General
America Service Group Inc. ("ASG" or the "Company") is a leading non-governmental provider and/or administrator of managed correctional healthcare services in the United States. The Company is a provider and/or administrator of managed healthcare services to county/municipal jails and detention centers and state correctional facilities. As of April 1, 2009, the Company provided and/or administered managed healthcare services under 65 contracts to approximately 180,000 inmates at over 170 sites in 23 states.
The Company operates through its subsidiaries, Prison Health Services, Inc. ("PHS"), EMSA Limited Partnership ("EMSA"), Correctional Health Services, LLC ("CHS") and Secure Pharmacy Plus, LLC ("SPP"). ASG was incorporated in 1990 as a holding company for PHS. Unless the context otherwise requires, the terms "ASG" or the "Company" refer to ASG and its direct and indirect subsidiaries. ASG's executive offices are located at 105 Westpark Drive, Suite 200, Brentwood, Tennessee 37027. Its telephone number is (615) 373-3100.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes included herein.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent management's current expectations regarding future events. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding the Company's future financial position, business strategy, budgets, projected costs, and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements typically are identified by use of terms such as "may," "will," "should," "plan," "expect," "anticipate," "estimate," "believe," "continue," "intend," "project" and similar words, although some forward-looking statements are expressed differently. These statements are based on the Company's current plans and anticipated future activities, and its actual results of operations may be materially different from those expressed or implied by the forward-looking statements. Some of the factors that may cause the Company's actual results of operations to differ materially from those expressed or implied by the forward-looking statements include, among other things:
• 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 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;

• 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;

• the Company's ability to expand its products beyond its traditional correctional health client base; and

• the risks arising from shareholder litigation.

In addition to the factors referenced above and the other cautionary statements discussed in this report, you should also consider the risks included in Item 1A, "Risk Factors" contained in this Form 10-Q and Item 1A, "Risk Factors" contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and in other documents that the Company files from time to time with the Securities and Exchange Commission. Because these risk factors could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by the Company or on the Company's behalf, stockholders should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict which factors will arise. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Critical Accounting Policies And Estimates General
The Company's discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to:
• 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.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies are affected by its more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. Revenue and Cost Recognition
The Company's contracts to provide healthcare services to correctional institutions are principally fixed price contracts with revenue adjustments for census fluctuations and risk sharing arrangements, such as stop-loss provisions and aggregate limits for off-site or pharmaceutical costs. Such contracts typically have a term of one to three years with subsequent renewal options and generally may be terminated by either party without cause upon proper notice. Revenues earned under contracts with correctional institutions are recognized in the period that services are rendered. Cash received in advance for future services is recorded as deferred revenue and recognized as income when the service is performed.
Revenues are calculated based on the specific contract terms and fall into one of three general categories: fixed fee, population based, or cost plus a fee.
For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract irrespective of inmate population. Revenues for population-based contracts are calculated either on a fixed fee that is subsequently adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate multiplied by the average inmate population for the period of service. For cost plus a fee contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual fee.
Generally, the Company's contracts will also include additional provisions which mitigate a portion of the Company's risk related to cost increases. Off-site utilization risk is mitigated in the majority of the Company's contracts through aggregate pools or caps for off-site expenses, stop-loss provisions, cost plus a fee arrangements or, in some cases, the entire exclusion of certain or all off-site service costs. Pharmacy expense risk is similarly mitigated in certain of the Company's contracts. Typically, under the terms of such provisions, the Company's revenue under the contract increases to offset increases in specified cost categories such as off-site expenses or pharmaceutical costs. For contracts that include such provisions, the Company recognizes the additional revenues due from clients based on its estimates of applicable contract to date costs incurred as compared to the corresponding pro rata contractual limit for such costs. Because such provisions typically specify how often such additional revenue may be invoiced and require all such additional revenue to be ultimately settled based on actual expenses, the additional revenues are initially recorded as unbilled receivables until the time period for billing has been met and actual costs are known. Any differences between the Company's estimates of incurred costs and the actual costs are recorded in the period in which such differences become known along with the corresponding adjustment to the amount of recorded additional revenues.
Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from a failure to meet performance or staffing related criteria. If necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.
The table below illustrates these revenue categories as a percentage of total revenues from continuing operations for the quarters ended March 31, 2009 and 2008.

