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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Income for the quarters and nine months ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Defaults Upon Senior Securities
    
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    46Signatures
    
    
    47
 2




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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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,474
    
    
    $
    8,969Accounts receivable, net of allowance for doubtful accounts of $585 and $689, respectively
    
    
    51,956
    
    
    
    62,663Inventories
    
    
    2,776
    
    
    
    2,999Prepaid expenses and other current assets
    
    
    12,294
    
    
    
    10,727Current deferred tax assets
    
    
    5,248
    
    
    
    5,442Total current assets
    
    
    94,748
    
    
    
    90,800Property and equipment, net
    
    
    5,844
    
    
    
    5,055Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    2,644
    
    
    
    3,911Other intangibles, net
    
    
    211
    
    
    
    384Other assets
    
    
    7,027
    
    
    
    9,182Noncurrent deferred tax assets
    
    
    
    
    
    
    816Total assets
    
    $
    151,246
    
    
    $
    150,920LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    17,285
    
    
    $
    20,264Accrued medical claims liability
    
    
    20,294
    
    
    
    22,184Accrued expenses
    
    
    39,526
    
    
    
    33,860Deferred revenue
    
    
    7,632
    
    
    
    11,996Revolving credit facility
    
    
    7,500
    
    
    
    7,500Total current liabilities
    
    
    92,237
    
    
    
    95,804Noncurrent portion of accrued expenses
    
    
    15,094
    
    
    
    15,466Noncurrent deferred tax liabilities
    
    
    491
    
    
    
    Total liabilities
    
    
    107,822
    
    
    
    111,270Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at September 30, 2008 and
December 31, 2007; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at September 30, 2008 and
December 31, 2007; 9,360,708 and 9,316,014 shares issued and outstanding at September 30,
2008 and December 31, 2007, respectively
    
    
    94
    
    
    
    93Additional paid-in capital
    
    
    38,577
    
    
    
    37,485Retained earnings
    
    
    4,753
    
    
    
    2,072Total stockholders equity
    
    
    43,424
    
    
    
    39,650Total liabilities and stockholders equity
    
    $
    151,246
    
    
    $
    150,920
 
 3




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##### 



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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    $
    129,535
    
    
    $
    117,319
    
    
    $
    381,394
    
    
    $
    353,078Healthcare expenses
    
    
    117,606
    
    
    
    110,556
    
    
    
    349,497
    
    
    
    329,564Gross margin
    
    
    11,929
    
    
    
    6,763
    
    
    
    31,897
    
    
    
    23,514Selling, general and administrative expenses
    
    
    7,457
    
    
    
    6,230
    
    
    
    20,797
    
    
    
    20,328Audit Committee investigation and related expenses
    
    
    99
    
    
    
    7
    
    
    
    157
    
    
    
    47Corporate restructuring expenses
    
    
    2,255
    
    
    
    333
    
    
    
    2,255
    
    
    
    333Depreciation and amortization
    
    
    935
    
    
    
    903
    
    
    
    2,820
    
    
    
    2,864Income (loss) from operations
    
    
    1,183
    
    
    
    (710
    )
    
    
    5,868
    
    
    
    (58
    )Interest, net
    
    
    176
    
    
    
    409
    
    
    
    625
    
    
    
    1,129Income (loss) from continuing operations before income tax
provision (benefit)
    
    
    1,007
    
    
    
    (1,119
    )
    
    
    5,243
    
    
    
    (1,187
    )Income tax provision (benefit)
    
    
    525
    
    
    
    (488
    )
    
    
    2,247
    
    
    
    (420
    )Income (loss) from continuing operations
    
    
    482
    
    
    
    (631
    )
    
    
    2,996
    
    
    
    (767
    )Income (loss) from discontinued operations, net of taxes
    
    
    (134
    )
    
    
    1,472
    
    
    
    (315
    )
    
    
    4,267Net income
    
    $
    348
    
    
    $
    841
    
    
    $
    2,681
    
    
    $
    3,500Net income
(loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.33
    
    
    $
    (0.08
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.16
    
    
    
    (0.04
    )
    
