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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, 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 200Brentwood, 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 March 31, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the quarters ended March 31, 2007 and
2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2007 and
2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    41Signatures
    
    
    42Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification
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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 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,898
    
    
    $
    13,736Accounts receivable, net of allowance for doubtful accounts of $548 and $524, respectively
    
    
    76,257
    
    
    
    80,945Inventories
    
    
    5,984
    
    
    
    7,070Prepaid expenses and other current assets
    
    
    13,295
    
    
    
    12,851Current deferred tax assets
    
    
    9,427
    
    
    
    8,864Total current assets
    
    
    112,861
    
    
    
    123,466Property and equipment, net
    
    
    7,011
    
    
    
    6,800Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    5,131
    
    
    
    5,538Other intangibles, net
    
    
    557
    
    
    
    615Other assets
    
    
    7,323
    
    
    
    7,540Total assets
    
    $
    173,655
    
    
    $
    184,731LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22,505
    
    
    $
    26,809Accrued medical claims liability
    
    
    28,748
    
    
    
    31,005Accrued expenses
    
    
    38,247
    
    
    
    37,541Deferred revenue
    
    
    10,730
    
    
    
    11,740Revolving credit facility
    
    
    10,000
    
    
    
    10,000Total current liabilities
    
    
    110,230
    
    
    
    117,095Noncurrent portion of accrued expenses
    
    
    19,597
    
    
    
    20,634Noncurrent deferred tax liabilities
    
    
    2,030
    
    
    
    548Total liabilities
    
    
    131,857
    
    
    
    138,277Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at March 31, 2007 and
December 31, 2006; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at March 31, 2007 and
December 31, 2006; 9,553,410 and 10,049,587 shares issued and outstanding at March 31,
2007 and December 31, 2006, respectively
    
    
    95
    
    
    
    100Additional paid-in capital
    
    
    41,086
    
    
    
    47,597Retained earnings (deficit)
    
    
    617
    
    
    
    (1,243
    )Total stockholders equity
    
    
    41,798
    
    
    
    46,454Total liabilities and stockholders equity
    
    $
    173,655
    
    
    $
    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 endedMarch 31,2007
    
    
    2006Healthcare revenues
    
    $
    145,655
    
    
    $
    141,945Healthcare expenses
    
    
    134,188
    
    
    
    133,131Gross margin
    
    
    11,467
    
    
    
    8,814Selling, general and administrative expenses
    
    
    7,330
    
    
    
    5,912Audit Committee investigation and related expenses
    
    
    14
    
    
    
    3,569Depreciation and amortization
    
    
    1,051
    
    
    
    973Income (loss) from operations
    
    
    3,072
    
    
    
    (1,640
    )Interest, net
    
    
    362
    
    
    
    513Income (loss) from continuing operations before income tax provision (benefit)
    
    
    2,710
    
    
    
    (2,153
    )Income tax provision (benefit)
    
    
    1,116
    
    
    
    (873
    )Income (loss) from continuing operations
    
    
    1,594
    
    
    
    (1,280
    )Income (loss) from discontinued operations, net of taxes
    
    
    (234
    )
    
    
    132Net income (loss)
    
    $
    1,360
    
    
    $
    (1,148
    )Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    (0.12
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    (0.11
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    (0.12
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    (0.11
    )Weighted average common shares outstanding:Basic
    
    
    9,945,304
    
    
    
    10,766,181Diluted
    
    
    10,032,668
    
    
    
    10,766,181
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (shown in 000s)  (UNAUDITED)
 Quarter endedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    1,360
    
    
    $
    (1,148
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,052
    
    
    
    985Loss on retirement of fixed assets
    
    
    22
    
    
    
    3Finance cost amortization
    
    
    29
    
    
    
    24Deferred income taxes
    
    
    919
    
    
    
    (796
    )Share-based compensation expense
    
    
    1,173
    
    
    
    1,047Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    (374
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    4,688
    
    
    
    2,205Inventories
    
    
    1,086
    
    
    
    (1,526
    )Prepaid expenses and other current assets
    
    
    (444
    )
    
    
    (824
    )Other assets
    
    
    192
    
    
    
    704Accounts payable
    
    
    (4,304
    )
    
    
    6,271Accrued medical claims liability
    
    
    (2,257
    )
    
    
    4,595Accrued expenses
    
    
    169
    
    
    
