##### 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 September 30, 2007
 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 200
Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 373-3100
 þ o
  o þ o
 o þ




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##### 



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 September 30, 2007 and December 31, 2006
    
    3Condensed Consolidated Statements of Operations for the quarters and nine months ended
September 30, 2007 and 2006
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2007 and 2006
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    36Item 4. Controls and Procedures
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    41Item 3. Defaults Upon Senior Securities
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    41Item 5. Other Information
    
    41Item 6. Exhibits
    
    42Signatures
    
    43Ex-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  (shown in 000s except share and per share amounts)  (UNAUDITED)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,751
    
    
    $
    13,736Accounts receivable, net of allowance for doubtful accounts of $628 and $524, respectively
    
    
    73,437
    
    
    
    80,945Inventories
    
    
    3,629
    
    
    
    7,070Prepaid expenses and other current assets
    
    
    12,127
    
    
    
    12,851Current deferred tax assets
    
    
    8,441
    
    
    
    8,864Total current assets
    
    
    100,385
    
    
    
    123,466Property and equipment, net
    
    
    5,118
    
    
    
    6,800Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    4,318
    
    
    
    5,538Other intangibles, net
    
    
    442
    
    
    
    615Other assets
    
    
    10,090
    
    
    
    7,540Total assets
    
    $
    161,125
    
    
    $
    184,731LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,350
    
    
    $
    26,809Accrued medical claims liability
    
    
    27,815
    
    
    
    31,005Accrued expenses
    
    
    38,729
    
    
    
    37,541Deferred revenue
    
    
    10,120
    
    
    
    11,740Revolving credit facility
    
    
    10,000
    
    
    
    10,000Total current liabilities
    
    
    106,014
    
    
    
    117,095Noncurrent portion of accrued expenses
    
    
    12,861
    
    
    
    20,634Noncurrent deferred tax liabilities
    
    
    2,493
    
    
    
    548Total liabilities
    
    
    121,368
    
    
    
    138,277Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at September 30, 2007 and
December 31, 2006; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at September 30, 2007 and
December 31, 2006; 9,318,014 and 10,049,587 shares issued and outstanding at September
30, 2007 and December 31, 2006, respectively
    
    
    93
    
    
    
    100Additional paid-in capital
    
    
    36,907
    
    
    
    47,597Retained earnings (deficit)
    
    
    2,757
    
    
    
    (1,243
    )Total stockholders equity
    
    
    39,757
    
    
    
    46,454Total liabilities and stockholders equity
    
    $
    161,125
    
    
    $
    184,731
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (shown in 000s except share and per share amounts)  (UNAUDITED)
 Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Healthcare revenues
    
    $
    139,082
    
    
    $
    130,247
    
    
    $
    415,760
    
    
    $
    396,031Healthcare expenses
    
    
    129,428
    
    
    
    121,337
    
    
    
    384,274
    
    
    
    368,924Gross margin
    
    
    9,654
    
    
    
    8,910
    
    
    
    31,486
    
    
    
    27,107Selling, general and administrative expenses
    
    
    6,230
    
    
    
    6,085
    
    
    
    20,328
    
    
    
    18,608Corporate restructuring expenses
    
    
    333
    
    
    
    
    
    
    
    333
    
    
    
    Audit Committee investigation and related expenses
    
    
    7
    
    
    
    370
    
    
    
    47
    
    
    
    4,967Depreciation and amortization
    
    
    919
    
    
    
    1,048
    
    
    
    2,915
    
    
    
    3,055Income from operations
    
    
    2,165
    
    
    
    1,407
    
    
    
    7,863
    
    
    
    477Interest, net
    
    
    409
    
    
    
    531
    
    
    
    1,129
    
    
    
    1,546Income (loss) from continuing operations before
income tax provision (benefit)
    
    
    1,756
    
    
    
    876
    
    
    
    6,734
    
    
    
    (1,069
    )Income tax provision (benefit)
    
    
    683
    
    
    
    86
    
    
    
    2,806
    
    
    
    (876
    )Income (loss) from continuing operations
    
    
    1,073
    
    
    
    790
    
    
    
    3,928
    
    
    
    (193
    )Loss from discontinued operations, net of taxes
    
    
    (232
    )
    
    
    (707
    )
    
    
    (428
    )
    
    
    (358
    )Net income (loss)
    