    
    0.45Net income
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.37Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.33
    
    
    $
    (0.08
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.16
    
    
    
    (0.04
    )
    
    
    0.45Net income
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.37Weighted average common shares outstanding:Basic
    
    
    9,130,847
    
    
    
    9,278,360
    
    
    
    9,168,474
    
    
    
    9,527,855Diluted
    
    
    9,157,367
    
    
    
    9,278,360
    
    
    
    9,187,720
    
    
    
    9,527,855
 
 4




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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (shown in 000s)
 (UNAUDITED)
 Nine month endedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    2,681
    
    
    $
    3,500Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,834
    
    
    
    2,932Loss on retirement of fixed assets
    
    
    21
    
    
    
    46Finance cost amortization
    
    
    31
    
    
    
    87Deferred income taxes
    
    
    1,553
    
    
    
    2,368Share-based compensation expense
    
    
    2,295
    
    
    
    2,581Changes in operating assets and liabilities, net of effect of sale of SPP assets:Accounts receivable, net
    
    
    10,707
    
    
    
    7,453Inventories
    
    
    223
    
    
    
    1,550Prepaid expenses and other current assets
    
    
    (1,567
    )
    
    
    688Other assets
    
    
    2,124
    
    
    
    (2,637
    )Accounts payable
    
    
    (2,979
    )
    
    
    (7,459
    )Accrued medical claims liability
    
    
    (1,890
    )
    
    
    (3,190
    )Accrued expenses
    
    
    5,294
    
    
    
    (5,938
    )Deferred revenue
    
    
    (4,364
    )
    
    
    (1,620
    )Net cash provided by operating activities
    
    
    16,963
    
    
    
    361Cash flows from investing activities:Capital expenditures, net
    
    
    (2,204
    )
    
    
    (1,880
    )Proceeds from sale of SPP assets
    
    
    
    
    
    
    3,811Net cash provided by (used in) investing activities
    
    
    (2,204
    )
    
    
    1,931Cash flows from financing activities:Share repurchases
    
    
    (1,521
    )
    
    
    (13,655
    )Issuance of common stock
    
    
    235
    
    
    
    378Exercise of stock options
    
    
    32
    
    
    
    Net cash used in financing activities
    
    
    (1,254
    )
    
    
    (13,277
    )Net increase (decrease) in cash and cash equivalents
    
    
    13,505
    
    
    
    (10,985
    )Cash and cash equivalents at beginning of period
    
    
    8,969
    
    
    
    13,736Cash and cash equivalents at end of period
    
    $
    22,474
    
    
    $
    2,751
 
 5




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AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
  1. Basis of Presentation
   2. Description of Business
   6




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3. Audit Committee Investigation
  4. Recently Issued Accounting Pronouncements
 Fair Value Measurement. Fair Value Measurement
 Effective Date of FASB Statement No.
 Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  5. Restructuring Charge
  7




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6. Share-Based Compensation
 Share-Based Payment
  Quarter and ninemonths endedSept. 30, 2008Volatility
    
    
    0.52Interest rate
    
    
    2.92
    %Expected life (years)
    
    
    4.18Dividend yields
    
    
    0.00
    %
   Weighted Average
    
    
    Aggregate IntrinsicWeighted Average
    
    
    Remaining
    
    
    Value (inOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands) (1)Outstanding, December 31, 2007
    
    
    1,193,951
    
    
    $
    17.19Granted
    
    
    75,000
    
    
    
    10.01Exercised
    
    
    (15,300
    )
    
    
    2.14Canceled
    
    
    (76,640
    )
    
    
    12.12Outstanding, September 30, 2008
    
    
    1,177,011
    
    
    $
    17.26
    
    
    
    5.85
    
    
    $
    47Exercisable, September 30, 2008
    
    
    1,030,005
    
    
    $
    17.97
    
    
    
    5.42
    
    
    $
    47
 
 (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. 8




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##### 



WeightedRestricted
    
    
    Average Grant-Shares
    
    
    Date Fair ValueNonvested, December 31, 2007
    
    
    141,230
    
    
    $
    15.44Granted
    
    
    148,000
    
    
    