    4,293Deferred revenue
    
    
    (1,010
    )
    
    
    282Net cash provided by operating activities
    
    
    2,675
    
    
    
    15,741Cash flows from investing activities:Capital expenditures, net
    
    
    (824
    )
    
    
    (654
    )Net cash used in investing activities
    
    
    (824
    )
    
    
    (654
    )Cash flows from financing activities:Share repurchases
    
    
    (7,887
    )
    
    
    Reduction in restricted cash used to collateralize letters of credit
    
    
    
    
    
    
    11Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    374Issuance of common stock, net
    
    
    198
    
    
    
    215Exercise of stock options
    
    
    
    
    
    
    406Net cash provided by (used in) financing activities
    
    
    (7,689
    )
    
    
    1,006Net increase (decrease) in cash and cash equivalents
    
    
    (5,838
    )
    
    
    16,093Cash and cash equivalents at beginning of period
    
    
    13,736
    
    
    
    Cash and cash equivalents at end of period
    
    $
    7,898
    
    
    $
    16,093
 
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AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
 1. Basis of Presentation
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
  2. Description of Business
  3. Audit Committee Investigation
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4. Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income
Taxes
 Fair Value Measurement. Fair Value Measurement
  5. Share-Based Compensation
 Share-Based Payment
  2006Volatility
    
    
    0.78Interest rate
    
    
    4-5
    %Expected life (years)
    
    
    4.75Dividend yields
    
    
    0.0
    %
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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
    
    
    $
    17.46
    
    
    
    6.99
    
    
    $
    2,758Exercisable, March 31, 2007
    
    
    785,606
    
    
    $
    17.25
    
    
    
    5.82
    
    
    $
    2,140
 
 (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.  6. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter endedMarch 31,2007
    
    
    2006Healthcare revenues
    
    $
    798
    
    
    $
    25,618Healthcare expenses
    
    
    1,192
    
    
    
    25,379Gross margin
    
    
    (394
    )
    
    
    239Depreciation and amortization
    
    
    1
    
    
    
    12Interest, net
    
    
    
    
    
    
    10Income (loss) from discontinued operations before taxes
    
    
    (395
    )
    
    
    217Income tax provision (benefit)
    
    
    (161
    )
    
    
    85Income (loss) from discontinued operations, net of taxes
    
    $
    (234
    )
    
    $
    132
 7. Accounts Receivable
  March 31,
    
    
    December 31,2007
    
    
    2006Billed accounts receivable
    
    $
    42,306
    
    
    $
    40,242Unbilled accounts receivable
    
    
    33,290
    
    
    
    40,375Other accounts receivable
    
    
    1,209
    
    
    
    85276,805
    
    
    
    81,469Less: Allowances for doubtful accounts
    
    
    (548
    )
    
    
    (524
    )$
    76,257
    
    
    $
    80,945
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8. Prepaid Expenses and Other Current Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Prepaid insurance
    
    $
    7,006
    
    
    $
    6,295Prepaid cash deposits for professional
liability claims losses
    
    
    5,500
    
    
    
    6,000Prepaid performance bonds
    
    
    110
    
    
    
    134Prepaid other
    
    
    679
    
    
    
    422$
    13,295
    
    
    $
    12,851
 9. Property and Equipment
  March 31,
    
    
    December 31,
    
    
    Estimated2007
    
    
    2006
    
    
    Useful LivesLeasehold improvements
    
    $
    1,230
    
    
    $
    1,230
    
    
    5 yearsEquipment and furniture
    
    
    11,319
    
    
    
    10,986
    
    
    5 yearsComputer software
    
    
    5,002
    
    
    
    4,645
    
    
    3-5 yearsMedical equipment
    
    
    2,368
    
    
    
    2,334
    
    
    5 yearsAutomobiles
    
    
    63
    
    
    
    60
    
    
    5 yearsManagement information systems under development
    
    
    113
    
    
    
    102
    
    
    
    20,095
    
    
    
    19,357Less: Accumulated depreciation
    
    
    (13,084
    )
    
    
    (12,557
    )$
    7,011
    
    
    $
    6,800
  10. Other Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Deferred financing costs
    
    $
    334
    
    
    $
    334Less: Accumulated amortization
    
    
    (153
    )
    
    
    (124
    )181
    
    
    
    210Estimated professional liability claims losses
    
    
    1,326
    
    
    