    $
    841
    
    
    $
    83
    
    
    $
    3,500
    
    
    $
    (551
    )Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    (0.02
    )Loss from discontinued operations, net of taxes
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.37
    
    
    $
    (0.05
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    (0.02
    )Loss from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.05
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.36
    
    
    $
    (0.05
    )Weighted average common shares outstanding:Basic
    
    
    9,278,360
    
    
    
    10,410,046
    
    
    
    9,527,855
    
    
    
    10,652,077Diluted
    
    
    9,339,259
    
    
    
    10,471,516
    
    
    
    9,620,839
    
    
    
    10,652,077
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (shown in 000s)  (UNAUDITED)
 Nine months endedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    3,500
    
    
    $
    (551
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,932
    
    
    
    3,116Loss on retirement of fixed assets
    
    
    46
    
    
    
    3Finance cost amortization
    
    
    87
    
    
    
    82Deferred income taxes
    
    
    2,368
    
    
    
    (976
    )Share-based compensation expense
    
    
    2,581
    
    
    
    3,117Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    (429
    )Changes in operating assets and liabilities, net of effect of sale of SPP assets:Accounts receivable, net
    
    
    7,453
    
    
    
    10,637Inventories
    
    
    1,550
    
    
    
    (1,392
    )Prepaid expenses and other current assets
    
    
    688
    
    
    
    (64
    )Other assets
    
    
    (2,637
    )
    
    
    5,538Accounts payable
    
    
    (7,459
    )
    
    
    (8,498
    )Accrued medical claims liability
    
    
    (3,190
    )
    
    
    (2,827
    )Accrued expenses
    
    
    (5,938
    )
    
    
    7,446Deferred revenue
    
    
    (1,620
    )
    
    
    6,290Net cash provided by operating activities
    
    
    361
    
    
    
    21,492Cash flows from investing activities:Capital expenditures, net
    
    
    (1,880
    )
    
    
    (2,386
    )Proceeds from sale of SPP assets
    
    
    3,811
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,931
    
    
    
    (2,386
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    
    
    
    
    681Share repurchases
    
    
    (13,655
    )
    
    
    (11,582
    )Reduction in restricted cash used to collateralize letters of credit
    
    
    
    
    
    
    4,200Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    429Issuance of common stock, net
    
    
    378
    
    
    
    398Exercise of stock options
    
    
    
    
    
    
    1,055Net cash used in financing activities
    
    
    (13,277
    )
    
    
    (4,819
    )Net increase (decrease) in cash and cash equivalents
    
    
    (10,985
    )
    
    
    14,287Cash and cash equivalents at beginning of period
    
    
    13,736
    
    
    
    Cash and cash equivalents at end of period
    
    $
    2,751
    
    
    $
    14,287
 
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##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
 1. Basis of Presentation
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
  2. Description of Business
   6




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##### Table of Contents



3. Audit Committee Investigation
  4. Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income
Taxes
 Fair Value Measurement. Fair Value Measurement
  Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  5. Restructuring Charge
  7




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##### Table of Contents



One-timeTerminationBenefitsBalance at June 30, 2007
    
    $
    Plus: Costs incurred
    
    
    333Less: Amounts paid
    
    
    (110
    )Balance at September 30, 2007
    
    $
    223
 6. Share-Based Compensation
 Share-Based Payment
  Nine months endedSeptember 30, 2006Volatility
    
    
    0.64Interest rate
    
    
    5.03
    %Expected life (years)
    
    
    4.66Dividend yields
    
    
    0.00
    %
   Weighted Average
    
    
    Aggregate IntrinsicWeighted Average
    
    
    Remaining
    
    
    Value (inOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands) (1)Outstanding, December 31, 2006
    
    
    1,363,507
    
    
    $
    17.47Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (2,666
    )
    
    
    22.35Outstanding, March 31, 2007
    
    
    1,360,841
    
    
    $
    17.46Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (33,569
    )
    
    
    19.78Outstanding, June 30, 2007
    
    
    1,327,272
    
    
    $
    17.40Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (56,334
    )
    
    
    15.71Outstanding, September 30, 2007
    
    
    1,270,938
    
    
    $
    17.43
    
    
    
    6.40
    
    
    $
    564Exercisable, September 30, 2007
    
    
    1,023,848
    
    
    $
    17.77
    
    
    