    10.47Vested
    
    
    (56,340
    )
    
    
    13.71Forfeited
    
    
    (1,500
    )
    
    
    16.28Nonvested, September 30, 2008
    
    
    231,390
    
    
    $
    12.68
 7. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    $
    (75
    )
    
    $
    23,421
    
    
    $
    2,498
    
    
    $
    75,544Healthcare expenses
    
    
    149
    
    
    
    20,917
    
    
    
    3,014
    
    
    
    68,279Gross margin
    
    
    (224
    )
    
    
    2,504
    
    
    
    (516
    )
    
    
    7,265Depreciation and amortization
    
    
    2
    
    
    
    21
    
    
    
    14
    
    
    
    68Income (loss) from discontinued operations before taxes
    
    
    (226
    )
    
    
    2,483
    
    
    
    (530
    )
    
    
    7,197Income tax provision (benefit)
    
    
    (92
    )
    
    
    1,011
    
    
    
    (215
    )
    
    
    2,930Income (loss) from discontinued operations, net of taxes
    
    $
    (134
    )
    
    $
    1,472
    
    
    $
    (315
    )
    
    $
    4,267
 8. Accounts Receivable
  September 30,
    
    
    December 31,2008
    
    
    2007Billed accounts receivable
    
    $
    34,440
    
    
    $
    36,199Unbilled accounts receivable
    
    
    19,969
    
    
    
    28,439Other accounts receivable
    
    
    663
    
    
    
    1,25455,072
    
    
    
    65,892Less: Allowances
    
    
    (585
    )
    
    
    (689
    )54,487
    
    
    
    65,203Less: Receivables reclassified as noncurrent
    
    
    (2,531
    )
    
    
    (2,540
    )$
    51,956
    
    
    $
    62,663
    9




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##### 



10




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##### 



9. Prepaid Expenses and Other Current Assets
  September 30,
    
    
    December 31,2008
    
    
    2007Prepaid insurance
    
    $
    5,216
    
    
    $
    5,637Prepaid cash deposits for
professional liability claims losses
    
    
    6,234
    
    
    
    4,500Prepaid performance bonds
    
    
    49
    
    
    
    114Prepaid other
    
    
    795
    
    
    
    476$
    12,294
    
    
    $
    10,727
 10. Property and Equipment
  September 30,
    
    
    December 31,
    
    
    Estimated2008
    
    
    2007
    
    
    Useful LivesLeasehold improvements
    
    $
    96
    
    
    $
    96
    
    
    5 yearsEquipment and furniture
    
    
    10,330
    
    
    
    9,356
    
    
    5 yearsComputer software
    
    
    3,849
    
    
    
    3,075
    
    
    3-5 yearsMedical equipment
    
    
    1,088
    
    
    
    1,047
    
    
    5 yearsAutomobiles
    
    
    61
    
    
    
    70
    
    
    5 yearsManagement information systems under development
    
    
    366
    
    
    
    
    
    
    
    15,790
    
    
    
    13,644Less: Accumulated depreciation
    
    
    (9,946
    )
    
    
    (8,589
    )$
    5,844
    
    
    $
    5,055
  Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
 11




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##### 



11. Other Assets
  September 30,
    
    
    December 31,2008
    
    
    2007Deferred financing costs
    
    $
    385
    
    
    $
    334Less: Accumulated amortization
    
    
    (271
    )
    
    
    (241
    )114
    
    
    
    93Excess deposits for professional liability claims
    
    
    
    
    
    
    2,160Prepaid insurance deposits
    
    
    4,273
    
    
    
    4,273Long-term receivables
    
    
    2,531
    
    
    
    2,540Other refundable deposits
    
    
    109
    
    
    
    116$
    7,027
    
    
    $
    9,182
 12. Contracts and Other Intangible Assets
  September 30,
    
    
    December 31,2008
    
    
    2007Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (13,226
    )
    
    
    (11,959
    )$
    2,644
    
    
    $
    3,911Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (2,189
    )
    
