##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 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: 0-19673
 
 AMERICA SERVICE GROUP INC.
  Delaware
    
    51-0332317(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 105 Westpark Drive, Suite 200Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 373-3100
 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer þ
Non-Accelerated filer o(Do not check if a smaller reporting company)
Smaller Reporting Company o o þ




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##### 



AMERICA SERVICE GROUP INC.
 QUARTERLY REPORT ON FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the quarters and nine months ended
September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults Upon Senior Securities
    
    
    38Item 4. Reserved
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits
    
    
    39Signatures
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I:
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (shown in 000s except share and per share amounts)  (UNAUDITED)
 September 30,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,401
    
    
    $
    37,655Accounts receivable, net of allowance for doubtful accounts of $377 and $358, respectively
    
    
    65,032
    
    
    
    44,629Inventories
    
    
    2,938
    
    
    
    2,929Prepaid expenses and other current assets
    
    
    12,929
    
    
    
    16,754Current deferred tax assets
    
    
    5,205
    
    
    
    9,252Total current assets
    
    
    101,505
    
    
    
    111,219Property and equipment, net
    
    
    10,859
    
    
    
    9,447Goodwill
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    1,728
    
    
    
    1,937Other assets
    
    
    9,892
    
    
    
    11,837Total assets
    
    $
    164,756
    
    
    $
    175,212LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    19,317
    
    
    $
    15,393Accrued medical claims liability
    
    
    22,389
    
    
    
    22,358Accrued expenses
    
    
    44,825
    
    
    
    62,895Deferred revenue
    
    
    4,149
    
    
    
    13,385Total current liabilities
    
    
    90,680
    
    
    
    114,031Noncurrent portion of accrued expenses
    
    
    19,547
    
    
    
    15,481Noncurrent deferred tax liabilities
    
    
    4,834
    
    
    
    3,727Total liabilities
    
    
    115,061
    
    
    
    133,239Commitments and contingencies (Note 18)Stockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at September 30, 2010 and
December 31, 2009; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at September 30, 2010 and
December 31, 2009; 8,947,415 and 8,947,370 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively
    
    
    89
    
    
    
    89Additional paid-in capital
    
    
    35,014
    
    
    
    33,608Retained earnings
    
    
    14,592
    
    
    
    8,276Total stockholders equity
    
    
    49,695
    
    
    
    41,973Total liabilities and equity
    
    $
    164,756
    
    
    $
    175,212
 
 3




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##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (shown in 000s except share and per share amounts)  (UNAUDITED)
 Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Healthcare revenues
    
    $
    157,933
    
    
    $
    153,586
    
    
    $
    474,357
    
    
    $
    428,449Healthcare expenses
    
    
    144,235
    
    
    
    144,478
    
    
    
    432,445
    
    
    
    399,182Gross margin
    
    
    13,698
    
    
    
    9,108
    
    
    
    41,912
    
    
    
    29,267Selling, general and administrative expenses
    
    
    7,865
    
    
    
    6,591
    
    
    
    24,910
    
    
    
    21,251Corporate restructuring expenses
    
    
    (21
    )
    
    
    
    
    
    
    290
    
    
    
    Audit Committee investigation and related expenses
    
    
    31
    
    
    
    973
    
    
    
    387
    
    
    
    1,106Depreciation and amortization
    
    
    894
    
    
    
    646
    
    
    
    2,491
    
    
    
    1,906Income from operations
    
    
    4,929
    
    
    
    898
    
    
    
    13,834
    
    
    
    5,004Interest expense (income)
    
    
    (26
    )
    
    
    28
    
    
    
    (78
    )
    
    
    148Income from continuing operations before income tax provision
    
    
    4,955
    
    
    
    870
    
    
    
    13,912
    
    
    
    4,856Income tax provision
    
    
    2,111
    
    
    
    395
    
    
    
    5,923
    
    
    
    2,126Income from continuing operations
    
    
    2,844
    
    
    
    475
    
    
    
    7,989
    
    
    
    2,730Income (loss) from discontinued operations, net of taxes
    
    
    (51
    )
    
    
    241
    
    
    
    (60
    )
    
