##### 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 March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________
  
 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
 x  ̈
   ̈ x  ̈
  ̈ x




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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 March 31, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the quarters ended March 31, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2006 and 2005
    
    
    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
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40Signatures
    
    
    41Ex-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
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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)
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,093
    
    
    $
    Restricted cash
    
    
    4,189
    
    
    
    4,200Accounts receivable, less allowances of $759 and $698, respectively
    
    
    97,507
    
    
    
    99,712Inventories
    
    
    8,072
    
    
    
    6,546Prepaid expenses and other current assets
    
    
    19,800
    
    
    
    18,976Current deferred tax assets
    
    
    8,371
    
    
    
    7,575Total current assets
    
    
    154,032
    
    
    
    137,009Property and equipment, net
    
    
    6,467
    
    
    
    6,336Goodwill, net
    
    
    43,813
    
    
    
    43,813Contracts, net
    
    
    6,759
    
    
    
    7,166Other intangibles, net
    
    
    788
    
    
    
    845Other assets
    
    
    9,340
    
    
    
    10,068Total assets
    
    $
    221,199
    
    
    $
    205,237LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    42,294
    
    
    $
    36,023Accrued medical claims liability
    
    
    35,717
    
    
    
    31,122Accrued expenses
    
    
    48,521
    
    
    
    44,478Deferred revenue
    
    
    8,815
    
    
    
    8,533Revolving credit facility
    
    
    12,500
    
    
    
    12,500Total current liabilities
    
    
    147,847
    
    
    
    132,656Noncurrent portion of accrued expenses
    
    
    15,951
    
    
    
    15,701Noncurrent deferred tax liabilities
    
    
    876
    
    
    
    876Total liabilities
    
    
    164,674
    
    
    
    149,233Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at
March 31, 2006 and December 31, 2005; no shares issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at
March 31, 2006 and December 31, 2005; 10,870,001 and 10,761,526
shares issued and outstanding at March 31, 2006 and December 31,
2005, respectively
    
    
    109
    
    
    
    108Additional paid-in capital
    
    
    55,427
    
    
    
    53,759Retained earnings
    
    
    989
    
    
    
    2,137Total stockholders equity
    
    
    56,525
    
    
    
    56,004Total liabilities and stockholders equity
    
    $
    221,199
    
    
    $
    205,237
 
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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 endedMarch 31,2006
    
    
    2005Healthcare revenues
    
    $
    167,101
    
    
    $
    132,953Healthcare expenses
    
    
    157,799
    
    
    
    121,464Gross margin
    
    
    9,302
    
    
    
    11,489Selling, general and administrative expenses
    
    
    5,912
    
    
    
    4,304Audit Committee investigation and related expenses
    
    
    3,569
    
    
    
    Depreciation and amortization
    
    
    976
    
    
    
    961Income (loss) from operations
    
    
    (1,155
    )
    
    
    6,224Interest, net
    
    
    513
    
    
    
    278Income (loss) from continuing operations before income tax provision (benefit)
    
    
    (1,668
    )
    
    
    5,946Income tax provision (benefit)
    
    
    (679
    )
    
    
    2,388Income (loss) from continuing operations
    
    
    (989
    )
    
    
    3,558Income (loss) from discontinued operations, net of taxes
    
    
    (159
    )
    
    
    305Net income (loss)
    
    $
    (1,148
    )
    
    $
    3,863Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    (0.09
    )
    
    $
    0.33Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.03Net income (loss)
    
    $
    (0.11
    )
    
    $
    0.36Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    (0.09
    )
    
    $
    0.32Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.03Net income (loss)
    
    $
    (0.11
    )
    
    $
    0.35Weighted average common shares outstanding:Basic
    
    
    10,766,181
    
    
    
    10,846,671Diluted
    
    
    10,766,181
    
    
    
    11,161,051
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (shown in 000s) (UNAUDITED)
 Quarter endedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (1,148
    )
    
    $
    3,863Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    985
    
    
    
    984Finance cost amortization
    
    
    24
    
    
    
    146Loss on retirement of fixed assets
    
    
    3
    
    
    
    Stock option income tax benefits
    
    
    
    
    
    
    81Deferred income taxes
    
    
    (796
    )
    
    
    2,436Share-based compensation expense
    
    
    1,047
    
    
    
    14Excess tax benefits from share-based compensation expense
    
    
    (374
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    2,205
    
    
    
    8,093Inventories
    
    
    (1,526
    )
    
    
    (134
    )Prepaid expenses and other current assets
    
    
    (824
    )
    