    1,382Excess deposits for professional liability claims
    
    
    2,236
    
    
    
    2,369Prepaid insurance
    
    
    3,523
    
    
    
    3,523Other refundable deposits
    
    
    57
    
    
    
    56$
    7,323
    
    
    $
    7,540
 11. Contracts and Other Intangible Assets
  March 31,
    
    
    December 31,2007
    
    
    2006Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (10,739
    )
    
    
    (10,332
    )$
    5,131
    
    
    $
    5,538Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (1,843
    )
    
    
    (1,785
    )$
    557
    
    
    $
    615
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12. Accrued Expenses
  March 31,
    
    
    December 31,2007
    
    
    2006Salaries and employee benefits
    
    $
    20,345
    
    
    $
    17,926Professional liability claims
    
    
    22,874
    
    
    
    23,511Accrued workers compensation claims
    
    
    6,334
    
    
    
    6,438Other
    
    
    8,291
    
    
    
    10,30057,844
    
    
    
    58,175Less: Noncurrent portion of professional
liability and workers compensation claims
    
    
    (19,597
    )
    
    
    (20,634
    )$
    38,247
    
    
    $
    37,541
 13. Reserve for Loss Contracts
   14. Banking Arrangements
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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
   15. Income Taxes
 Accounting for Income Taxes
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16. Professional and General Liability Self-insurance Retention
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17. Commitments and Contingencies
 Catastrophic Limits
  Litigation and Claims
 Lake Professional Liability Suit.
 EMSA lease matter. th
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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.
 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.
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Matters involving PHS and Baltimore County, Maryland.
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Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
  Delaware Department of Justice Inquiry
 Other Matters
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Performance Bonds
  18. Net Income (Loss) Per Share
  Earnings Per Share,
 Quarter endedMarch 31,2007
    
    
    2006Numerator:Income (loss) from continuing operations
    
    $
    1,594
    
    
    $
    (1,280
    )Income (loss) from discontinued operations, net of taxes
    
    
    (234
    )
    
    
    132Numerator for basic and diluted net income (loss) per share
    
    $
    1,360
    
    
    $
    (1,148
    )Denominator:Denominator for basic net income per share 
weighted average shares
    
    
    9,945,304
    
    
    
    10,766,181Effect of dilutive securities:Employee stock options
    
    
    87,364
    
    
    
    Denominator for diluted net income per share 
adjusted weighted average shares and assumed
conversions
    
    
    10,032,668
    
    
    
    10,766,181Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    (0.12
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    (0.11
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    (0.12
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    (0.11
    )
  Quarter endedMarch 31,2007
    
    
    2006Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    973,219
    
    
    
    1,237,239Weighted average exercise price of excluded options
    
    $
    20.08
    
    
    $
    17.72
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19. Comprehensive Income
  20. Segment Data
    Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended March 31, 2007:Healthcare revenues
    
    $
    142,969
    
    
    $
    14,405
    
    
    $
    (11,719
    )
    
    $
    145,655Healthcare expenses
    
    
    131,275
    
    
    
    14,632
    
    
    
    (11,719
    )
    
    
    134,188Gross margin
    
    $
    11,694
    
    
    $
    (227
    )
    
    $
    
    
    
    $
    11,467Depreciation and amortization expense
    
    $
    868
    
    
    $
    183
    
    
    $
    
    
    
    $
    1,051Quarter ended March 31, 2006:Healthcare revenues
    
    $
    136,146
    
    
    $
    20,334
    
    
    $
    (14,535
    )
    
    $
    141,945Healthcare expenses
    
    
    126,332
    
    
    
    21,334
    
    
    
    (14,535
    )
    
    
    133,131Gross margin
    
    $
    9,814
    
    
    $
    (1,000
    )
    
    $
    
    
    
    $
    8,814Depreciation and amortization expense
    
    $
    784
    
    
    $
    189
    
    
    $
    
    
    
    $
    973
 Correctional
    
    
    PharmaceuticalHealthcare
    
    
    DistributionServices
    
    
    Services
    
    
    ConsolidatedAs of March 31, 2007:Inventories
    
    $
    3,961
    
    
    $
    2,023
    
    
    $
    5,984Property and equipment, net
    
    $
    4,994
    
    
    $
    2,017
    
    
    $
    7,011Goodwill, net
    
    $
    40,772
    
    
    $
    
    
    