    5.90
    
    
    $
    564
 
 (1)
    
    Based upon the difference between the closing market price of the Companys common stock on the last trading
day of the quarter and the grant price of in-the-money options. 8




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##### Table of Contents



WeightedRestricted
    
    
    Average Grant-Shares
    
    
    Date Fair ValueNonvested, December 31, 2006
    
    
    54,500
    
    
    $
    14.62Granted
    
    
    109,570
    
    
    
    15.75Vested
    
    
    (16,000
    )
    
    
    15.36Forfeited
    
    
    (4,840
    )
    
    
    15.75Nonvested, September 30, 2007
    
    
    143,230
    
    
    $
    15.37
 7. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Healthcare revenues
    
    $
    1,658
    
    
    $
    31,463
    
    
    $
    12,862
    
    
    $
    93,133Healthcare expenses
    
    
    2,045
    
    
    
    32,612
    
    
    
    13,569
    
    
    
    93,646Gross margin
    
    
    (387
    )
    
    
    (1,149
    )
    
    
    (707
    )
    
    
    (513
    )Depreciation and amortization
    
    
    5
    
    
    
    17
    
    
    
    17
    
    
    
    61Interest, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Loss from discontinued operations before taxes
    
    
    (392
    )
    
    
    (1,166
    )
    
    
    (724
    )
    
    
    (590
    )Income tax benefit
    
    
    (160
    )
    
    
    (459
    )
    
    
    (296
    )
    
    
    (232
    )Loss from discontinued operations, net of taxes
    
    $
    (232
    )
    
    $
    (707
    )
    
    $
    (428
    )
    
    $
    (358
    )
 8. Accounts Receivable
  September 30,
    
    
    December 31,2007
    
    
    2006Billed accounts receivable
    
    $
    40,198
    
    
    $
    40,242Unbilled accounts receivable
    
    
    32,803
    
    
    
    40,375Other accounts receivable
    
    
    1,064
    
    
    
    85274,065
    
    
    
    81,469Less: Allowances for doubtful accounts
    
    
    (628
    )
    
    
    (524
    )$
    73,437
    
    
    $
    80,945
    9




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##### Table of Contents



9. Prepaid Expenses and Other Current Assets
  September 30,
    
    
    December 31,2007
    
    
    2006Prepaid insurance
    
    $
    6,229
    
    
    $
    6,295Prepaid cash deposits for professional
liability claims losses
    
    
    5,300
    
    
    
    6,000Prepaid performance bonds
    
    
    55
    
    
    
    134Prepaid other
    
    
    543
    
    
    
    422$
    12,127
    
    
    $
    12,851
 10




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10. Property and Equipment
  September 30,
    
    
    December 31,
    
    
    Estimated2007
    
    
    2006
    
    
    Useful LivesLeasehold improvements
    
    $
    96
    
    
    $
    1,230
    
    
    5 yearsEquipment and furniture
    
    
    9,031
    
    
    
    10,986
    
    
    5 yearsComputer software
    
    
    2,979
    
    
    
    4,645
    
    
    3-5 yearsMedical equipment
    
    
    1,017
    
    
    
    2,334
    
    
    5 yearsAutomobiles
    
    
    70
    
    
    
    60
    
    
    5 yearsManagement information systems under development
    
    
    56
    
    
    
    102
    
    
    
    13,249
    
    
    
    19,357Less: Accumulated depreciation
    
    
    (8,131
    )
    
    
    (12,557
    )$
    5,118
    
    
    $
    6,800
  11. Other Assets
  September 30,
    
    
    December 31,2007
    
    
    2006Deferred financing costs
    
    $
    334
    
    
    $
    334Less: Accumulated amortization
    
    
    (211
    )
    
    
    (124
    )123
    
    
    
    210Prepaid cash deposits for professional liability
claims losses
    
    
    1,701
    
    
    
    1,382Excess deposits for professional liability claims
    
    
    2,987
    
    
    
    2,369Prepaid
insurance deposit
    
    
    3,523
    
    
    
    3,523Long-term receivable
    
    
    1,697
    
    
    
    Other refundable deposits
    
    
    59
    
    
    
    56$
    10,090
    
    
    $
    7,540
 12. Contracts and Other Intangible Assets
  September 30,
    
    
    December 31,2007
    
    
    2006Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (11,552
    )
    
