America Service Group Reports Year-End Results.

Business Editors, Health/Medical Writers

NASHVILLE, Tenn.--(BW HealthWire)--March 18, 2002

America Service Group (NASDAQ:ASGR)

Fourth Quarter and Year-End Highlights:

-- Progress on upgrade of contract portfolio is proceeding, with 25 contracts
renewed, amended or allowed to expire

-- Strengthened and reorganized management team

-- Debt levels reduced from third quarter level by $11 million to $52 million
through today's date

-- New bank amendment completed March 15, 2002

-- Same contract revenue growth of 11% in 2001

-- Continued improvements in gross margins and EBITDA from the prior quarter

-- Entire portfolio analyzed, with five unprofitable contracts identified,
resulting in a nonrecurring fourth quarter charge of $18.3 million

America Service Group Inc. (NASDAQ:ASGR) announced today results for the fourth quarter and year ended December 31, 2001.

Business Update

"During 2001, the Company weathered a difficult year. However, we have addressed our issues and are beginning our recovery. The Company's program to upgrade its contract portfolio is proceeding," commented Michael Catalano, chairman, president and chief executive officer of America Service Group. "From July 1, 2001, through December 31, 2001, the Company has renewed, modified or allowed to expire twenty-five contracts and contracted for approximately $20 million of new business on an annualized basis. The Company's objectives have been to achieve reasonable rates, which reflect current healthcare costs, and to establish risk-sharing models for areas such as pharmacy, off-site utilization and nursing costs.

"We have strengthened and reorganized our management team, bringing on Richard Wright as vice chairman of operations and Michael Taylor as chief financial officer during the fourth quarter. Their addition complements an already strong management group.

"Company performance is showing some improvement with debt levels significantly reduced from the prior quarter, strong same contract revenue growth for the year and improvements in gross margins and EBITDA, before nonrecurring charges, for the last two quarters."

As discussed in the Company's prior quarterly earnings release, five contracts, with combined third quarter revenues of $30.2 million, accounted for a negative gross margin of approximately $2.0 million in the third quarter. The Company has executed amendments that either increase revenues, provide for risk sharing or provide flexibility of staffing on four of these contracts. Reflecting improved terms, these five contracts produced combined fourth quarter negative gross margins of $1.2 million.

During the fourth quarter, the Company conducted a comprehensive analysis of its portfolio of 145 contracts for the purpose of identifying loss contracts and developing a contract loss reserve for succeeding years. Resulting from this review, three of the five contracts mentioned above, plus an additional two county contracts, were determined to be loss contracts. These five contracts accounted for a negative gross margin of $2.5 million during the fourth quarter and were included in a charge for loss contracts of $18.3 million as of December 31, 2001. The five contracts covered by the charge have expiration dates ranging from June 30, 2002 through June 30, 2005. Ninety percent of the charge relates to the State of Kansas contract, which expires June 30, 2005, and the City of Philadelphia contract, which expires June 30, 2004. The remaining liability covers the State of Maine contract, which expires June 30, 2002, and two county contracts that expire August 15, 2002 and June 30, 2005.

The Company will continue, in cooperation with clients, to address the loss circumstances of the five contracts. As a result of the comprehensive review of all contracts, the Company does not anticipate further contracts requiring loss reserves.

"The dramatic and continuing rise in healthcare costs has impacted the correctional healthcare industry, and particularly our Company, the leading player. Long-term, full-risk contracts, the prevailing industry standard for large contract awards, can no longer be supported in the current cost environment. The charge for loss contracts in 2001 recognizes that reality and will shape the Company's future contracting strategy," added Mr. Catalano.

Financial Results

Healthcare revenues for the fourth quarter of 2001 were $133.6 million, an increase of 17.7% over the prior year quarter. For the year ended December 31, 2001, healthcare revenues were $552.5 million, an increase of 44.6% over the prior year. Same contract revenues increased 11.1% in 2001, as compared with the prior year.

Healthcare expenses for the fourth quarter of 2001 were $126.3 million, or 94.6% of revenue, including the impact of the five loss contracts discussed above. In the prior year quarter, healthcare expenses were $102.9 million, or 90.7% of revenue. For the year ended December 31, 2001, healthcare expenses were $532.7 million, or 96.4% of revenue, as compared to $344.8 million, or 90.3% of revenue, in the prior year. Included in the full year results for 2001 was a charge of $6.4 million to healthcare expenses in the second quarter, which was the result of an increase in reserves for medical claims.

