America Service Group Announces Fourth Quarter and Year-End Results.

Announces Intent to Sell Certain Assets of Secure Pharmacy Plus

BRENTWOOD, Tenn. -- America Service Group Inc. (NASDAQ:ASGR):

Highlights:

* Gross margin of $10.3 million in the quarter as compared with $7.1 million in the prior year quarter

* Charge taken for impairment of goodwill of pharmacy segment of $3.0 million

* Adjusted EBITDA of $3.0 million in the quarter as compared with $2.8 million in the prior year quarter

* Net cash provided by operating activities of $25.3 million in 2006 as compared with net cash used in operating activities of $10.6 million in the prior year

America Service Group Inc. (NASDAQ:ASGR) announced today results for the fourth quarter and year ended December 31, 2006, and its intent to sell certain assets of Secure Pharmacy Plus, LLC (SPP), a wholly owned subsidiary.

Commenting on today's announcement, Michael Catalano, chairman, president and chief executive officer of America Service Group, said, "We entered 2006 with the commitment to address clearly defined challenges that had adversely affected the financial performance of the Company. In July, the Wyoming contract was renewed upon mutually agreeable terms. In November, losses under the Florida DOC Region IV contract stopped after the Company acted to end the contract. In January 2007, the Company entered into a new, innovative, cost-plus contract with the Vermont DOC. Hopefully, at the end of the first quarter, the Company will have a new strategic relationship with a preeminent correctional pharmacy services company. As we addressed these challenges, the Company produced $25 million in cash flow from operations. In the fourth quarter, the Company produced Adjusted EBITDA from continuing operations of $3.0 million, which, should be noted, included the impact of the negative $2.1 million of gross margin related to discontinued contracts. The Company ended the year with more cash than debt, positive working capital and the ability to leverage its balance sheet to grow the Company and enhance shareholder value."

FAS 144 Impact on Income Statement Presentation Format

As noted in its 2005 annual report on Form 10-K, the Company is applying the discontinued operations provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 144 ("FAS 144") to all service contracts that expire subsequent to January 1, 2002. FAS 144 requires the Company to follow the income statement presentation format described in FAS 144. The results of operations of contracts that expire, less applicable income taxes, are classified on the Company's consolidated statements of operations separately from continuing operations. The presentation prescribed for discontinued operations requires the collapsing of healthcare revenues and expenses, as well as other specifically identifiable costs, into the income or loss from discontinued operations, net of taxes. Items such as indirect selling, general and administrative expenses or interest expense cannot be allocated to expired contracts. The application of the FAS 144 accounting presentation to expired contracts has no impact on net income, earnings per share, total cash flows or stockholders' equity.

As a result of the application of FAS 144, "healthcare revenues" and "healthcare expenses" on the Company's consolidated statements of operations for any period presented will only include revenues and expenses from continuing contracts. The Company will also discuss "Total Revenues," "Total Healthcare Expenses," and "Total Gross Margin," which will include all of the Company's revenues and healthcare expenses for a period (i.e., healthcare revenues plus revenues from expired service contracts, or healthcare expenses plus expenses from expired contracts less share-based compensation expense). Total Gross Margin is defined as Total Revenues less Total Healthcare Expenses. Total Gross Margin excludes loss contract reserve utilization and share-based compensation expense. Reconciliations of healthcare revenues to Total Revenues, healthcare expenses to Total Healthcare Expenses and gross margin to Total Gross Margin are found in the attached schedules.

Results for Fourth Quarter and Year Ended December 31, 2006

Healthcare revenues from continuing contracts for the fourth quarter of 2006 were $149.7 million, an increase of 4.7% over the prior year quarter. Healthcare revenues from continuing contracts for the year ended December 31, 2006, were $569.4 million, an increase of 5.5% over the prior year period. Total Revenues, which includes revenues from continuing and discontinued contracts, for the fourth quarter of 2006 were $160.6 million, an increase of 7.2% over the prior year quarter. Total Revenues for the year ended December 31, 2006, were $649.8 million, an increase of 0.1% compared with the prior year period.