    
    788Net income
    
    $
    2,793
    
    
    $
    716
    
    
    $
    7,929
    
    
    $
    3,518Net income available to common shareholders (Note 19)
    
    $
    2,767
    
    
    $
    695
    
    
    $
    7,754
    
    
    $
    3,400Net income (loss) available to common shareholders per common share  basic:Continuing operations
    
    $
    0.32
    
    
    $
    0.05
    
    
    $
    0.89
    
    
    $
    0.29Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    0.09Net income available to common shareholders per common share (Note 19)
    
    $
    0.31
    
    
    $
    0.08
    
    
    $
    0.88
    
    
    $
    0.38Net income (loss) available to common shareholders per common share -
diluted:Continuing operations
    
    $
    0.32
    
    
    $
    0.05
    
    
    $
    0.89
    
    
    $
    0.28Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    0.09Net income available to common shareholders per common share (Note 19)
    
    $
    0.31
    
    
    $
    0.08
    
    
    $
    0.88
    
    
    $
    0.37Weighted average common shares outstanding:Basic
    
    
    8,871,307
    
    
    
    8,998,512
    
    
    
    8,772,845
    
    
    
    8,964,710Diluted
    
    
    8,930,066
    
    
    
    9,097,653
    
    
    
    8,852,413
    
    
    
    9,075,505Dividends declared per share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.18
    
    
    $
    0.05
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (shown in 000s)  (UNAUDITED)
 Nine months endedSeptember 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    7,929
    
    
    $
    3,518Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,498
    
    
    
    1,967Loss on retirement of fixed assets
    
    
    4
    
    
    
    31Finance cost amortization
    
    
    24
    
    
    
    106Deferred income taxes
    
    
    5,285
    
    
    
    1,209Share-based compensation expense
    
    
    1,774
    
    
    
    1,378Excess tax benefits from share-based compensation expense
    
    
    (131
    )
    
    
    (143
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (20,403
    )
    
    
    (9,931
    )Inventories
    
    
    (9
    )
    
    
    85Prepaid expenses and other current assets
    
    
    3,825
    
    
    
    (6,061
    )Other assets
    
    
    1,920
    
    
    
    (2,699
    )Accounts payable
    
    
    3,924
    
    
    
    (2,095
    )Accrued medical claims liability
    
    
    31
    
    
    
    9,574Accrued expenses
    
    
    (14,004
    )
    
    
    18,414Deferred revenue
    
    
    (9,236
    )
    
    
    641Net cash provided by (used in) operating activities
    
    
    (16,569
    )
    
    
    15,994Cash flows from investing activities:Capital expenditures
    
    
    (3,704
    )
    
    
    (3,216
    )Net cash used in investing activities
    
    
    (3,704
    )
    
    
    (3,216
    )Cash flows from financing activities:Share repurchases
    
    
    (544
    )
    
    
    (3,570
    )Dividends on common stock
    
    
    (1,613
    )
    
    
    (465
    )Excess tax benefits from share-based compensation expense
    
    
    131
    
    
    
    143Restricted stock repurchased from employees for employees tax liability
    
    
    (958
    )
    
    
    (177
    )Issuance of common stock
    
    
    391
    
    
    
    319Exercise of stock options
    
    
    612
    
    
    
    1,715Net cash used in financing activities
    
    
    (1,981
    )
    
    
    (2,035
    )Net increase (decrease) in cash and cash equivalents
    
    
    (22,254
    )
    
    
    10,743Cash and cash equivalents at beginning of period
    
    
    37,655
    
    
    
    24,855Cash and cash equivalents at end of period
    
    $
    15,401
    
    
    $
    35,598
 
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##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
 1. Basis of Presentation
   2. Description of Business
  3. Audit Committee Investigation
  6




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4. Restructuring Charge
   One-timeTerminationBenefitsBalance at June 30, 2010
    
    $
    245Plus: Costs incurred
    
    
    Less: Amounts paid
    
    
    (45
    )Balance at September 30, 2010
    
    $
    200
 5. Share-Based Compensation
   Weighted
    
    Weighted Average
    
    Aggregate IntrinsicAverage
    
    Remaining
    
    Value (inOptions
    
    Exercise Price
    
    Contractual Term
    
    thousands) (1)Outstanding, December 31, 2009
    
    
    822,673
    
    
    $
    17.16Granted
    
    
    