Selling, general and administrative expenses for the fourth quarter of 2001 were $4.6 million, or 3.5% of revenue. Included in the results for the quarter was an increase in legal reserves of $600,000, primarily related to further development of malpractice cases previously covered by insurance carriers now in liquidation. In the prior year quarter, selling, general and administrative expenses were $3.5 million, or 3.1% of revenue. For the year ended December 31, 2001, selling, general and administrative expenses were $19.1 million, or 3.5% of revenue, as compared to $13.8 million, or 3.6% of revenue, in the prior year. In addition to the $600,000 charge in the fourth quarter noted above, the Company incurred an additional $1.3 million of charges to selling, general and administrative expenses from increases in reserves for legal and malpractice issues in the second quarter.

EBITDA for the fourth quarter was $3.2 million, as compared with $7.0 million in the prior year quarter. For the year ended December 31, 2001, EBITDA was $2.6 million, including the negative impact of the $6.4 million increase in reserves for medical claims in the second quarter, as compared with $23.3 million in the prior year. The Company defines EBITDA as earnings before interest, taxes, depreciation, amortization and certain non-recurring charges. Considered to be non-recurring charges for the purposes of calculating EBITDA for 2001 were $1.9 million of charges to selling, general and administrative expenses related to increases in reserves for legal and malpractice issues, $2.6 million of strategic initiative and severance expenses, $13.2 million of charges related to impairment of long-lived assets, and the $18.3 million charge for loss contracts.

As of December 31, 2001, the Company had $16.1 million of gross deferred tax assets primarily created during 2001 by the various charges mentioned above. Under accounting rules prescribed by Financial Accounting Standards Board Statement 109, the Company established a full valuation allowance related to its gross deferred tax assets. Assuming the Company achieves sufficient profitability to realize the deferred income tax assets, the valuation allowance will be reduced in future years through a credit to income tax expense.

Primarily as a result of the charge for loss contracts, establishment of a valuation allowance related to deferred taxes and the increase in legal reserves, the Company incurred a net loss of $27.8 million, or $5.12 per diluted share, in the fourth quarter, as compared with net income of $2.0 million, or $0.38 per diluted share, in the prior year quarter. For the year ended December 31, 2001, the Company incurred a net loss available to common shareholders of $45.0 million, or $8.50 per diluted share, as compared with net income available to common shareholders of $7.2 million, or $1.40 per diluted share, in the prior year.

Cash and cash equivalents increased to $10.4 million at December 31, 2001, as compared with $256,000 in the prior year. The Company has reduced debt levels from $63.0 million at the end of the third quarter to $58.1 million at December 31, 2001, and $52.025 million as of the date of this release. Additionally, the Company has amended its revolving credit facility with its syndicate of bank lenders, effective March 15, 2002. Among other changes, this amendment reduces the level of facility commitment reductions required before ultimate maturity of the facility on April 1, 2003, waives certain financial covenant violations for the period ended December 31, 2001, and modifies financial covenant targets prospectively. If the current credit facility is still in place at December 31, 2002, the Company must deliver to the lenders warrants entitling the lenders to acquire either 2.5% or 5% of the fully diluted common stock of the Company. The amount of the warrants would be based on the facility size at December 31, 2002.

A listen-only simulcast and 30-day replay of America Service Group's year-end conference call will be available online at www.asgr.com, or www.companyboardroom.com on March 19, 2002, beginning at 9:00 a.m. Eastern time.

America Service Group Inc., based in Brentwood, Tennessee, is the leading provider of correctional healthcare services in the United States. America Service Group Inc., through its subsidiaries, provides a wide range of healthcare and pharmacy programs to government agencies for the medical care of inmates.

This press release may contain "forward-looking" statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. As such, they involve risk and uncertainty that actual results may differ materially from those projected in the forward-looking statements. A discussion of the important factors and assumptions regarding the statements and risks involved is contained in the Company's filings with the Securities and Exchange Commission.

                      AMERICA SERVICE GROUP INC.
                         Financial Highlights
                 (In thousands, except per share data)