                                         Percentage of Revenue from
                                           Continuing Operations
                                 For the Quarter           For the Quarter
          Contract Category    Ended March 31, 2009      Ended March 31, 2008
          Fixed Fee                          15.0 %                    14.8 %
          Population Based                   58.1 %                    59.0 %
          Cost Plus a Fee                    26.9 %                    26.2 %

Contracts under the population based and fixed fee categories generally have similar margins which are higher than margins for contracts under the cost plus a fee category. Cost plus a fee contracts generally have lower margins but with much less potential for variability due to the limited risk involved. The Company's profitability under each of the three general contract categories discussed above varies based on the level of risk assumed under the contract terms with the most potential for variability being in contracts under the population based or fixed fee categories which do not contain the risk mitigating provisions related to off-site utilization described above.
Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing and/or administering the managed care, including, the costs associated with services provided and/or administered by off-site medical providers, the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. Many of the Company's contracts require the Company's customers to reimburse the Company for all treatment costs or, in some cases, only treatment costs related to certain catastrophic events, and/or for specific disease diagnoses illnesses. Certain of the Company's contracts do not contain such limits. The Company attempts to compensate for the increased financial risk when pricing contracts that do not contain individual, catastrophic or specific disease diagnosis-related limits. However, the occurrence of severe individual cases, specific disease diagnoses illnesses or a catastrophic event in a facility governed by a contract without such limitations could render the contract unprofitable and could have a material adverse effect on the Company's operations. For certain of its contracts that do not contain catastrophic protection, the Company maintains stop loss insurance from an unaffiliated insurer with respect to, among other things, inpatient and outpatient hospital expenses (as defined in the policy) for amounts in excess of $375,000 per inmate up to an annual cap of $1.0 million per inmate. Amounts reimbursable per claim under the policy are further limited to the lessor of 60% of billed charges, the amount paid or the contracted amounts in situations where the Company has negotiated rates with the applicable providers.
The cost of healthcare services provided, administered or contracted for are recognized in the period in which they are provided and/or administered based in part on estimates, including an accrual for estimated unbilled medical services rendered through the balance sheet date. The Company estimates the accrual for unbilled medical services using actual utilization data including hospitalization, one-day surgeries, physician visits and emergency room and ambulance visits and their corresponding costs, which are estimated using the average historical cost of such services. Additionally, the Company's utilization management personnel perform a monthly review of inpatient hospital stays in order to identify any stays which would have a cost in excess of the historical average rates. Once identified, reserves for such stays are determined which take into consideration the specific facts of the stay. An actuarial analysis is also prepared at least quarterly as an additional tool to be considered by management in evaluating the adequacy of the Company's total accrual related to contracts which have sufficient claims payment history. The analysis takes into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.
Actual payments and future reserve requirements will differ from the Company's current estimates. The differences could be material if significant fluctuations occur in the healthcare cost structure or the Company's future claims experience. Changes in estimates of claims resulting from such fluctuations and differences between actuarial estimates and actual claims payments are recognized in the period in which the estimates are changed or the payments are made.
Along with other information, an actuarial analysis is prepared at least quarterly as an additional tool in evaluating the adequacy of the Company's reserves for self-insurance retention for certain reported as well as unreported professional and general liability claims associated with the delivery of medical services and included in accrued expenses and the noncurrent portion of accrued expenses on the accompanying consolidated balance sheets. Reserves for medical malpractice claims fluctuate because the number of claims and the severity of the underlying incidents change from one period to the next. Furthermore, payments with respect to previously estimated liabilities frequently differ from the estimated liability. Changes in estimates of losses resulting from such fluctuations and differences between actuarial estimates and actual loss payments are recognized by an adjustment to the reserve for medical malpractice claims in the period in which the estimates are changed or payments are made and a corresponding change in healthcare expenses.
The Company accrues losses under its fixed price contracts when it is probable that a loss has been incurred (i.e., expected future healthcare costs and maintenance costs will exceed anticipated future revenue) and the amount

