AMERICA SERVICE GROUP INC /DE - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes o No þ

There were 6,692,840 shares of Common Stock outstanding as of November 12, 2003.


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		Number

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		3
	Condensed Consolidated Statements of Operations for the quarters and nine month periods ended September 30, 2003 and 2002		4
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 6. Exhibits and Reports on Form 8-K			30
Signatures			32


		September 30,			December 31,
		2003			2002

		*(shown in 000’s except share and*
		*per share amounts)*
ASSETS
Current assets:
	Cash and cash equivalents	$	8,714		$	3,770
	Restricted cash		—			6,250
	Accounts receivable: healthcare and other, less allowances		64,114			72,477
	Inventories		5,917			6,390
	Prepaid expenses and other current assets		18,548			13,100

Total current assets			97,293			101,987
Property and equipment, net			4,448			6,240
Goodwill			43,896			43,896
Contracts, net			10,827			12,048
Other intangibles, net			1,333			1,483
Other assets			5,526			5,852

Total assets		$	163,323		$	171,506

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	42,897		$	40,892
	Medical claims liability		14,028			13,697
	Accrued expenses		36,902			33,482
	Deferred revenue		12,735			6,203
	Current portion of loss contract reserve		451			3,306
	Current portion of long-term debt		1,667			1,667
	Revolving credit facility classified as current (see Note 11)		20,580			41,135

Total current liabilities			129,260			140,382
Noncurrent portion of accounts payable and accrued expenses			8,179			7,924
Noncurrent portion of loss contract reserve			425			5,681
Long-term debt, net of current portion			1,944			3,194

Total liabilities			139,808			157,181

Commitments and contingencies
Stockholders’ equity:
	Common stock, $.01 par value, 10,000,000 shares authorized; 6,399,000 and 6,122,000 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively		64			61
	Additional paid-in capital		39,360			36,561
	Stockholders’ notes receivable		(1,154	)		(1,241	)
	Accumulated deficit		(14,755	)		(21,056	)

Total stockholders’ equity			23,515			14,325

Total liabilities and stockholders’ equity		$	163,323		$	171,506

The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets. The condensed consolidated balance sheet at
December 31, 2002 is taken from the audited financial statements at that date.


		Quarter ended				Nine months ended
		September 30,				September 30,

		2003		2002		2003			2002

		*(shown in 000's except per share amounts)*
Healthcare revenues		$	140,184	$	111,498	$	397,309		$	321,180
Healthcare expenses			130,555		104,122		371,150			300,915
Reduction in reserve for loss contracts			—		—		—			3,320

Gross margin			9,629		7,376		26,159			23,585
Selling, general, and administrative expenses			3,692		3,394		10,694			10,958
Depreciation and amortization			1,042		1,228		3,200			3,495

Income from operations			4,895		2,754		12,265			9,132
Interest, net			883		1,223		2,947			4,627

Income from continuing operations before income taxes			4,012		1,531		9,318			4,505
Income tax provision			287		322		698			214

Income from continuing operations			3,725		1,209		8,620			4,291
Income (loss) from discontinued operations, net of taxes			1,602		1,076		(2,319	)		5,281

Net income		$	5,327	$	2,285	$	6,301		$	9,572

Net income per common share — basic:
	Income from continuing operations	$	0.59	$	0.22	$	1.37		$	0.78
	Income (loss) from discontinued operations, net of taxes		0.25		0.19		(0.37	)		0.97

	Net income	$	0.84	$	0.41	$	1.00		$	1.75

Net income per common share — diluted:
	Income from continuing operations	$	0.56	$	0.22	$	1.33		$	0.77
	Income (loss) from discontinued operations, net of taxes		0.25		0.19		(0.35	)		0.95

	Net income	$	0.81	$	0.41	$	0.98		$	1.72

Weighted average common shares outstanding:
Basic			6,357		5,526		6,287			5,472

Diluted			6,601		5,631		6,458			5,578

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.


				Nine months ended
				September 30,

				2003			2002

				*(Amounts shown in 000's)*
Operating Activities
Net income				$	6,301		$	9,572
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				3,220			3,573
	Loss on retirement of fixed assets				179			—
	Finance cost amortization				423			821
	Increase in reserve for loss contracts				4,500			—
	Reduction in reserve for loss contracts				(1,714	)		(3,320	)
	Interest on stockholders’ notes receivable				(54	)		(58	)
	Other comprehensive income charged to interest expense				—			542
	Changes in operating assets and liabilities:
		Accounts receivable, net			8,363			(2,021	)
		Inventories			285			271
		Prepaid expenses and other current assets			(5,448	)		(7,410	)
		Other assets			(95	)		397
		Accounts payable			(1,246	)		10,361
		Medical claims liability			331			(1,269	)
		Accrued expenses			1,294			2,299
		Deferred revenue			6,532			2,668
		Loss contract reserve			(4,397	)		(5,188	)