Healthcare expenses from continuing contracts for the fourth quarter of 2006 were $139.4 million, or 93.1% of healthcare revenues, as compared with $135.9 million, or 95.0% of healthcare revenues, in the prior year quarter. Healthcare expenses from continuing contracts for the year ended December 31, 2006, were $530.2 million, or 93.1% of healthcare revenues, as compared with $506.4 million, or 93.9% of healthcare revenues, in the prior year period. Included in healthcare expenses from continuing contracts is share-based compensation expense of $112,000 and $436,000 for the fourth quarter of 2006 and the year ended December 31, 2006, respectively. Healthcare expenses from continuing operations were negatively impacted in the fourth quarter by legal and other expenses related to union negotiations and a potential labor strike, which was subsequently averted, in Alameda County, California, ($499,000), and slightly higher losses than anticipated ($355,000) at SPP. Total Healthcare Expenses, which includes expenses from continuing and discontinued contracts and excludes share-based compensation expense, for the fourth quarter of 2006 were $152.3 million, or 94.8% of Total Revenues, as compared with $142.1 million, or 94.9% of Total Revenues, in the prior year quarter. Total Healthcare Expenses for the year ended December 31, 2006, were $614.5 million, or 94.6% of Total Revenues, as compared with $612.8 million, or 94.4% of Total Revenues, in the prior year period.

Gross margin from continuing contracts for the fourth quarter of 2006 was $10.3 million, or 6.9% of healthcare revenues, as compared with $7.1 million, or 5.0% of healthcare revenues, in the prior year quarter. Gross margin from continuing contracts for the year ended December 31, 2006, was $39.2 million, or 6.9% of healthcare revenues, as compared with $33.1 million, or 6.1% of healthcare revenues, in the prior year period. Reducing gross margin from continuing contracts is share-based compensation expense of $112,000 and $436,000 for the fourth quarter of 2006 and the year ended December 31, 2006, respectively. Total Gross Margin, which includes continuing and discontinued contracts and excludes share-based compensation expense, for the fourth quarter of 2006 was $8.3 million, or 5.2% of Total Revenues, as compared with $7.7 million, or 5.1% of Total Revenues, in the prior year quarter. Total Gross Margin for the year ended December 31, 2006, was $35.2 million, or 5.4% of Total Revenues, as compared with $36.5 million, or 5.6% of Total Revenues, in the prior year period.

Selling, general and administrative expenses for the fourth quarter of 2006 were $6.4 million, or 4.4% of healthcare revenues, as compared with $4.9 million, or 3.4% of healthcare revenues, in the prior year quarter. Selling, general and administrative expenses for the year ended December 31, 2006, were $25.0 million, or 4.4% of healthcare revenues, as compared with $18.1 million, or 3.4% of healthcare revenues, in the prior year period. Included in selling, general and administrative expenses is share-based compensation expense of $1.1 million and $3.8 million for the fourth quarter of 2006 and the year ended December 31, 2006, respectively. Selling, general and administrative expenses, excluding share-based compensation expense, as a percentage of Total Revenues for the fourth quarter of 2006 were 3.3%, consistent with the prior year quarter. Selling, general and administrative expenses, excluding share-based compensation expense, as a percentage of Total Revenues for the year ended December 31, 2006, were 3.3%, as compared with 2.8%, in the prior year period.

As of December 31, 2006, the Company performed its annual goodwill impairment analysis as required by Statement of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142 and recorded a non-cash impairment charge related to its pharmaceutical distribution services segment of $3.0 million to write-off the carrying value of goodwill. The impairment charge was attributable to a decrease in the segment's estimated fair value resulting from a decline in volume occurring primarily in the fourth quarter of 2006 and an indication of value of this segment based on a proposed independent third party transaction as described below.

Expenses related to the Audit Committee investigation into certain matters at SPP, the findings of which were reported on March 15, 2006, for the fourth quarter of 2006 were $340,000, as compared with $3.3 million in the prior year quarter. Audit Committee investigation and related expenses for the year ended December 31, 2006, were $5.3 million, as compared with $3.7 million in the prior year period.