    
    (10,332
    )$
    4,318
    
    
    $
    5,538Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (1,958
    )
    
    
    (1,785
    )$
    442
    
    
    $
    615
  11




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##### Table of Contents



13. Accrued Expenses
  September 30,
    
    
    December 31,2007
    
    
    2006Salaries and employee benefits
    
    $
    19,897
    
    
    $
    17,926Professional liability claims
    
    
    19,738
    
    
    
    23,511Accrued workers compensation claims
    
    
    6,176
    
    
    
    6,438Other
    
    
    5,779
    
    
    
    10,30051,590
    
    
    
    58,175Less: Noncurrent portion of professional
liability and workers compensation claims
    
    
    (12,861
    )
    
    
    (20,634
    )$
    38,729
    
    
    $
    37,541
 14. Reserve for Loss Contracts
   15. Banking Arrangements
    12




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##### Table of Contents



Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement
   16. Income Taxes
 Accounting for Income Taxes
   13




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##### Table of Contents



17. Professional and General Liability Self-insurance Retention
  18. Commitments and Contingencies
 Catastrophic Limits
  14




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##### Table of Contents



Litigation and Claims
 Lake Professional Liability Suit.
 Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 The Health and Hospital Corporation of Marion County, Indiana v. Prison Health Services, Inc.
 15




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##### Table of Contents



Andrew Berkowitz, M.D., Individually and on behalf of all others similarly situated v. Prison
Health Services, Inc. and City of Philadelphia.
 Saint Josephs Regional Medical Center v. Correctional Health Services, et al.
 Matters involving PHS and Baltimore County, Maryland.
  16




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##### Table of Contents



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 17




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##### Table of Contents



Delaware Department of Justice Inquiry
 Other Matters
  Performance Bonds
  19. Net Income (Loss) Per Share
  18




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Earnings Per Share,
 Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income (loss) from continuing operations
    
    $
    1,073
    
    
    $
    790
    
    
    $
    3,928
    
    
    $
    (193
    )Loss from discontinued operations, net of taxes
    
    
    (232
    )
    
    
    (707
    )
    
    
    (428
    )
    
    
    (358
    )Numerator for basic and diluted net income (loss) per share
    
    $
    841
    
    
    $
    83
    
    
    $
    3,500
    
    
    $
    (551
    )Denominator:Denominator for basic net income (loss) per share 
weighted average shares
    
    
    9,278,360
    
    
    
    10,410,046
    
    
    
    9,527,855
    
    
    
    10,652,077Effect of dilutive securities:Employee stock options
    
    
    60,899
    
    
    
    61,470
    
    
    
    92,984
    
    
    
    Denominator for diluted net income (loss) per share 
adjusted weighted average shares and assumed
conversions
    
    
    9,339,259
    
    
    
    10,471,516
    
    
    
    9,620,839
    
    
    
    10,652,077Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    (0.02
    )Loss from discontinued operations, net of taxes
    
    
    (0.03
    )
    
    
    (0.07
    )
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.37
    
    
    $
    (0.05
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    (0.02
    )Loss from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.05
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    0.36
    
    
    $
    (0.05
    )
  Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    1,053,996
    
    
    
    1,135,675
    
    
    
    949,273
    
    
    
    1,386,341Weighted average exercise price of excluded options
    
    $
    19.38
    
    
    $
    19.36
    
    
    $
    20.10
    
    
    $
    17.50
 20. Comprehensive Income
  21. Segment Data
   19




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##### Table of Contents



Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended September 30, 2007:Healthcare revenues
    
    $
    139,106
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    139,082Healthcare expenses
    
    
    129,452
    
    
    
    (24
    )
    
    
    
    
    
    
    129,428Gross margin
    
    $
    9,654
    
    
    $
    
    
    
    $
    
    
    
    $
    9,654Depreciation and amortization expense
    
    $
    919
    
    
    $
    
    
    
    $
    
    
    
    $
    919Quarter ended September 30, 2006:Healthcare revenues
    
    $
    126,930
    
    
    $
    20,554
    
    
    $
    (17,237
    )
    
    $
    130,247Healthcare expenses
    
    
    117,450
    
    
    
    21,124
    
    
    
    (17,237
    )
    