of the loss can be reasonably estimated. The Company performs this loss accrual analysis on a specific contract basis.
Allowance for Doubtful Accounts
Accounts receivable are stated at estimated net realizable value. The Company recognizes allowances for doubtful accounts based on a variety of factors, including the length of time receivables are past due, significant one-time events, contractual rights, client funding and/or political pressures, discussions with clients and historical experience. If circumstances change, estimates of the recoverability of receivables would be further adjusted and such adjustments could have a material adverse effect on the Company's results of operations in the period in which they are recorded.
Unbilled accounts receivable generally represent additional revenue earned under shared-risk contracting models that remain unbilled at each balance sheet date, due to provisions within the contracts governing the timing for billing such amounts.
The Company and its clients will, from time to time, have disputes over amounts billed under the Company's contracts. The Company records a reserve for contractual allowances in circumstances where it concludes that a loss from such disputes is probable.
As discussed more fully in Part II - Item 1. "Legal Proceedings," PHS is currently involved in two lawsuits with its former client, Baltimore County, Maryland (the "County"); one of the two lawsuits involves the County's lack of payment for services rendered. PHS has approximately $1.7 million of receivables due from the County, primarily related to services rendered between April 1, 2006 and September 14, 2006, the date the Company's relationship with the County was terminated. The County has refused to pay PHS for these amounts and therefore, on October 27, 2006, PHS filed suit against the County in the Circuit Court for Baltimore County, Maryland seeking collection of the outstanding receivables balance, damages for breach of contract, quantum meruit, and unjust enrichment as well as prejudgment interest. PHS believes, in the case of this lawsuit, that it has a valid and meritorious cause of action and, as a result, has concluded that the outstanding receivables, which represent services performed under the relationship between the parties, are probable of collection. However, although PHS believes it has valid contractual and legal arguments, an adverse result in this lawsuit could have a negative impact on the results of this matter and/or PHS' ability to collect the outstanding receivables amount. These receivables are classified as other noncurrent assets in the Company's condensed consolidated balance sheet.
As stated above, the Company believes the recorded amount represents valid receivables which are contractually due from the County and expects full collection. However, due to the factors discussed above and more fully in Note 17, there is a heightened risk of uncollectibility of these receivables which may result in a future loss. Nevertheless, the Company intends to take all necessary and available measures in order to collect these receivables.
Changes in circumstances related to the matter discussed above involving the County, or any other receivables, could result in a change in the allowance for doubtful accounts or the estimate of contractual adjustments in future periods. Such change, if it were to occur, could have a material adverse affect on the Company's results of operations and financial position in the period in which the change occurs.
In addition, as discussed more fully in Part II - Item 1. "Legal Proceedings," at December 31, 2008, PHS had approximately $1.4 million of gross billed receivables due from a former client, Hillsborough County Sheriff's Office ("HCSO"), whose contract terminated prior to January 1, 2006. Approximately $0.7 million of these receivables related to billings for costs incurred by the Company for offsite medical services and pharmacy costs which were in excess of the Company's maximum exposure for such costs as set forth under the Company's contract that was in effect with HCSO. The remaining receivables represented interest accrued on the past due balances under the terms of the contract. At December 31, 2008, the Company had recorded reserves totaling approximately $0.7 million related to these receivables. During the first quarter of 2009, the Company and HCSO entered into a settlement agreement pursuant to which the net outstanding receivables were collected.