    
    574Other assets
    
    
    704
    
    
    
    (593
    )Accounts payable
    
    
    6,271
    
    
    
    (5,139
    )Accrued medical claims liability
    
    
    4,595
    
    
    
    443Accrued expenses
    
    
    4,293
    
    
    
    3,107Deferred revenue
    
    
    282
    
    
    
    (2,392
    )Loss contract reserve utilization
    
    
    
    
    
    
    (3,056
    )Net cash provided by operating activities
    
    
    15,741
    
    
    
    8,427Cash flows from investing activities:Capital expenditures, net
    
    
    (654
    )
    
    
    (1,156
    )Net cash used in investing activities
    
    
    (654
    )
    
    
    (1,156
    )Cash flows from financing activities:Reduction in restricted cash used to collateralize letters of credit
    
    
    11
    
    
    
    Excess tax benefits from share-based compensation expense
    
    
    374
    
    
    
    Issuance of common stock, net
    
    
    215
    
    
    
    369Exercise of stock options
    
    
    406
    
    
    
    745Net cash provided by financing activities
    
    
    1,006
    
    
    
    1,114Net increase in cash and cash equivalents
    
    
    16,093
    
    
    
    8,385Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    7,191Cash and cash equivalents at end of period
    
    $
    16,093
    
    
    $
    15,576
 
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AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2006
 1. Basis of Presentation
    2. Description of Business
  3. Restatement of Financial Statements
   6




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4. Share-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Share-Based Payment
    Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards
 7




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March 31,2005Income from continuing operations as reported
    
    $
    3,558Add: Stock based compensation expense included in reported net
income, net of taxes
    
    
    8Deduct: Stock based compensation expense determined under SFAS
No. 123, net of taxes
    
    
    (407
    )Pro forma income from continuing operations
    
    
    3,159Income from discontinued operations, net of taxes
    
    
    305Pro forma net income attributable to common shares
    
    $
    3,464As reported net income per common share  basic:As reported income from continuing operations
    
    $
    0.33As reported income from discontinued operations, net of taxes
    
    
    0.03As reported net income
    
    $
    0.36Pro forma net income per common share  basic:Pro forma income from continuing operations
    
    $
    0.29Pro forma income from discontinued operations
    
    
    0.03Pro forma net income
    
    $
    0.32As reported net income per common share  diluted:As reported income from continuing operations
    
    $
    0.32As reported income from discontinued operations, net of taxes
    
    
    0.03As reported net income
    
    $
    0.35Pro forma net income per common share  diluted:Pro forma income from continuing operations
    
    $
    0.28Pro forma income from discontinued operations
    
    
    0.03Pro forma net income
    
    $
    0.31
 Stock Options
    8




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2006
    
    
    2005Volatility
    
    
    0.78
    
    
    
    0.84Interest rate
    
    
    4-5
    %
    
    
    3-4
    %Expected life (years)
    
    
    4.75
    
    
    
    4.5Dividend yields
    
    
    0.0
    %
    
    
    0.0
    %
  Weighted Average
    
    
    Aggregate IntrinsicWeighted Average
    
    
    Remaining
    
    
    Value (inOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands) (1)Outstanding,
December 31, 2005
    
    
    1,300,502
    
    
    $
    16.82Granted
    
    
    40,000
    
    
    
    14.10Exercised
    
    
    (92,513
    )
    
    
    4.39Canceled
    
    
    (10,750
    )
    
    
    10.99Outstanding, March 31, 2006
    
    
    1,237,239
    
    
    $
    17.72
    
    
    
    7.23
    
    
    $
    1,383Exercisable, March 31, 2006
    
    
    582,345
    
    
    $
    14.04
    
    
    
    5.57
    
    
    $
    
 
 (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.   Restricted Stock
  Employee Stock Purchase Plan
  9




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5. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter endedMarch 31,2006
    
    
    2005Healthcare revenues
    
    $
    462
    
    
    $
    36,605Healthcare expenses
    
    
    711
    
    
    
    36,071Gross margin
    
    
    (249
    )
    
    
    534Depreciation and amortization
    
    
    9
    
    
    
    23Interest, net
    
    
    10
    
    
    
    2Income (loss) from discontinued operations before taxes
    
    
    (268
    )
    
    
    509Income tax provision (benefit)
    
    
    (109
    )
    
    
    204Income (loss) from discontinued operations, net of taxes
    
    $
    (159
    )
    