    
    
    
    Exercised
    
    
    (87,240
    )
    
    
    11.52Canceled
    
    
    (5,088
    )
    
    
    15.32Outstanding, September 30, 2010
    
    
    730,345
    
    
    $
    17.85
    
    
    
    4.73
    
    
    $
    589Exercisable, September 30, 2010
    
    
    705,345
    
    
    $
    18.13
    
    
    
    4.62
    
    
    $
    467Expected to vest, September 30, 2010 (2)
    
    
    24,701
    
    
    $
    10.01
    
    
    
    7.97
    
    
    $
    120
 
 (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 exercise price of in-the-money options.(2)
    
    Amount represents options expected to vest, net of estimated forfeitures. 7




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WeightedRestricted
    
    Average Grant-Shares
    
    Date Fair ValueNonvested, December 31, 2009
    
    
    298,070
    
    
    $
    12.83Granted
    
    
    
    
    
    
    Vested
    
    
    (220,972
    )
    
    
    12.66Forfeited
    
    
    
    
    
    
    Nonvested, September 30, 2010
    
    
    77,098
    
    
    $
    13.32
 6. Discontinued Operations
   Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Healthcare revenues
    
    $
    770
    
    
    $
    6,200
    
    
    $
    5,497
    
    
    $
    20,934Healthcare expenses
    
    
    854
    
    
    
    5,777
    
    
    
    5,591
    
    
    
    19,543Gross margin
    
    
    (84
    )
    
    
    423
    
    
    
    (94
    )
    
    
    1,391Depreciation and amortization
    
    
    2
    
    
    
    16
    
    
    
    7
    
    
    
    61Income (loss) from discontinued operations before taxes
    
    
    (86
    )
    
    
    407
    
    
    
    (101
    )
    
    
    1,330Income tax provision (benefit)
    
    
    (35
    )
    
    
    166
    
    
    
    (41
    )
    
    
    542Income (loss) from discontinued operations, net of taxes
    
    $
    (51
    )
    
    $
    241
    
    
    $
    (60
    )
    
    $
    788
 7. Fair Value of Financial Instruments
   8




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8. Accounts Receivable
  September 30,
    
    
    December 31,2010
    
    
    2009Billed accounts receivable
    
    $
    39,995
    
    
    $
    20,762Unbilled accounts receivable
    
    
    26,680
    
    
    
    25,485Other accounts receivable
    
    
    628
    
    
    
    64867,303
    
    
    
    46,895Less: Allowances
    
    
    (377
    )
    
    
    (358
    )66,926
    
    
    
    46,537Less: Receivables reclassified as noncurrent
    
    
    (1,894
    )
    
    
    (1,908
    )$
    65,032
    
    
    $
    44,629
      9. Prepaid Expenses and Other Current Assets
  September 30,
    
    
    December 31,2010
    
    
    2009Prepaid insurance
    
    $
    3,834
    
    
    $
    6,824Prepaid cash deposits for professional liability claims losses
    
    
    7,088
    
    
    
    8,501Prepaid performance bonds
    
    
    17
    
    
    
    80Prepaid other
    
    
    1,990
    
    
    
    1,349$
    12,929
    
    
    $
    16,754
 9




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10. Property and Equipment
  September 30,
    
    
    December 31,
    
    
    Estimated2010
    
    
    2009
    
    
    Useful LivesLeasehold improvements
    
    $
    1,006
    
    
    $
    1,006
    
    
    7 yearsEquipment and furniture
    
    
    11,426
    
    
    
    9,843
    
    
    5 yearsComputer software
    
    
    9,073
    
    
    
    7,095
    
    
    3-5 yearsMedical equipment
    
    
    1,238
    
    
    
    1,180
    
    
    5 yearsAutomobiles
    
    
    62
    
    
    
    62
    
    
    5 yearsManagement information systems under development
    
    
    153
    
    
    
    176
    
    
    
    22,958
    
    
    
    19,362Less: Accumulated depreciation
    
    
    (12,099
    )
    
