   22




---



##### Table of Contents



Other Self-Funded Insurance Reserves
  Legal Contingencies
  Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
 23




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##### Table of Contents




    
    significant underperformance or loss of key contracts relative to expected
historical or projected future operating results;
    
    significant changes in the manner of use of the Companys assets or in the
Companys overall business strategy; and
    
    significant negative industry or economic trends.
    Income Taxes
 Accounting for Income Taxes
   24




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25




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Results of Operations
  Quarter ended
    
    Six months endedJune 30,
    
    June 30,Percentage of Healthcare Revenues
    
    2005
    
    2004
    
    2005
    
    2004Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    92.3
    
    
    
    91.2
    
    
    
    92.2
    
    
    
    91.4Gross margin
    
    
    7.7
    
    
    
    8.8
    
    
    
    7.8
    
    
    
    8.6Selling, general and administrative expenses
    
    
    2.7
    
    
    
    3.0
    
    
    
    2.7
    
    
    
    3.1Discontinued acquisition expenses
    
    
    0.3
    
    
    
    
    
    
    
    0.2
    
    
    
    Depreciation and amortization
    
    
    0.6
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.6Charge for settlement of Florida legal matter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.8Income from operations
    
    
    4.1
    
    
    
    5.1
    
    
    
    4.3
    
    
    
    3.1Interest, net
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Late fee income
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    Income from continuing operations before
income tax provision (benefit)
    
    
    4.2
    
    
    
    4.8
    
    
    
    4.3
    
    
    
    2.7Income tax provision (benefit)
    
    
    1.7
    
    
    
    (3.6
    )
    
    
    1.7
    
    
    
    (1.7
    )Income from continuing operations
    
    
    2.5
    
    
    
    8.4
    
    
    
    2.6
    
    
    
    4.4Loss from discontinued operations, net of taxes
    
    
    (0.5
    )
    
    
    (5.5
    )
    
    
    (0.4
    )
    
    
    (3.0
    )Net income
    
    
    2.0
    %
    
    
    2.9
    %
    
    
    2.2
    %
    
    
    1.4
    %
 Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004
 Healthcare revenues.
 Healthcare expenses.
  26




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##### Table of Contents



Selling, general and administrative expenses.
 Discontinued acquisition expenses.
 Depreciation and amortization
 Interest, net
 Late fee income.
 Income tax provision (benefit).
 Income from continuing operations.
 Loss from discontinued operations, net of taxes
  27




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##### Table of Contents



Net income.
 Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Healthcare revenues.
 Healthcare expenses.
 28




---



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Selling, general and administrative expenses.
 Discontinued acquisition expenses.
 Depreciation and amortization
 Charge for settlement of Florida legal matter.
   29




---



##### Table of Contents



Interest, net
 Late fee income.
 Income tax provision (benefit).
 Income from continuing operations.
 Loss from discontinued operations, net of taxes
 Net income.
 30




---



##### Table of Contents



Liquidity and Capital Resources
 Overview
      Credit Facility
    31




---



##### Table of Contents



Other Financing Transactions
  Contractual Obligations And Commercial Commitments
  Current
    

2-3
years
    

4-5
years
    

After
5 yearsOperating leases
    
    $
    815
    
    
    $
    3,059
    
    
    $
    1,145
    
    
    $
    Professional
and general liability claims
    
    
    8,800
    
    
    
    4,642
    
    
    
    2,485
    
    
    
    1,421Total
    
    $
    9,615
    
    
    $
    7,701
    
    
    $
    3,630
    
    
    $
    1,421
  32




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##### Table of Contents



Off-Balance Sheet Transactions
  Inflation
  Stock Repurchase Program
  Outlook
   Recently Issued Accounting Pronouncement
 Share-Based Payment
   33




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34




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   35




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PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Professional Liability Suit.
 EMSA lease matter. th
 Other matters.
 36




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Companys Annual Meeting of Stockholders was held on Wednesday, June 15, 2005.(b)
    
    Not applicable.(c)
    
    The results of the vote for election of directors to the Companys Board of Directors
were as follows:
 Director
    
    Votes For
    
    Votes WithheldMichael Catalano
    
    
    9,165,238
    
    
    
    183,197Michael E. Gallagher
    
    
    8,856,552
    
    
    
    491,883Carol R. Goldberg
    
    
    9,049,114
    
    
    
    299,321William D. Eberle
    
    
    9,083,083
    
    
    
    266,352Burton C. Einspruch, M.D.
    
    
    9,257,362
    
    
    
    91,073Richard M. Mastaler
    
    
    8,966,959
    
    
    
    381,476Richard D. Wright
    
    
    9,112,397
    
    
    
    236,038
 
 ITEM 5. OTHER INFORMATION
  37




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##### Table of Contents



ITEM 6. EXHIBITS
 2.1 
    
    Securities Purchase Agreement, dated as of January 26, 1999, among America Service Group
Inc., Health Care Capital Partners L.P. and Health Care Executive Partners L.P. (incorporated
herein by reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed on
February 10, 1999).3.1 
    
    Amended and Restated Certificate of Incorporation of America Service Group Inc.
(incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q for the three month period ended June 30, 2002).3.2 
    
    Amended and Restated By-Laws of America Service Group Inc. (incorporated herein by
reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the three-month
period ended June 30, 2002).3.3 
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated herein by reference to Exhibit 3.4 to the Companys Quarterly
Report on Form 10-Q for the three month period ended June 30, 2004).4.1 
    
    Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the three month period ended June 30, 2002).4.2 
    
    Certificate of Designation of the Series A Convertible Preferred Stock (incorporated
herein by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on
February 10, 1999).10.1 
    
    Amendment No. 3 to Revolving Credit, Term Loan and Security Agreement dated as of October
31, 2002, by and between America Service Group Inc., Prison Health Services, Inc., EMSA
Limited Partnership, Prison Health Services Of Indiana, L.L.C., Correctional Health Services,
LLC, and Secure Pharmacy Plus, LLC, Capitalsource Finance LLC, (CapitalSource), as agent for
the Lenders, and CapitalSource and Wells Fargo Foothill, Inc., as Lenders.11 
    
    Computation of Per Share Earnings.*31.1 
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 *
    
    Data required by SFAS No. 128, Earnings Per Share, is provided in Note 18 to the condensed
consolidated financial statements in this report. 38




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##### Table of Contents



SIGNATURES
  AMERICA SERVICE GROUP INC./s/ MICHAEL CATALANOMichael CatalanoChairman, President & Chief Executive Officer(Duly Authorized Officer)/s/ MICHAEL W. TAYLORMichael W. TaylorSenior Vice President & Chief Financial Officer(Principal Financial Officer)Dated: August 9, 2005
 39