Adjusted EBITDA for the fourth quarter of 2006 was $3.0 million, as compared with $2.8 million in the prior year quarter. Adjusted EBITDA for the year ended December 31, 2006, was $14.1 million, as compared with $18.4 million in the prior year period. As reflected in the attached schedule, the Company defines Adjusted EBITDA as earnings before interest expense, late fee income, income taxes, depreciation, amortization, increases or decreases in reserves for loss contracts, discontinued acquisition expenses, Audit Committee investigation expenses, impairment of goodwill and share-based compensation expense. The Company includes in Adjusted EBITDA the results of discontinued operations under the same definition. The negative gross margin generated by discontinued contracts of $2.1 million in the fourth quarter of 2006 and $4.4 million for the year ended December 31, 2006, significantly impacted Adjusted EBITDA results.

Depreciation and amortization expense for the fourth quarter of 2006 was $1.1 million, as compared with $965,000 in the prior year quarter. Depreciation and amortization expense for the year ended December 31, 2006, was $4.1 million, as compared with $4.0 million in the prior year period.

The loss from operations for the fourth quarter of 2006 was $571,000, as compared with $2.1 million in the prior year quarter. Income from operations for the year ended December 31, 2006, was $1.7 million, as compared with $6.7 million in the prior year period. Negatively impacting the current year results is the $3.0 million impairment of goodwill in the fourth quarter, the $4.3 million of share-based compensation expense ($1.2 million in the fourth quarter) and the $5.3 million of Audit Committee investigation and related expenses ($340,000 in the fourth quarter). Negatively impacting the prior year results is $658,000 of discontinued acquisition expenses (none of which was in the fourth quarter of 2005) and $3.7 million of Audit Committee investigation and related expenses ($3.3 million in the fourth quarter of 2005).

Net interest expense for the fourth quarter of 2006 was $386,000, as compared with $371,000 in the prior year quarter. Net interest expense for the year ended December 31, 2006, was $1.9 million, as compared with $1.2 million in the prior year period.

The loss from continuing operations before income taxes for the fourth quarter of 2006 was $957,000, as compared with $2.4 million in the prior year quarter. The loss from continuing operations before income taxes for the year ended December 31, 2006, was $255,000, as compared with income from continuing operations before income taxes of $5.7 million in the prior year period. Negatively impacting the current year results is the $3.0 million impairment of goodwill in the fourth quarter, the $4.3 million of share-based compensation expense ($1.2 million in the fourth quarter) and the $5.3 million of Audit Committee investigation and related expenses ($340,000 in the fourth quarter). Negatively impacting the prior year results is $658,000 of discontinued acquisition expenses (none of which was in the fourth quarter of 2005) and $3.7 million of Audit Committee investigation and related expenses ($3.3 million in the fourth quarter of 2005), partially offset by the positive impact of $249,000 of late fee income (none of which was in the fourth quarter of 2005).

The income tax provision for the fourth quarter of 2006 was $1.1 million, as compared with an income tax benefit of $947,000 in the prior year quarter. The income tax provision for the year ended December 31, 2006, was $437,000, as compared with $2.5 million in the prior year period. The income tax provision for the year ended December 31, 2006, is due to the impact of non-deductible expenses and the revision of prior year tax estimates upon completion of the related tax returns.

The loss from continuing operations for the fourth quarter of 2006 was $2.1 million, as compared with $1.5 million in the prior year quarter. The loss from continuing operations for the year ended December 31, 2006, was $692,000, as compared with income from continuing operations of $3.2 million in the prior year period. Negatively impacting the current year results is the pre-tax $3.0 million impairment of goodwill in the fourth quarter, the pre-tax $4.3 million of share-based compensation expense ($1.2 million in the fourth quarter) and the pre-tax $5.3 million of Audit Committee investigation and related expenses ($340,000 in the fourth quarter). Negatively impacting the prior year results is the pre-tax $658,000 of discontinued acquisition expenses (none of which was in the fourth quarter of 2005) and the pre-tax $3.7 million of Audit Committee investigation and related expenses ($3.3 million in the fourth quarter of 2005), partially offset by the positive impact of the pre-tax $249,000 of late fee income (none of which was in the fourth quarter of 2005).