    $
    305
 6. Accounts Receivable
  March 31,
    
    
    December 31,2006
    
    
    2005Billed accounts receivable
    
    $
    53,576
    
    
    $
    46,735Unbilled accounts receivable
    
    
    43,718
    
    
    
    53,563Other accounts receivable
    
    
    972
    
    
    
    11298,266
    
    
    
    100,410Less: Allowances
    
    
    (759
    )
    
    
    (698
    )$
    97,507
    
    
    $
    99,712
   10




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7. Prepaid Expenses and Other Current Assets
  March 31,
    
    
    December 31,2006
    
    
    2005Prepaid insurance
    
    $
    10,777
    
    
    $
    10,067Prepaid cash deposits for estimated
professional liability claims losses
    
    
    8,400
    
    
    
    8,400Prepaid performance bonds
    
    
    82
    
    
    
    115Prepaid other
    
    
    541
    
    
    
    394$
    19,800
    
    
    $
    18,976
 11




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8. Property and Equipment
  March 31,
    
    
    December 31,
    
    
    Estimated2006
    
    
    2005
    
    
    Useful LivesLeasehold improvements
    
    $
    1,230
    
    
    $
    1,230
    
    
    5 yearsEquipment and furniture
    
    
    10,023
    
    
    
    9,657
    
    
    5 yearsComputer software
    
    
    3,996
    
    
    
    3,945
    
    
    3-5 yearsMedical equipment
    
    
    2,283
    
    
    
    2,231
    
    
    5 yearsAutomobiles
    
    
    59
    
    
    
    38
    
    
    5 yearsManagement information systems under development
    
    
    59
    
    
    
    59
    
    
    
    17,650
    
    
    
    17,160Less: Accumulated depreciation
    
    
    (11,183
    )
    
    
    (10,824
    )$
    6,467
    
    
    $
    6,336
  Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
 9. Other Assets
  March 31,
    
    
    December 31,2006
    
    
    2005Deferred financing costs
    
    $
    334
    
    
    $
    251Less: Accumulated amortization
    
    
    (38
    )
    
    
    (14
    )296
    
    
    
    237Prepaid cash deposits for estimated professional
liability claims losses
    
    
    5,267
    
    
    
    5,892Excess deposits for professional liability claims
    
    
    3,702
    
    
    
    3,864Other refundable deposits
    
    
    75
    
    
    
    75$
    9,340
    
    
    $
    10,068
 10. Contracts and Other Intangible Assets
  March 31,
    
    
    December 31,2006
    
    
    2005Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (9,111
    )
    
    
    (8,704
    )$
    6,759
    
    
    $
    7,166Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (1,612
    )
    
    
    (1,555
    )$
    788
    
    
    $
    845
  12




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11. Accrued Expenses
  March 31,
    
    
    December 31,2006
    
    
    2005Salaries and employee benefits
    
    $
    20,047
    
    
    $
    16,390Professional liability claims
    
    
    24,851
    
    
    
    24,600Accrued workers compensation claims
    
    
    5,680
    
    
    
    5,707Other
    
    
    13,894
    
    
    
    13,48264,472
    
    
    
    60,179Less: Noncurrent portion of professional liability claims
    
    
    (15,951
    )
    
    
    (15,701
    )$
    48,521
    
    
    $
    44,478
 12. Reserve for Loss Contracts
      13




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13. Banking Arrangements
  14




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Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause
and a Lock-Box Arrangement
   14. Income Taxes
 Accounting for Income Taxes
 15




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15. Professional and General Liability Self-insurance Retention
  16. Commitments and Contingencies
 Catastrophic Limits
  Litigation and Claims
 Lake Professional Liability Suit.
 16




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EMSA lease matter. th
  Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 17




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Delaware Department of Justice Informal Inquiry
 The Health and Hospital Corporation of Marion County, Indiana v. Prison Health Services, Inc.
 Other Matters.
 Performance Bonds
  17. Net Income (Loss) Per Share
 Earnings Per Share,
 18




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Quarter endedMarch 31,2006
    
    
    2005Numerator:Income (loss) from continuing operations
    
    $
    (989
    )
    
    $
    3,558Income (loss) from discontinued operations, net of taxes
    
    
    (159
    )
    
    
    305Numerator for basic and diluted net income (loss)
    
    $
    (1,148
    )
    
    $
    3,863Denominator:Denominator for basic net income per share 
weighted average shares
    
    
    10,766,181
    
    
    
    10,846,671Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    314,380Denominator for diluted net income per share 
adjusted weighted average shares and assumed
conversions
    