    
    (2,016
    )$
    211
    
    
    $
    384
   12




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##### 



13. Accrued Expenses
  September 30,
    
    
    December 31,2008
    
    
    2007Salaries and employee benefits
    
    $
    22,985
    
    
    $
    16,940Professional liability claims
    
    
    19,221
    
    
    
    19,693Accrued workers compensation claims
    
    
    7,455
    
    
    
    7,022Other
    
    
    4,959
    
    
    
    5,67154,620
    
    
    
    49,326Less: Noncurrent portion of professional
liability and workers compensation
claims
    
    
    (15,094
    )
    
    
    (15,466
    )$
    39,526
    
    
    $
    33,860
 14. Reserve for Loss Contracts
   15. Banking Arrangements
    13




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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
   16. Income Taxes
 Accounting for Income Taxes
   14




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##### 



Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
   17. Professional and General Liability Self-insurance Retention
  18. Commitments and Contingencies
 Litigation and Claims
 Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 15




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##### 



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.
 Prison Health Services, Inc. v. Hillsborough County Sheriffs Office.
  16




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##### 



Matters involving PHS and Baltimore County, Maryland.
    17




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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
 18




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##### 



Other Matters
  Performance Bonds
  19. Net Income (Loss) Per Share
  Earnings Per Share,
 Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Income (loss) from continuing operations
    
    $
    482
    
    
    $
    (631
    )
    
    $
    2,996
    
    
    $
    (767
    )Income (loss) from discontinued operations, net of taxes
    
    
    (134
    )
    
    
    1,472
    
    
    
    (315
    )
    
    
    4,267Numerator for basic and diluted net income per share
    
    $
    348
    
    
    $
    841
    
    
    $
    2,681
    
    
    $
    3,500Denominator:Denominator for basic net income (loss) per share 
weighted average shares
    
    
    9,130,847
    
    
    
    9,278,360
    
    
    
    9,168,474
    
    
    
    9,527,855Effect of dilutive securities:Employee stock options and restricted shares
    
    
    26,520
    
    
    
    
    
    
    
    19,246
    
    
    
    Denominator for diluted net income (loss) per share 
adjusted weighted average shares and assumed
conversions
    
    
    9,157,367
    
    
    
    9,278,360
    
    
    
    9,187,720
    
    
    
    9,527,855Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.33
    
    
    $
    (0.08
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.16
    
    
    
    (0.04
    )
    
    
    0.45Net income
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.37Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.05
    
    
    $
    (0.07
    )
    
    $
    0.33
    
    
    $
    (0.08
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.16
    
    
    
    (0.04
    )
    
    
    0.45Net income
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.29
    
    
    $
    0.37
 19




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##### 



Quarter ended
    
    
    Nine month endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    1,044,262
    
    
    
    1,270,938
    
    
    
    1,097,174
    
    
    
    1,270,938Weighted average exercise price of excluded options
    
    $
    18.25
    
    
    $
    17.43
    
    
    $
    17.85
    
    
    $
    17.43
 20. Comprehensive Income
  21. Segment Data
    Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
        ConsolidatedQuarter ended September 30, 2007:Healthcare revenues
    
    $
    117,343
    
    
    $
    (24
    )
    
    $
    
    
    
    $
    117,319Healthcare expenses
    
    
    110,580
    
    
    
    (24
    )
    
    
    
    
    
    
    110,556Gross margin
    
    $
    6,763
    
    
    $
    
    
    
    $
    
    
    
    $
    6,763Depreciation and amortization expense
    
    $
    903
    
    
    $
    
    
    
    $
    
    
    
    $
    903Nine months ended September 30, 2007:Healthcare revenues
    
    $
    349,576
    
    
    $
    19,071
    
    
    $
    (15,569
    )
    
    $
    353,078Healthcare expenses
    
    
    325,748
    
    
    
    19,385
    
    
    
    (15,569
    )
    
    
    329,564Gross margin
    
    $
    23,828
    
    
    $
    (314
    )
    
    $
    
    
    
    $
    23,514Depreciation and amortization expense
    
    $
    2,620
    
    
    $
    244
    
    
    $
    
    
    