The loss from discontinued operations, net of taxes, for the fourth quarter of 2006 was $755,000, as compared with income from discontinued operations, net of taxes, of $301,000 in the prior year quarter. The loss from discontinued operations, net of taxes, for the year ended December 31, 2006, was $2.7 million, as compared with income from discontinued operations, net of taxes, of $1.2 million in the prior year period. Negatively impacting the prior year results is the pre-tax $1.3 million increase in the Company's loss contract reserve (none of which was in the fourth quarter of 2005).

The net loss for the fourth quarter of 2006 was $2.8 million, or $0.28 basic and diluted per common share, as compared with a net loss of $1.2 million, or $0.11 basic and diluted per common share in the prior year quarter. The net loss for the year ended December 31, 2006, was $3.4 million, or $0.32 basic and diluted per common share, as compared with net income of $4.4 million, or $0.40 basic and $0.39 diluted per common share in the prior year period. Negatively impacting the current year results is the pre-tax $3.0 million impairment of goodwill in the fourth quarter, the pre-tax $4.3 million of share-based compensation expense ($1.2 million in the fourth quarter) and the pre-tax $5.3 million of Audit Committee investigation and related expenses ($340,000 in the fourth quarter). Negatively impacting the prior year results is the pre-tax $658,000 of discontinued acquisition expenses (none of which was in the fourth quarter of 2005), the pre-tax $3.7 million of Audit Committee investigation and related expenses ($3.3 million in the fourth quarter of 2005), and the pre-tax $1.3 million increase in the Company's loss contract reserve (none of which was in the fourth quarter of 2005), partially offset by the positive impact of the pre-tax $249,000 of late fee income (none of which was in the fourth quarter of 2005).

Net cash provided by operating activities for the fourth quarter of 2006 was $3.8 million, as compared with net cash used in operating activities of $8.9 million in the prior year quarter. Net cash provided by operating activities for the year ended December 31, 2006, was $25.3 million, as compared with net cash used in operating activities of $10.6 million in the prior year period.

Cash and cash equivalents were $13.7 million at December 31, 2006, as compared with $14.3 million at September 30, 2006, and cash, cash equivalents and restricted cash of $4.2 million at December 31, 2005. Total debt outstanding was $10.0 million at December 31, 2006, as compared with $13.2 million at September 30, 2006, and $12.5 million at December 31, 2005. Days sales outstanding in accounts receivable were 46 days at December 31, 2006, as compared with 51 days at September 30, 2006, and 61 days at December 31, 2005.

Planned Sale of Certain Assets of Secure Pharmacy Plus

On February 28, 2007, the Company entered into a non-binding asset purchase proposal whereby it intends to sell certain assets of SPP to Maxor National Pharmacy Services Corporation (Maxor). The Company and Maxor are in the process of negotiating a definitive asset purchase agreement providing for Maxor's purchase, at book value, of certain assets of SPP at closing, including certain prepaid assets, inventory, information systems and other property and equipment. As part of the transaction, Maxor and Prison Health Services, Inc. (PHS), the Company's primary operating subsidiary, will enter into a long-term supply contract pursuant to which Maxor will be the exclusive provider of pharmaceuticals and medical supplies to PHS. The Company and Maxor are currently targeting the closing of this transaction effective March 31, 2007. The final execution of a definitive asset purchase agreement, long-term supply contract and closing of the transaction is subject to final negotiations of the agreements, completion of due diligence and final approval of the respective companies' boards of directors, among other things.

Update on Stock Repurchase Program

On July 26, 2005, the Company announced that its Board of Directors had approved a stock repurchase program to repurchase up to $30 million of the Company's common stock over an approximate 24-month period. The Company intends to repurchase common stock under this program from time to time in accordance with Securities and Exchange Commission requirements and subject to ongoing reviews of the Company's operating cash flow requirements. This program is intended to be implemented through purchases made from time to time in either the open market or through private transactions. Under the stock repurchase program, no shares will be purchased directly from officers or directors of the Company.