    
    121,337Gross margin
    
    $
    9,480
    
    
    $
    (570
    )
    
    $
    
    
    
    $
    8,910Depreciation and amortization expense
    
    $
    857
    
    
    $
    191
    
    
    $
    
    
    
    $
    1,048Nine months ended September 30, 2007:Healthcare revenues
    
    $
    412,258
    
    
    $
    19,071
    
    
    $
    (15,569
    )
    
    $
    415,760Healthcare expenses
    
    
    380,458
    
    
    
    19,385
    
    
    
    (15,569
    )
    
    
    384,274Gross margin
    
    $
    31,800
    
    
    $
    (314
    )
    
    $
    
    
    
    $
    31,486Depreciation and amortization expense
    
    $
    2,671
    
    
    $
    244
    
    
    $
    
    
    
    $
    2,915Nine months ended September 30, 2006:Healthcare revenues
    
    $
    381,778
    
    
    $
    63,257
    
    
    $
    (49,004
    )
    
    $
    396,031Healthcare expenses
    
    
    352,901
    
    
    
    65,027
    
    
    
    (49,004
    )
    
    
    368,924Gross margin
    
    $
    28,877
    
    
    $
    (1,770
    )
    
    $
    
    
    
    $
    27,107Depreciation and amortization expense
    
    $
    2,488
    
    
    $
    567
    
    
    $
    
    
    
    $
    3,055
 Correctional
    
    
    PharmaceuticalHealthcare
    
    
    DistributionServices
    
    
    Services
    
    
    ConsolidatedAs of September 30, 2007:Inventories
    
    $
    3,629
    
    
    $
    
    
    
    $
    3,629Property and equipment, net
    
    $
    5,118
    
    
    $
    
    
    
    $
    5,118Goodwill, net
    
    $
    40,772
    
    
    $
    
    
    
    $
    40,772Total assets
    
    $
    161,125
    
    
    $
    
    
    
    $
    161,125As of December 31, 2006:Inventories
    
    $
    4,238
    
    
    $
    2,832
    
    
    $
    7,070Property and equipment, net
    
    $
    4,634
    
    
    $
    2,166
    
    
    $
    6,800Goodwill, net
    
    $
    40,772
    
    
    $
    
    
    
    $
    40,772Total assets
    
    $
    177,901
    
    
    $
    6,830
    
    
    $
    184,731
 22. Share Repurchases
  20




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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 at
acceptable pricing levels;
    
    whether or not government agencies continue to privatize correctional healthcare
services;
    
    the possible effect of adverse publicity regarding the Companys business;
 21




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##### Table of Contents




    
    increased competition for new contracts and renewals of existing contracts;
    
    the Companys ability to locate and/or execute acquisition opportunities;
    
    risks arising from the possibility that the Company may be unable to collect accounts
receivable or that accounts receivable collection may be delayed;
    
    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 Companys ability to maintain and continually develop information technology and
clinical systems;
    
    the outcome or adverse development of pending litigation, including professional
liability litigation;
    
    risks arising from the possibility that the acquirer of certain assets of SPP cannot
provide pharmaceuticals or related services at either a cost or service level sufficient to
allow the Company to meet its contractual obligations with its customers without negatively
impacting financial performance;
    
    the Companys dependence on key management and clinical personnel;
    
    risks arising from potential weaknesses or deficiencies in the Companys internal
control over financial reporting;
    
    risks associated with the possibility that the Company may be unable to satisfy
covenants under its credit facility;
    
    the risk that government or municipal entities (including the Companys government and
municipal customers) may bring enforcement actions against, seek additional refunds from,
or impose penalties on, the Company or its subsidiaries as a result of the matters
investigated by the Audit Committee in prior years or the previous restatement of the
Companys financial results; and
    
    the risks arising from shareholder litigation as a result of the matters investigated by
the Audit Committee in prior years or the previous restatement of the Companys financial
results.
  Critical Accounting Policies And Estimates
 General
  22




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##### Table of Contents




    
    revenue (net of contractual allowances) and cost recognition (including the
estimated cost of off-site 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;
    
    income taxes; and
    
    share-based compensation.
   Revenue and Cost Recognition
     23




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Allowance for Doubtful Accounts
    24




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Loss Contracts
  25




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##### Table of Contents



Professional and General Liability Self-Insurance Retention
     26




---



##### Table of Contents



Other Self-Funded Insurance Reserves
  Legal Contingencies
  Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
   27