Consolidated Statements
 of Operations:                            Three Months Ended
                                    ---------------------------------
                                    Dec. 31,   % of  Dec. 31,   % of
                                      2001   Revenue   2000    Revenue
                                    --------  -----  --------   ------
Healthcare revenues                 $133,606  100.0  $113,486   100.0
Healthcare expenses                  126,345   94.6   102,919    90.7
                                    --------  -----  --------   -----
Gross margin                           7,261    5.4    10,567     9.3
Selling, general and
 administrative expenses               4,634    3.5     3,531     3.1
Depreciation and amortization          1,794    1.3     1,924     1.7
Strategic initiative and
 severance expenses                      (24)   --       --       --
Charge for loss contracts             18,318   13.7      --       --
                                    --------  -----  --------   -----
Income (loss) from operations        (17,461) (13.1)    5,112     4.5
Interest, net                          1,798    1.3     1,310     1.1
                                    --------  -----  --------   -----
Income (loss) before income taxes    (19,259) (14.4)    3,802     3.4
Provision for income
 taxes (benefit)                       8,547    6.4     1,606     1.5
                                    --------  -----  --------   -----
Net income (loss)                    (27,806) (20.8)    2,196     1.9
Preferred stock dividends               --      --        159     0.1
                                    --------  -----  --------   -----
Net income (loss) attributable
 to common shares                   $(27,806) (20.8)   $2,037     1.8
                                    ========  =====  ========   =====
Net income (loss) per common share:
  Basic                               $(5.12)           $0.51
                                    ========         ========
  Diluted                             $(5.12)           $0.38
                                    ========         ========
Weighted average shares outstanding:
  Basic                                5,433            4,029
                                    ========         ========
  Diluted                              5,433            5,842
                                    ========         ========

                                               Year Ended
                                    ---------------------------------
                                    Dec. 31,   % of  Dec. 31,   % of
                                      2001   Revenue   2000    Revenue
                                    --------  -----  --------   ------
Healthcare revenues                 $552,471  100.0  $381,946   100.0
Healthcare expenses                  532,739   96.4   344,759    90.3
                                    --------  -----  --------   -----
Gross margin                          19,732    3.6    37,187     9.7
Selling, general and
 administrative expenses              19,063    3.5    13,838     3.6
Depreciation and amortization          7,535    1.4     5,962     1.6
Strategic initiative and
 severance expenses                    2,562    0.4       --     --
Impairment of long-lived assets       13,236    2.4       --     --
Charge for loss contracts             18,318    3.3       --     --
                                    --------  -----  --------   -----
Income (loss) from operations        (40,982)  (7.4)   17,387     4.5
Interest, net                          5,713    1.0     4,077     1.1
                                    --------  -----  --------   -----
Income (loss) before income taxes    (46,695)  (8.4)   13,310     3.4
Provision for income
 taxes (benefit)                      (1,852)  (0.3)    5,503     1.4
                                    --------  -----  --------   -----
Net income (loss)                    (44,843)  (8.1)    7,807     2.0
Preferred stock dividends                163    --        648     0.1
                                    --------  -----  --------   -----
Net income (loss) attributable
 to common shares                   $(45,006)  (8.1)   $7,159     1.9
                                    ========  =====  ========   =====
Net income (loss) per common share:
     Basic                            $(8.50)           $1.86
                                    ========          =======
     Diluted                          $(8.50)           $1.40
                                    ========          =======
Weighted average shares outstanding:
     Basic                             5,292            3,854
                                    ========         ========
     Diluted                           5,292            5,587
                                    ========         ========


                      AMERICA SERVICE GROUP INC.
                         Financial Highlights
                 (In thousands, except per share data)

Consolidated Balance Sheets:                          December 31,
                                                   2001        2000
                                                ---------   ---------
ASSETS
Current assets:
 Cash and cash equivalents                        $10,382        $256
 Accounts receivable, healthcare
  and other less allowances                        64,691      64,053
 Inventories                                        7,747       7,497
 Prepaid expenses and other current assets          6,984       1,427
 Current deferred taxes                              --         1,143
                                                ---------   ---------
Total current assets                               89,804      74,376
Property and equipment, net                         7,827       8,651
Goodwill, net                                      44,566      61,358
Contracts, net                                     13,242      14,002
Other intangibles, net                              1,683       1,925
Other assets                                        1,172       1,090
                                                ---------   ---------

Total assets                                     $158,294    $161,402
                                                =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                 $31,159     $21,664
 Medical claims liability                          15,238      11,285
 Accrued expenses                                  28,062      24,213
 Deferred revenue                                   4,161       1,641
 Current portion of loss
  contract reserve                                  4,310        --
 Current portion of long-term debt                 10,700        --
                                                ---------   ---------
Total current liabilities                          93,630      58,803
Noncurrent portion of
 accrued expenses                                   6,810       3,680
Deferred taxes                                       --           757
Noncurrent portion of loss
 contract reserve                                  14,008        --
Long-term debt, net of
 current portion                                   47,400      56,800
                                                ---------   ---------
Total liabilities                                 161,848     120,040
Mandatory redeemable preferred stock                 --        12,397
Common stock                                           54          41
Additional paid-in capital                         31,377      18,259
Stockholders' notes receivable                     (1,383)     (1,384)
Accumulated other comprehensive income               (645)       --
Retained earnings (deficit)                       (32,957)     12,049
                                                ---------   ---------

Total liabilities and
 stockholders' equity                            $158,294    $161,402
                                                =========   =========