    
    (9,915
    )$
    10,859
    
    
    $
    9,447
   11. Other Assets
  September 30,
    
    
    December 31,2010
    
    
    2009Deferred financing costs
    
    $
    68
    
    
    $
    68Less: Accumulated amortization
    
    
    (34
    )
    
    
    (10
    )34
    
    
    
    58Prepaid cash deposits for
professional liability claims losses
    
    
    3,310
    
    
    
    5,217Prepaid insurance deposits
    
    
    4,540
    
    
    
    4,540Noncurrent receivables
    
    
    1,894
    
    
    
    1,908Other refundable deposits
    
    
    114
    
    
    
    114$
    9,892
    
    
    $
    11,837
 12. Contract Intangibles
  September 30,
    
    
    December 31,2010
    
    
    2009Gross contracts value
    
    $
    4,000
    
    
    $
    4,000Less: Accumulated amortization
    
    
    (2,272
    )
    
    
    (2,063
    )$
    1,728
    
    
    $
    1,937
   10




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13. Accrued Expenses
  September 30,
    
    
    December 31,2010
    
    
    2009Salaries and employee benefits
    
    $
    23,779
    
    
    $
    21,528Professional liability claims
    
    
    21,604
    
    
    
    25,236Accrued workers compensation claims
    
    
    7,609
    
    
    
    7,130Accrued loss contingency related to shareholder
litigation (see Note 18)
    
    
    4,536
    
    
    
    15,126Other
    
    
    6,844
    
    
    
    9,35664,372
    
    
    
    78,376Less: Noncurrent portion of deferred lease liability
    
    
    (875
    )
    
    
    (958
    )Less: Noncurrent portion of professional liability
and workers compensation claims
    
    
    (18,672
    )
    
    
    (14,523
    )$
    44,825
    
    
    $
    62,895
 14. Reserve for Loss Contracts
    15. Banking Arrangements
   11




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16. Income Taxes
    12




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17. Professional and General Liability Self-Insurance Retention
   13




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18. Commitments and Contingencies
  Litigation and Claims
 DeSantis Professional Liability Suit.
 Matters involving PHS and Baltimore County, Maryland.
    14




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Matters Related to the Audit Committee Investigation and Shareholder Litigation
  Shareholder Litigation.
  15




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Delaware Department of Justice Inquiry
 Other Matters
  Performance Bonds
  19. Net Income (Loss) Per Common Share
  16




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##### Table of Contents



Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Income from continuing operations
    
    $
    2,844
    
    
    $
    475
    
    
    $
    7,989
    
    
    $
    2,730Income (loss) from discontinued operations, net of taxes
    
    
    (51
    )
    
    
    241
    
    
    
    (60
    )
    
    
    788Net income
    
    
    2,793
    
    
    
    716
    
    
    
    7,929
    
    
    
    3,518Less: Income allocated to participating securities (unvested
restricted shares)
    
    
    (26
    )
    
    
    (21
    )
    
    
    (175
    )
    
    
    (118
    )Net income allocated to common shareholders
    
    $
    2,767
    
    
    $
    695
    
    
    $
    7,754
    
    
    $
    3,400Components of income allocated to participating securities
(unvested restricted shares):Income from continuing operations
    
    $
    27
    
    
    $
    13
    
    
    $
    176
    
    
    $
    90Income (loss) from discontinued operations, net of taxes
    
    
    (1
    )
    
    
    8
    
    
    
    (1
    )
    
    
    28Income allocated to participating securities
    
    $
    26
    
    
    $
    21
    
    
    $
    175
    
    
    $
    118Components of net income allocated to common shareholders 
numerator for calculating net income (loss) available to common
shareholders per common share:Income from continuing operations
    
    $
    2,817
    
    
    $
    462
    
    
    $
    7,813
    
    
    $
    2,640Income (loss) from discontinued operations, net of taxes
    
    
    (50
    )
    
    
    233
    
    
    
    (59
    )
    
    
    760Net income allocated to common shareholders
    
    $
    2,767
    
    
    $
    695
    
    
    $
    7,754
    
    
    $
    3,400Denominator:Denominator for basic net income loss) available to common
shareholders per common share  weighted average shares
    