    $
    40,772Total assets
    
    $
    167,783
    
    
    $
    5,872
    
    
    $
    173,655As 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
 21. Share Repurchases
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22. Subsequent Event
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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 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 or the previous restatement of the Companys financial
results;
    
    the risks arising from shareholder litigation as a result of the matters investigated by
the Audit Committee or the previous restatement of the Companys financial results;
    
    risks associated with the possibility that the Company may be unable to satisfy
covenants, or obtain a waiver, amendment or other curative document, in the event it is
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 or that accounts receivable collection may be delayed;
    
    the Companys ability to retain existing client contracts and obtain new contracts at
acceptable pricing levels;
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
    
    whether or not government agencies continue to privatize correctional healthcare services;
    
    the possible effect of adverse publicity regarding the Companys business;
    
    the Companys ability to comply with government regulations and/or orders of judicial authorities;
    
    increased competition for new contracts and renewals of existing contracts;
    
    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 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 Secure
Pharmacy Plus 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; and
    
    the Companys determination whether and/or ability to continue to repurchase shares
under the stock repurchase program.
  Recent Development
  22




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Critical Accounting Policies And Estimates
 General
  
    
    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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24




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Allowance for Doubtful Accounts
         25




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Loss Contracts
   Professional and General Liability Self-Insurance Retention
    26




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




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
    
    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
  29




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##### Table of Contents



Results of Operations
  Quarter endedMarch 31,Percentage of Healthcare Revenues
    
    2007
    
    2006Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    92.1
    
    
    
    93.8Gross margin
    
    
    7.9
    
    
    
    6.2Selling, general and administrative expenses
    
    
    5.0
    
    
    
    4.2Audit Committee investigation and related expenses
    
    
    
    
    
    
    2.5Depreciation and amortization
    
    
    0.8
    
    
    
    0.7Income (loss) from operations
    
    
    2.1
    
    
    
    (1.2
    )Interest, net
    
    
    0.2
    
    
    
    0.3Income (loss) from continuing operations before income
tax provision (benefit)
    
    
    1.9
    
    
    
    (1.5
    )Income tax provision (benefit)
    
    
    0.8
    
    
    
    (0.6
    )Income (loss) from continuing operations
    
    
    1.1
    
    
    
    (0.9
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.2
    )
    
    
    0.1Net income (loss)
    
    
    0.9
    %
    
    
    (0.8
    )%
 Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 Depreciation and amortization
 30




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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
    31




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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
 32




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Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    973
    
    
    $
    1,014
    
    
    $
    
    
    
    $
    Revolving credit facility
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    2,915
    
    
    
    2,968
    
    
    
    555
    
    
    
    Professional and general liability claims
    
    
    3,277
    
    
    
    11,888
    
    
    
    5,169
    
    
    
    2,540Total
    
    $
    17,165
    
    
    $
    15,870
    
    
    $
    5,724
    
    
    $
    2,540
  Off-Balance Sheet Transactions
  Inflation
  Stock Repurchase Program
  33




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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
  34




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




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PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Lake Professional Liability Suit.
 EMSA lease matter. th
  Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 36




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##### Table of Contents



The Health and Hospital Corporation of Marion County, Indiana v. Prison Health Services, Inc.
 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.
 37




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SEC and United States Attorney Informal Inquiries.
 38




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Shareholder Litigation.
  Delaware Department of Justice Inquiry
 Other
Matters.
 39




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (d) Maximum Number(c) Total Number of
    
    (or Approximate Dollar(a) Total of
    
    
    
    
    
    Shares Purchased
    
    Value) of shares thatNumber of
    
    (b) Average
    
    as Part of Publicly
    
    May Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    Programs (1)January 2007
(1/1/07 to 1/31/07)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    February 2007
(2/1/07 to 2/28/07)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    March 2007 (3/1/07
to 3/31/07)
    
    
    511,800
    
    
    $
    15.40
    
    
    
    511,800
    
    
    $
    6,777
 
 (1)
    
    On July 25, 2005, the Companys Board of Directors approved a stock repurchase program to
repurchase up to $30 million of the Companys common stock over an approximate two-year period. As
of March 31, 2007, the Company has repurchased and retired a total of 1,624,736 common shares at an
aggregate cost of approximately $23.2 million.  40




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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
    
    
    
    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).2.2
    
    
    
    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 18 to the condensed
consolidated financial statements in this report. 42




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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)
  43