    $
    2,864
 20




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##### 



22. Share Repurchases
  21




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##### 



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;
 22




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##### 




    
    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 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;
    
    the Companys determination whether to repurchase shares under its stock repurchase
program;
    
    risks arising from the possibility that Maxor, the acquirer of certain assets of SPP,
cannot provide pharmaceuticals or related services at either a cost or service level
sufficient to allow the Company to meet its contractual obligations with its customers
without negatively impacting financial performance;
    
    the Companys dependence on key management and clinical personnel;
    
    risks arising from potential weaknesses or deficiencies in the Companys internal
control over financial reporting;
    
    risks associated with the possibility that the Company may be unable to satisfy
covenants under its credit facility;
    
    the risk that government or municipal entities (including the Companys government and
municipal customers) may bring enforcement actions against, seek additional refunds from,
or impose penalties on, the Company or its subsidiaries as a result of the matters
investigated by the Audit Committee in prior years or the previous restatement of the
Companys financial results; and
    
    the risks arising from shareholder litigation.
  Critical Accounting Policies And Estimates
 General
  23




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##### 




    
    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.
   Revenue and Cost Recognition
      24




---



##### 



Percentage of Revenue fromContinuing OperationsFor the Nine Months
    
    For the Nine MonthsContract Category
    
    Ended Sept. 30, 2008
    
    Ended Sept. 30, 2007Fixed Fee
    
    
    16.1
    %
    
    
    15.8
    %Population Based
    
    
    58.5
    %
    
    
    57.8
    %Cost Plus a Fee
    
    
    25.4
    %
    
    
    25.4
    %Pharmacy Revenue*
    
    
    0.0
    %
    
    
    1.0
    %
 
 *
    
    Pharmacy revenue is revenue recognized by SPP. Effective April 30, 2007, SPP
sold certain of its assets to Maxor.
For more information, see Item 2.  General.    25




---



##### 



Allowance for Doubtful Accounts
     26




---



##### 



Loss Contracts
 27




---



##### 



Professional and General Liability Self-Insurance Retention
     28




---



##### 



Other Self-Funded Insurance Reserves
  Legal Contingencies
  Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
  
    
    significant underperformance or loss of key contracts relative to expected
historical or projected future operating results;
    
    significant changes in the manner of use of the Companys assets or in the
Companys overall business strategy; and
    
    significant negative industry or economic trends.
 29




---



##### 



Amortizable Life of Contract Intangibles
  Income Taxes
 Accounting for Income Taxes
   30




---



##### 



Share-Based Compensation
 Share-Based Payment
 31




---



##### 



Results of Operations
  Quarter ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,Percentage of Healthcare Revenues
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    90.8
    
    
    
    94.2
    
    
    
    91.6
    
    
    
    93.3Gross margin
    
    
    9.2
    
    
    
    5.8
    
    
    
    8.4
    
    
    
    6.7Selling, general and administrative expenses
    
    
    5.8
    
    
    
    5.3
    
    
    
    5.5
    
    
    
    5.8Audit Committee investigation and related expenses
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Corporate restructuring expenses
    
    
    1.7
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.1Depreciation and amortization
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.8Income (loss) from operations
    
    
    0.9
    
    
    
    (0.6
    )
    
    
    1.5
    
    
    
    Interest, net
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.3Income (loss) from continuing operations before income
tax provision (benefit)
    
    
    0.8
    
    
    
    (1.0
    )
    
    
    1.4
    
    
    
    (0.3
    )Income tax provision (benefit)
    
    
    0.4
    
    
    
    (0.5
    )
    
    
    0.6
    
    
    
    (0.1
    )Income (loss) from continuing operations
    
    
    0.4
    
    
    
    (0.5
    )
    
    
    0.8
    
    
    
    (0.2
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.1
    )
    
    
    1.2
    
    
    
    (0.1
    )
    
    
    1.2Net income
    
    
    0.3
    %
    
    
    0.7
    %
    
    
    0.7
    %
    
    
    1.0
    %
 Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 32




---



##### 



Corporate restructuring expenses
 Depreciation and amortization
 Interest, net
 Income tax provision.
 Income from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income.
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Healthcare revenues.
 33