    
    8,871,307
    
    
    
    8,998,512
    
    
    
    8,772,845
    
    
    
    8,964,710Effect of dilutive non-participating securities:Employee stock options
    
    
    58,759
    
    
    
    99,141
    
    
    
    79,568
    
    
    
    110,795Denominator for diluted net income (loss) available to common
shareholders per common share  adjusted weighted average
shares and assumed conversions
    
    
    8,930,066
    
    
    
    9,097,653
    
    
    
    8,852,413
    
    
    
    9,075,505Net income (loss) available to common shareholders per common
share  basic:Continuing operations
    
    $
    0.32
    
    
    $
    0.05
    
    
    $
    0.89
    
    
    $
    0.29Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    0.09Net income available to common shareholders per common share
    
    $
    0.31
    
    
    $
    0.08
    
    
    $
    0.88
    
    
    $
    0.38Net income (loss) available to common shareholders per common
share  diluted:Continuing operations
    
    $
    0.32
    
    
    $
    0.05
    
    
    $
    0.89
    
    
    $
    0.28Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.03
    
    
    
    (0.01
    )
    
    
    0.09Net income available to common shareholders per common share
    
    $
    0.31
    
    
    $
    0.08
    
    
    $
    0.88
    
    
    $
    0.37
 17




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##### Table of Contents



Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Options excluded from computation of diluted net
income per common share as effect would be
anti-dilutive
    
    
    420,520
    
    
    
    584,000
    
    
    
    395,385
    
    
    
    859,005Weighted average exercise price of excluded options
    
    $
    21.44
    
    
    $
    22.02
    
    
    $
    21.82
    
    
    $
    19.55
 20. Comprehensive Income
  21. Share Repurchases
  22. Subsequent Event
   18




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 General
    Forward-Looking Statements
  
    
    the Companys ability to retain existing client contracts and obtain new contracts at
acceptable pricing levels;
    
    whether or not government agencies continue to privatize correctional healthcare
services;
    
    risks arising from governmental budgetary pressures and funding;
    
    the possible effect of adverse publicity on the Companys business;
    
    increased competition for new contracts and renewals of existing contracts;
    
    risks arising from the possibility that the Company may be unable to collect accounts
receivable or that accounts receivable collection may be delayed;
    
    the Companys ability to limit its exposure for inmate medical costs, catastrophic
illnesses, injuries and 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;
    
    the Companys determination whether to continue the payment of quarterly cash dividends,
and if so, at the current amount;
 19




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##### Table of Contents




    
    the Companys determination whether to repurchase shares under its stock repurchase
program;
    
    the Companys dependence on key management and clinical personnel;
    
    risks arising from potential weaknesses or deficiencies in the Companys internal control
over financial reporting;
    
    risks associated with the possibility that the Company may be unable to satisfy covenants
under its credit facility;
    
    the risk that government or municipal entities (including the Companys government and
municipal customers) may bring enforcement actions against, seek additional refunds from, or
impose penalties on, the Company or its subsidiaries as a result of the matters investigated
by the Audit Committee in prior years; and
    
    the Companys ability to expand its business beyond its traditional correctional health
client base.
  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;
    
    amortizable life of contract intangibles;
    
    income taxes; and
    
    share-based compensation.
  20




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Revenue and Cost Recognition
       Percentage of Revenue fromContinuing OperationsNine Months Ended
    
    Nine Months EndedContract Category
    
    September 30, 2010
    
    September 30, 2009Fixed Fee
    
    
    12.7
    %
    
    
    13.2
    %Population Based
    
    
    67.5
    %
    
    
    64.5
    %Cost Plus a Fee
    
    
    19.8
    %
    
    
    22.3
    %
  21




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Allowance for Doubtful Accounts
    22




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Loss Contracts
    Professional and General Liability Self-Insurance Retention
  23




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Other Self-Funded Insurance Reserves
  24




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Legal Contingencies
   Impairment of Intangible Assets and Goodwill
     
    
    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;
    
    significant negative industry or economic trends; and
    
    an adverse change in the Companys market capitalization.
  25




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Amortizable Life of Contract Intangibles
  Income Taxes
       26




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Share-Based Compensation
  Results of Operations
  Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,Percentage of Healthcare Revenues
    