    
    10,766,181
    
    
    
    11,161,051Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    (0.09
    )
    
    $
    0.33Income (loss) from discontinued operations, net of
taxes
    
    
    (0.02
    )
    
    
    0.03Net income (loss)
    
    $
    (0.11
    )
    
    $
    0.36Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    (0.09
    )
    
    $
    0.32Income (loss) from discontinued operations, net of
taxes
    
    
    (0.02
    )
    
    
    0.03Net income (loss)
    
    $
    (0.11
    )
    
    $
    0.35
  Quarter endedMarch 31,2006
    
    
    2005Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    1,237,239
    
    
    
    25,000Weighted average exercise price of excluded options
    
    $
    17.72
    
    
    $
    25.61
 18. Comprehensive Income
  19. Segment Data
  19




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Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended March 31, 2006:Healthcare revenues
    
    $
    161,302
    
    
    $
    20,334
    
    
    $
    (14,535
    )
    
    $
    167,101Healthcare expenses
    
    
    151,000
    
    
    
    21,334
    
    
    
    (14,535
    )
    
    
    157,799Gross margin
    
    $
    10,302
    
    
    $
    (1,000
    )
    
    $
    
    
    
    $
    9,302Depreciation and amortization expense
    
    $
    787
    
    
    $
    189
    
    
    $
    
    
    
    $
    976Quarter ended March 31, 2005:Healthcare revenues
    
    $
    122,041
    
    
    $
    22,287
    
    
    $
    (11,375
    )
    
    $
    132,953Healthcare expenses
    
    
    111,822
    
    
    
    21,017
    
    
    
    (11,375
    )
    
    
    121,464Gross margin
    
    $
    10,219
    
    
    $
    1,270
    
    
    $
    
    
    
    $
    11,489Depreciation and amortization expense
    
    $
    727
    
    
    $
    234
    
    
    $
    
    
    
    $
    961
 Correctional
    
    
    PharmaceuticalHealthcare
    
    
    DistributionServices
    
    
    Services
    
    
    ConsolidatedAs of March 31, 2006:Inventories
    
    $
    5,230
    
    
    $
    2,842
    
    
    $
    8,072Property and equipment, net
    
    $
    3,893
    
    
    $
    2,574
    
    
    $
    6,467Goodwill, net
    
    $
    40,771
    
    
    $
    3,042
    
    
    $
    43,813Total assets
    
    $
    202,645
    
    
    $
    18,554
    
    
    $
    221,199As of December 31, 2005:Inventories
    
    $
    3,944
    
    
    $
    2,602
    
    
    $
    6,546Property and equipment, net
    
    $
    3,670
    
    
    $
    2,666
    
    
    $
    6,336Goodwill, net
    
    $
    40,771
    
    
    $
    3,042
    
    
    $
    43,813Total assets
    
    $
    188,467
    
    
    $
    16,770
    
    
    $
    205,237
 20. Share Repurchases
  21. Related Party Transaction
  20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
    Forward-Looking Statements
  
    
    the risk that government entities (including the Companys government 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 or the
previous restatement of the
Companys financial results;
    
    the risks arising from shareholder litigation as a result of the
matters recently investigated by the Audit Committee or the previous restatement of the Companys financial
results;
    
    the ability of the Company to recruit a sufficient number of
independent directors to allow the Company to comply with director
independence requirements of Nasdaq Rule 4350(c) and the audit
committee composition requirements of Nasdaq Rule 4350(d)(2)(A);
    
    risks associated with the possibility that the Company may be unable to satisfy
covenants under its credit facility;
    
    risks arising from potential weaknesses or deficiencies in the Companys internal
control over financial reporting;
    
    risks arising from the possibility that the Company may be unable to collect accounts
receivable;
    
    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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
    
    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;
    
    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.
  Restatement of Financial Statements
    22




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Recent Developments
      Critical Accounting Policies And Estimates
 General
  23




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
    
    revenue 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
      24




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Allowance for Doubtful Accounts
     25




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Loss Contracts
    26




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27




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Professional and General Liability Self-Insurance Retention
     Other Self-Funded Insurance Reserves
  28




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Legal Contingencies
  Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
   
    
    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.
   29




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Income Taxes
 Accounting for Income Taxes
   Share-Based Compensation
  30




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Results of Operations
  Quarter endedMarch 31,Percentage of Healthcare Revenues
    
    2006
    
    
    2005Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    94.4
    
    
    
    91.4Gross margin
    
    
    5.6
    
    
    