			Net cash provided by operating activities		18,474			11,238

Investing Activities
Capital expenditures					(918	)		(925	)

			Net cash used in investing activities		(918	)		(925	)

Financing Activities
Net payments on line of credit and term loan					(21,805	)		(16,511	)
Decrease in restricted cash					6,250			—
Payment of deferred financing costs					—			(550	)
Proceeds from stockholders’ notes receivable					141			83
Issuance of common stock					205			—
Exercise of stock options					2,597			—

			Net cash used in financing activities		(12,612	)		(16,978	)

Net increase (decrease) in cash and cash equivalents					4,944			(6,665	)
Cash and cash equivalents at beginning of period					3,770			10,382

Cash and cash equivalents at end of period				$	8,714		$	3,717

Noncash Transaction
Payable to Health Cost Solutions, Inc. (see Notes 9 and 10)				$	5,632		$	—

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(dollar amounts shown in 000’s except per share amounts)
(unaudited)

The interim condensed consolidated financial statements of America Service Group Inc. and its consolidated subsidiaries (the “Company”) as of September 30, 2003 and for the quarters and nine month periods ended September 30, 2003 and 2002 are unaudited, but in the opinion of management, have been prepared in conformity with accounting principles generally accepted in the United States applied on a basis consistent with those of the annual audited consolidated financial statements. Such interim condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position and the results of operations for the quarters and nine month periods presented. The results of operations for the quarters and nine month periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2003. The interim condensed consolidated financial statements should be read in connection with the audited consolidated financial statements for the year ended December 31, 2002.

The Company provides managed healthcare services to correctional facilities under capitated contracts (with certain adjustments) with state and local governments and certain private entities. The health status of inmates may impact results of operations under such contractual arrangements.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and resolves significant implementation issues that had evolved since the issuance of SFAS No. 121. SFAS No. 144 established a single accounting model for long-lived assets to be disposed of by sale or abandonment. Additionally, SFAS No. 144 expanded the scope of financial accounting and reporting of discontinued operations to require that all components of an entity that have either been disposed of (by sale, by abandonment, or in a distribution to owners) or are held for sale and whose operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, should be presented as discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The provisions for presenting the components of an entity as discontinued operations are effective only for disposal activities after the effective date of SFAS No. 144. The Company adopted the provisions of SFAS No. 144 effective January 1, 2002. Pursuant to SFAS No. 144, each of the Company’s contracts is a component of the entity, whose operations can be distinguished from the rest of the Company. Therefore, when a contract terminates, by expiration or otherwise, the contract’s operations generally will be eliminated from the continuing operations of the Company. Accordingly, the operations of such contracts, net of applicable income taxes, have been presented as discontinued operations and prior period Consolidated Statements of Operations have been reclassified. See Note 5 for a further discussion of discontinued operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which requires the consolidation of certain variable interest entities, as defined by FIN 46. FIN 46 requires an assessment of contractual arrangements to determine if they represent interests in variable interest entities. Variable interest entities created prior to February 1, 2003, will be subject to the consolidation provisions of FIN 46 in fiscal periods ending after December 15, 2003. Variable interest entities created subsequent to February 1, 2003 are subject to the consolidation provisions currently. Additionally, disclosures are required currently if the Company expects to consolidate any variable interest entities in the future. The Company continues to evaluate the consolidation requirements of FIN 46 with respect to variable interest entities created prior to February 1, 2003.

The Company has elected to follow Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for its employee stock options. Under APB No. 25, compensation expense is generally recognized as the difference between the exercise price of the Company’s employee stock options and the market price of the underlying stock on the date of grant.

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of options issued during 2003 and 2002 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

The following table illustrates the effect on net income per common share as if the Company had applied the fair value recognition provisions of SFAS 123 for each of the quarters and nine month periods ended September 30, 2003 and 2002:


	Quarter ended				Nine months ended
	September 30,				September 30,

	2003		2002		2003			2002

Income from continuing operations as reported	$	3,725	$	1,209	$	8,620		$	4,291
Add: Stock based compensation expense included in reported net income		—		—		—			—
Deduct: Stock based compensation expense determined under SFAS 123		204		574		508			1,427

Pro forma income from continuing operations		3,521		635		8,112			2,864
Income (loss) from discontinued operations		1,602		1,076		(2,319	)		5,281

Pro forma net income attributable to common shares	$	5,123	$	1,711	$	5,793		$	8,145

Pro forma net income per common share — basic:


(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2003

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ______________________ to _____________________


Delaware (State or other jurisdiction of incorporation or organization)		51-0332317 (I.R.S. Employer Identification No.)

105 Westpark Drive, Suite 200 Brentwood, Tennessee (Address of principal executive offices)		37027 (Zip Code)


PART I: FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. — EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATIOIN OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


	2003			2002

Volatility		0.85			0.80
Interest rate		4-5	%		3-4	%
Expected life (years)		3			3
Dividend yields		0.0	%		0.0	%

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