---



##### 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
    28




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Share-Based Compensation
 Share-Based Payment
 29




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##### Table of Contents



Results of Operations
  Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,Percentage of Healthcare Revenues
    
    2007
    
    2006
    
    2007
    
    2006Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    93.1
    
    
    
    93.2
    
    
    
    92.4
    
    
    
    93.2Gross margin
    
    
    6.9
    
    
    
    6.8
    
    
    
    7.6
    
    
    
    6.8Selling, general and administrative expenses
    
    
    4.4
    
    
    
    4.6
    
    
    
    4.9
    
    
    
    4.7Corporate restructuring expenses
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    Audit Committee investigation and related expenses
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    1.2Depreciation and amortization
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.8Income from operations
    
    
    1.6
    
    
    
    1.1
    
    
    
    1.9
    
    
    
    0.1Interest, net
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4Income (loss) from continuing operations before
income tax provision (benefit)
    
    
    1.3
    
    
    
    0.7
    
    
    
    1.6
    
    
    
    (0.3
    )Income tax provision (benefit)
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.7
    
    
    
    (0.3
    )Income (loss) from continuing operations
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.9
    
    
    
    Loss from discontinued operations, net of taxes
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Net income (loss)
    
    
    0.6
    %
    
    
    0.1
    %
    
    
    0.8
    %
    
    
    (0.1
    )%
 Quarter Ended September 30, 2007 Compared to Quarter Ended September 30, 2006
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Corporate restructuring expenses.
 30




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Audit Committee investigation and related expenses.
 Depreciation and amortization
 Interest, net
 Income tax provision.
 Income from continuing operations.
 Loss from discontinued operations, net of taxes
 Net income.
 Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Healthcare revenues.
 Healthcare expenses.
 31




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##### Table of Contents



Selling, general and administrative expenses.
 Corporate restructuring expenses.
 Audit Committee investigation and related expenses.
 Depreciation and amortization
 Interest, net
 Income tax provision (benefit).
 Income (loss) from continuing operations.
 Loss from discontinued operations, net of taxes
 Net income (loss).
 Liquidity and Capital Resources
 Overview
  32




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Credit Facility
    33




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##### Table of Contents



Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement
  Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    323
    
    
    $
    1,043
    
    
    $
    
    
    
    $
    Revolving credit facility
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    2,653
    
    
    
    2,968
    
    
    
    555
    
    
    
    Professional and general liability claims
    
    
    10,400
    
    
    
    8,141
    
    
    
    837
    
    
    
    360Total
    
    $
    23,376
    
    
    $
    12,152
    
    
    $
    1,392
    
    
    $
    360
  34




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##### Table of Contents



Off-Balance Sheet Transactions
  Inflation
  Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurement. Fair Value Measurement
  Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  35




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   36




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##### Table of Contents



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Lake Professional Liability Suit.
 Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 The Health and Hospital Corporation of Marion County, Indiana v. Prison Health Services, Inc.
 37




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##### Table of Contents



Andrew Berkowitz, M.D., Individually and on behalf of all others similarly situated v. Prison
Health Services, Inc. and City of Philadelphia.
 Saint Josephs Regional Medical Center v. Correctional Health Services, et al.
 Matters involving PHS and Baltimore County, Maryland.
  38




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##### Table of Contents



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 39




---



##### Table of Contents



Delaware Department of Justice Inquiry
 Other Matters.
 40




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURTIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  41




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##### Table of Contents



ITEM 6. EXHIBITS
 2.1 
    
    Asset Purchase Agreement, dated as of April 12, 2007, by and among Maxor National Pharmacy
Services Corporation, Secure Pharmacy Plus, LLC and Prison Health Services, Inc., as guarantor
(incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on April 18, 2007).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 
    
    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).3.3 
    
    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).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).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 19 to the condensed
consolidated financial statements in this report. 42




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##### Table of Contents



SIGNATURES
  AMERICA SERVICE GROUP INC./s/ MICHAEL CATALANO

Michael CatalanoChairman, President & Chief Executive Officer
(Duly Authorized Officer)/s/ MICHAEL W. TAYLOR

Michael W. TaylorSenior Vice President & Chief Financial Officer
(Principal Financial Officer)
  43