Loss Contracts
On a quarterly basis, the Company performs a review of its portfolio of contracts for the purpose of identifying potential loss contracts and developing a loss contract reserve for succeeding periods if any loss contracts are identified. The Company accrues losses under its fixed price contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company performs this loss accrual analysis on a specific contract basis taking into consideration such factors as the Company's ability to terminate the contract, future contractual revenue, projected future healthcare and maintenance costs, projected future stop-loss insurance recoveries and the contract's specific terms related to future revenue increases as compared to increased healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and management's estimate of future cost increases. These estimates are subject to the same adverse fluctuations and future claims experience as previously noted.
In the course of performing its reviews in future periods, the Company might identify contracts which have become loss contracts due to a change in circumstances. Circumstances that might change and result in the identification of a contract as a loss contract in a future period include interpretations regarding contract termination or expiration provisions, unanticipated adverse changes in the healthcare cost structure, inmate population or the utilization of outside medical services in a contract, where such changes are not offset by increased healthcare revenues. Should a contract be identified as a loss contract in a future period, the Company would record, in the period in which such identification is made, a reserve for the estimated future losses that would be incurred under the contract. The identification of a loss contract in the future could have a material adverse effect on the Company's results of operations in the period in which the reserve is recorded.
There are no loss contracts identified as of March 31, 2009. Professional and General Liability Self-Insurance Retention As a healthcare provider, the Company's business occasionally results in actions for negligence and other causes of action related to its provision of healthcare services with the attendant risk of substantial damage awards, or court ordered non-monetary relief such as, changes in operating practices or procedures, which may lead to the potential for substantial increases in the Company's operating expenses. The most significant source of potential liability in this regard is the risk of suits brought by inmates alleging negligent healthcare services, deliberate indifference to their medical needs or the lack of timely or adequate healthcare services. The Company may also be liable, as employer, for the negligence of healthcare professionals it employs or healthcare professionals with whom it contracts. The Company's contracts generally provide for the Company to indemnify the governmental agency for losses incurred related to healthcare provided by the Company and its agents.
To mitigate a portion of this risk, the Company maintains a primary professional liability insurance program, principally on a claims-made basis. For 2002 through 2006 and 2008 through 2009 with respect to the majority of its patients, the Company purchased commercial insurance coverage, but is effectively self-insured due to the terms of the coverage which include adjustable premiums. For 2002 through 2006 and 2008 through 2009, the Company is covered by separate policies each of which contains a premium that is retroactively adjusted, with adjustment based on actual losses. The Company's ultimate premium for its 2002 through 2006 and 2008 through 2009 policies will depend on the final incurred losses related to each of these separate policy periods. For 2007, the Company is insured through claims made policies subject to per event and aggregate coverage limits. Any amounts ultimately incurred above these coverage limits would be the responsibility of the Company. Management establishes reserves for the estimated losses that will be incurred under these insurance policies after taking into consideration the Company's professional liability claims department and external counsel evaluations of the merits of the individual claims, analysis of claim history, actuarial analysis and coverage limits where applicable. Any adjustments resulting from the review are reflected in current earnings.
Given the fact that many claims are not brought during the year of occurrence, in addition to its reserves for known claims, the Company maintains a reserve for incurred but not reported claims. The reserve for incurred but not reported claims is recorded on an undiscounted basis. The Company's estimates of this reserve are supported by various analyses, including an actuarial analysis, which is performed on a quarterly basis.

At March 31, 2009, the Company's reserves for both known and incurred but not reported claims totaled $23.7 million. Reserves for medical malpractice claims fluctuate because the number of claims and the severity of the underlying incidents change from one period to the next. Reserves for medical malpractice claims can also fluctuate as a result of court decisions or as new facts become available. Furthermore, payments with respect to previously estimated liabilities frequently differ from the estimated liability. Changes in estimates of losses resulting from such fluctuations and differences between management's established reserves and actual loss payments are recognized by an adjustment to the reserve for medical malpractice claims in the period in which the estimates . . .