    8.6Selling, general and administrative expenses
    
    
    3.5
    
    
    
    3.2Audit Committee investigation and related expenses
    
    
    2.2
    
    
    
    Depreciation and amortization
    
    
    0.6
    
    
    
    0.7Income (loss) from operations
    
    
    (0.7
    )
    
    
    4.7Interest, net
    
    
    0.3
    
    
    
    0.2Income (loss) from continuing operations before income
tax provision (benefit)
    
    
    (1.0
    )
    
    
    4.5Income tax provision (benefit)
    
    
    (0.4
    )
    
    
    1.8Income (loss) from continuing operations
    
    
    (0.6
    )
    
    
    2.7Income (loss) from discontinued operations, net of taxes
    
    
    (0.1
    )
    
    
    0.2Net income (loss)
    
    
    (0.7
    )%
    
    
    2.9
    %
 Quarter Ended March 31, 2006 Compared to Quarter Ended March 31, 2005
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
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Depreciation and amortization
 Interest, net
 Income tax provision (benefit).
 Income (loss) from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income (loss).
 Liquidity and Capital Resources
 Overview
    32




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Credit Facility
     Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement
 33




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Other Financing Transactions
  Contractual Obligations And Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    1,199
    
    
    $
    2,379
    
    
    $
    244
    
    
    $
    Revolving credit facility
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    Professional and general liability claims
    
    
    8,899
    
    
    
    11,278
    
    
    
    3,633
    
    
    
    1,090Total
    
    $
    22,598
    
    
    $
    13,657
    
    
    $
    3,877
    
    
    $
    1,090
  Off-Balance Sheet Transactions
  Inflation
  Stock Repurchase Program
  34




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
    
    
    The use of legal counsel specializing in pharmaceutical matters to provide
interpretations of all SPP customer contracts.
    
    Utilizing these contract interpretations, the Company, with the assistance of third
party accounting resources, calculated SPPs revenue for the period.
    
    Company personnel expanded their review of SPP account reconciliations and
transactions.
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Changes in Internal Controls
  
    
    Policies have been developed and communicated to SPP management concerning the
clarity of definitions regarding pricing and returns policies to be used in proposals
and contracts.
    
    All proposals, new contracts and amendments to existing contracts must be reviewed
by the Legal and Finance Departments of the Company prior to delivery or execution.
    
    The significant terms of all proposals must be reviewed and approved by Executive
Management of the Company prior to delivery.
    
    Changes to customer pricing rules in SPPs information system must be reviewed and
approved by the Legal and Finance Departments of the Company prior to implementation
of the changes.
    
    Documentation of changes to the customer pricing rules must be maintained by SPP
with a copy of all changes sent to the Legal Department of the Company.
    
    The Controller of SPP now reports directly to the Finance Department of the Company
rather than to the President of SPP.
    
    Monthly account reconciliations of SPP are being reviewed by the Finance Department
of the Company.
 36




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##### Table of Contents



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Lake Professional Liability Suit.
 EMSA lease matter. th
  Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
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##### Table of Contents



SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 Delaware Department of Justice Informal Inquiry
 The Health and Hospital Corporation of Marion County, Indiana v. Prison Health Services, Inc.
 Other Matters.
 38




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##### Table of Contents



ITEM 1A. RISK FACTORS
  Shareholder Litigation.
 Potential Enforcement Actions
 Lack of Independent Directors.
 
 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
  
 ITEM 5. OTHER INFORMATION
  39




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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
    
    
    
    Contract dated December 30, 2005 between Prison Health Services, Inc., a Delaware
corporation, and the Florida Department of Corrections (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on January 3, 2006).10.2
    
    
    
    First Amendment to the Amended and Restated Revolving Credit and Security Agreement dated
October 31, 2005 between the Company, Prison Health Services, Inc., a Delaware corporation,
EMSA Limited Partnership, a Florida limited partnership, Prison Health Services of Indiana,
LLC, an Indiana limited liability company, Secure Pharmacy Plus, LLC, a Tennessee limited
liability company, and Correctional Health Services, LLC, a New Jersey limited liability
company, and CapitalSource Finance LLC, a Delaware limited liability company, as lender and
collateral and administrative agent (incorporated herein by reference to Exhibit 10.0 to the
Companys Current Report on Form 8-K filed on March 16, 2006).10.3
    
    
    
    Employment Agreement, dated March 28, 2006, between Richard Hallworth and America Service
Group Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 29, 2006).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 17 to the condensed
consolidated financial statements in this report. 40




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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)  41