    2010
    
    2009
    
    2010
    
    2009Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    91.3
    
    
    
    94.1
    
    
    
    91.2
    
    
    
    93.2Gross margin
    
    
    8.7
    
    
    
    5.9
    
    
    
    8.8
    
    
    
    6.8Selling, general and administrative expenses
    
    
    5.0
    
    
    
    4.3
    
    
    
    5.2
    
    
    
    5.0Corporate restructuring expenses
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    Audit Committee investigation and related expenses
    
    
    
    
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.2Depreciation and amortization
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.4Income from operations
    
    
    3.1
    
    
    
    0.6
    
    
    
    2.9
    
    
    
    1.2Interest expense (income)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Income from
continuing operations before income tax provision
    
    
    3.1
    
    
    
    0.6
    
    
    
    2.9
    
    
    
    1.1Income tax provision
    
    
    1.3
    
    
    
    0.3
    
    
    
    1.2
    
    
    
    0.5Income from continuing operations
    
    
    1.8
    
    
    
    0.3
    
    
    
    1.7
    
    
    
    0.6Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.2Net income
    
    
    1.8
    %
    
    
    0.5
    %
    
    
    1.7
    %
    
    
    0.8
    %
 Quarter Ended September 30, 2010 Compared to Quarter Ended September 30, 2009
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 27




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Audit Committee investigation and related expenses.
 Depreciation and amortization
 Interest expense (income)
 Income tax provision.
 Income from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income.
 28




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Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Corporate restructuring expenses.
 Audit Committee investigation and related expenses.
 Depreciation and amortization
 29




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##### Table of Contents



Interest expense (income)
 Income tax provision.
 Income from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income.
 Liquidity and Capital Resources
 Overview
      30




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Share Repurchases
   Dividends
   Credit Facility
  31




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Liquidity and Capital Resources Outlook
  32




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Other Financing Transactions
  Off-Balance Sheet Transactions
  33




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    34




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##### Table of Contents



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  DeSantis Professional Liability Suit.
 Matters involving PHS and Baltimore County, Maryland.
    35




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##### Table of Contents



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  Shareholder Litigation.
  36




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##### Table of Contents



Delaware Department of Justice Inquiry
 Other Matters
  37




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ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (c) Total
    
    (d) MaximumNumber of
    
    Number (orShares
    
    Approximate Dollar(b)
    
    Purchased as
    
    Value) of shares that(a) Total
    
    Average
    
    Part of Publicly
    
    May Yet Beof Number
    
    Price
    
    Announced
    
    Purchased Underof Shares
    
    Paid per
    
    Plans or
    
    the Plans orPeriod
    
    Purchased
    
    Share
    
    Programs
    
    Programs (1)July 2010 (7/1/10 to 7/31/10)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    August 2010 (8/1/10 to 8/31/10)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    September 2010 (9/1/10 to
9/30/10)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 
 (1)
    
    On February 27, 2008, the Companys Board of Directors approved a stock repurchase
program to repurchase up to $15 million of the Companys common stock through the end of 2009. On
July 28, 2009, the Companys Board of Directors authorized the extension of this program by two
years through the end of 2011, while maintaining the total $15 million limit. As of September 30,
2010, the Company has repurchased and retired a total of 891,850 shares of common stock under the
stock repurchase program at an aggregate cost of approximately $11.2 million. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. RESERVED
 
 ITEM 5. OTHER INFORMATION
  38




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ITEM 6. EXHIBITS
 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 3.1 to the Companys Current Report on Form 8-K filed on March 3, 2009).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
    
    Change Notice No. 2 to the Contract between Prison Health Service, Inc. and the State of
Michigan (incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on August 26, 2010).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 U.S. GAAP related to earnings per share is provided in Note 19 to the condensed
consolidated financial statements in this report. 39




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SIGNATURES
  AMERICA SERVICE GROUP INC./s/ RICHARD HALLWORTHRichard HallworthPresident & Chief Executive Officer
(Duly Authorized Officer)/s/ MICHAEL W. TAYLORMichael W. TaylorExecutive Vice President & Chief Financial Officer
(Principal Financial Officer)  40