The timing, prices and sizes of purchases will depend upon prevailing stock prices, general economic and market conditions and other considerations. Funds for the repurchase of shares are expected to come primarily from cash generated from operations and also from funds on hand, including amounts available under the Company's credit facility.

The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the repurchase program may be suspended at any time at the Company's discretion.

During the fourth quarter of 2006, the Company repurchased and retired 51,000 shares of its common stock for approximately $781,000. Repurchase activity was minimal during the fourth quarter due to significant limitations on open trading windows. Since the inception of the stock repurchase program, the Company has repurchased and retired 1,112,936 shares of its common stock for approximately $15.3 million. As of March 1, 2007, the Company had approximately 10.1 million shares outstanding.

2007 Guidance

The Company is maintaining its previous guidance for full-year 2007 results. Consistent with past practice, the Company's guidance for full-year 2007 results does not consider the impact of any potential new business. Contracts currently in operation are included in the guidance for full-year 2007 results through the end of the year, unless the Company has previously been notified otherwise by the client. The Company's current guidance for full-year 2007 results does not reflect the potential impact of the planned sale of certain assets of SPP to Maxor, as discussed above. It is currently expected that the proposed transaction and the anticipated effect of entering into the proposed long-term supply agreement with Maxor, when completed, will increase adjusted net income (as defined below) in a range of approximately $600,000 to $900,000 in the subsequent 12 months.

The Company's current guidance for estimated full-year 2007 results and a comparison with actual 2006 results (adjusted for the items discussed in detail in the footnotes) is summarized below:

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Conference Call

A listen-only simulcast and replay of America Service Group's fourth quarter 2006 results conference call will be available online at www.asgr.com or www.earnings.com on March 6, 2007, beginning at 11:00 a.m. Eastern time. In addition, a copy of the press release containing the related financial information can be found on the Company's website.

America Service Group Inc., based in Brentwood, Tennessee, is a leading provider of correctional healthcare services in the United States. America Service Group Inc., through its subsidiaries, provides a wide range of healthcare and pharmacy programs to government agencies for the medical care of inmates. More information about America Service Group can be found on the Company's website at www.asgr.com or at www.prisonhealthmedia.com.

This release contains certain financial information not derived in accordance with United States generally accepted accounting principles ("GAAP"). The Company believes this information is useful to investors and other interested parties. Such information should not be considered as a substitute for any measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. A discussion of the Company's definition of such information and reconciliation to the most comparable GAAP measure is included below.

The most directly comparable GAAP measures for the guidance provided by the Company are: healthcare revenues; gross margin; income from continuing operations before income taxes; depreciation and amortization; and interest, each of which will only include results from continuing contracts. Because it is not possible to reliably forecast discontinued operations, reconciliation of the Company's guidance to the most directly comparable GAAP measure cannot be estimated on a forward-looking basis.

Cautionary Statement

This press release contains "forward-looking" statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements in this release that are not historical facts, including statements about the Company's or management's beliefs and expectations, constitute forward-looking statements and may be indicated by words or phrases such as "anticipate," "estimate," "plans," "expects," "projects," "should," "will," "believes" or "intends" and similar words and phrases. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following:

* 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 recently 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;

* risks associated with the possibility that we may be unable to satisfy covenants under our credit facility;

* risks arising from potential weaknesses or deficiencies in our internal control over financial reporting;

* risks arising from the possibility that we 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 on the Company's business;

* 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 and injuries in excess of amounts covered under contracts or insurance coverage;

* the outcome or adverse development of pending litigation, including professional liability litigation;

* risks arising from the possibility that the potential sale of certain assets of Secure Pharmacy Plus either does not occur or does not occur on the terms described in this release;

* risks arising from the possibility that the potential 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;

* risks arising from the possibility of continued financial underperformance by Secure Pharmacy Plus;

* the Company's dependence on key personnel; and

* the Company's determination whether to repurchase shares under its stock repurchase program.

A discussion of important factors and assumptions regarding certain statements and risks involved in an investment in the Company is contained in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are made as of the date of this release. The Company assumes no obligations to update or revise them or provide reasons why actual results may differ.

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