---



##### 



Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 Corporate restructuring expenses.
 34




---



##### 



Depreciation and amortization
 Interest, net
 Income tax provision.
 Income (loss) from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income.
 Liquidity and Capital Resources
 Overview
     35




---



##### 



Credit Facility
     Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement
  36




---



##### 



Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    768
    
    
    $
    777
    
    
    $
    624
    
    
    $
    1,374Revolving credit facility
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    3,182
    
    
    
    3,317
    
    
    
    956
    
    
    
    Professional and general liability claims
    
    
    10,000
    
    
    
    7,726
    
    
    
    1,202
    
    
    
    292Total
    
    $
    21,450
    
    
    $
    11,820
    
    
    $
    2,782
    
    
    $
    1,666
  Off-Balance Sheet Transactions
  Inflation
  Recently Issued Accounting Pronouncements
 Fair Value Measurement. Fair Value Measurement
 Effective Date of FASB Statement No.
 37




---



##### 



Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  38




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   39




---



##### 



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Albert Einstein Healthcare Network v. The City of Philadelphia and 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.
 Prison Health Services, Inc. v. Hillsborough County Sheriffs Office.
 40




---



##### 



Matters involving PHS and Baltimore County, Maryland.
  41




---



##### 



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 42




---



##### 



Delaware Department of Justice Inquiry
 Other Matters.
 43




---



##### 



ITEM 1A. RISK FACTORS
  The failure of a third party insurance carrier with whom the Company contracts could result in the
Company losing insurance coverage or access to loss funding which has been prepaid to the insurance
carrier.
 The Company regularly maintains cash balances at a commercial bank in excess of the Federal Deposit
Insurance Corporation insurance limit and the failure of such commercial bank could result in the
loss of a portion of such cash deposits.
 44




---



##### 



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)July 2008 (7/1/08
to 7/31/08)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    August 2008 (8/1/08
to 8/31/08)
    
    
    146,900
    
    
    $
    10.32
    
    
    
    146,900
    
    
    $
    13,479September 2008
(9/1/08 to 9/30/08)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 
 (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. As
of September 30, 2008, the Company has repurchased and retired a total of 146,900 common shares at
an aggregate cost of approximately $1.5 million.  
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  45




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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 99.1 to the Companys Current Report on Form 8-K filed on December 17,
2007).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 
    
    Form of 2008 Employee Stock Grant Certificate under the America Service Group Inc. Amended
and Restated 1999 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on August 7, 2008).10.2 
    
    Form of 2008 Non-employee Director Stock Grant Certificate under the America Service Group
Inc. Amended and Restated 1999 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on August 7, 2008).10.3 
    
    Separation Agreement and General Release, dated as of September 15, 2008, between America
Service Group Inc. and Michael Catalano (incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on September 19, 2008).10.4 
    
    Letter Agreement, dated as of
November 7, 2008, between America
Service Group Inc. and Michael Catalano (incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on November
10, 2008).10.5 
    
    Amended and Restated Employment Agreement, dated as of September 15, 2008, between America
Service Group Inc. and Richard Hallworth (incorporated herein by reference to Exhibit 10.2 to
the Companys Current Report on Form 8-K filed on September 19, 2008).10.6 
    
    Amended and Restated Employment Agreement, dated as of September 15, 2008, between America
Service Group Inc. and Michael W. Taylor (incorporated herein by reference to Exhibit 10.3 to
the Companys Current Report on Form 8-K filed on September 19, 2008).11
    
    Computation of Per Share Earnings.*31.1 
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Data required by SFAS No. 128, Earnings Per Share, is provided in Note 19 to the condensed
consolidated financial statements in this report. 46




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##### 



SIGNATURES
  AMERICA SERVICE GROUP INC./s/ MICHAEL CATALANOMichael CatalanoChairman & Chief Executive Officer(Duly Authorized Officer)/s/ MICHAEL W. TAYLORMichael W. TaylorExecutive Vice President & Chief Financial Officer(Principal Financial Officer)
  47