NATURE OF THE ACTIONsecurities.stanford.edu/.../200652_o01c_Waggoner.pdf6. Plaintiff David Waggoner, as set forth in the accompanying certification, purchased the common stock of ASG

- 1 -

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

DAVID WAGGONER, Individually and On Behalf of All Others Similarly Situated,

Plaintiff,

vs.

AMERICA SERVICE GROUP, INC., MICHAEL CATALANO and MICHAEL W. TAYLOR,

Defendants.

) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. ___________

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Plaintiff has alleged the following based upon the investigation of plaintiff’s counsel,

which included a review of United States Securities and Exchange Commission (“SEC”)

filings by America Service Group Inc. (“ASG” or the “Company”), as well as regulatory

filings and reports, securities analysts’ reports and advisories about the Company, press

releases and other public statements issued by the Company, and media reports about the

Company, and plaintiff believes that substantial additional evidentiary support will exist for

the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of purchasers of the common

stock of ASG between September 24, 2003 to March 16, 2006, inclusive (the “Class Period”),

seeking to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

- 2 -

JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule l0b-5 promulgated thereunder by the

Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].

3. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §1337 and Section 27 of the Exchange Act [15 U.S.C. §78aa].

4. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. §1391(b), as and many of the acts and practices complained of herein occurred in

substantial part in this District. The Company maintains its principal executive offices in this

District.

5. In connection with the acts alleged in this complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national

securities markets.

PARTIES

6. Plaintiff David Waggoner, as set forth in the accompanying certification,

purchased the common stock of ASG at artificially inflated prices during the Class Period and

has been damaged thereby.

7. Defendant ASG is a Delaware corporation with its principal place of business

located at 105 Westpark Drive, Suite 200, Brentwood, TN 37027. The Company and its

subsidiaries, provide managed healthcare services to correctional facilities in the United States.

The Company contracts with state, county, and local governmental agencies to provide

healthcare services to inmates of prisons and jails.

- 3 -

8. (a) Defendant Michael Catalano (“Catalano”) was, at all relevant times,

ASG’s Chairman, Chief Executive Officer (“CEO”) and President.

(b) Defendant Michael W. Taylor (“Taylor”) has been ASG’s Chief Financial

Officer (“CFO”), Principal Accounting Officer, Senior Vice President and Treasurer.

(c) Defendants Catalano and Taylor are collectively referred to herein as the

“Individual Defendants.”

9. Because of the Individual Defendants’ positions with the Company, they had

access to the adverse undisclosed information about the Company’s business, operations,

operational trends, financial statements, markets and present and future business prospects via

access to internal corporate documents (including the Company’s operating plans, budgets and

forecasts and reports of actual operations compared thereto), conversations and connections with

other corporate officers and employees, attendance at management and Board of Directors

meetings and committees thereof and via reports and other information provided to them in

connection therewith.

10. It is appropriate to treat the Individual Defendants as a group for pleading

purposes and to presume that the false, misleading and incomplete information conveyed in the

Company’s public filings, press releases and other publications as alleged herein are the

collective actions of the narrowly defined group of defendants identified above. Each of the

above officers of ASG, by virtue of their high-level positions with the Company, directly

participated in the management of the Company, was directly involved in the day-to-day

operations of the Company at the highest levels and was privy to confidential proprietary

information concerning the Company and its business, operations, growth, financial

statements, and financial condition, as alleged herein. Said defendants were involved in

- 4 -

drafting, producing, reviewing and/or disseminating the false and misleading statements and

information alleged herein, were aware, or recklessly disregarded, that the false and misleading

statements were being issued regarding the Company, and approved or ratified these

statements, in violation of the federal securities laws.

11. As officers and controlling persons of a publicly-held company whose common

stock was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, traded

on the NASDAQ National Markets (“NASDAQ”), and governed by the provisions of the federal

securities laws, the Individual Defendants each had a duty to disseminate promptly, accurate and

truthful information with respect to the Company’s financial condition and performance, growth,

operations, financial statements, business, markets, management, earnings and present and future

business prospects, and to correct any previously-issued statements that had become materially

misleading or untrue, so that the market price of the Company’s publicly-traded common stock

would be based upon truthful and accurate information. The Individual Defendants’

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

12. The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public and shareholder and investor reports and other communications

complained of herein and were aware of, or recklessly disregarded, the misstatements contained

therein and omissions therefrom, and were aware of their materially false and misleading nature.

Because of their Board membership and/or executive and managerial positions with ASG, each

of the Individual Defendants had access to the adverse undisclosed information about ASG’s

business prospects, financial condition and performance as particularized herein and knew (or

recklessly disregarded) that these adverse facts, issued or adopted by the Company, rendered

- 5 -

the positive representations made by or about ASG and its business materially false and

misleading.

13. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases and other public statements pertaining to the Company during the

Class Period. Each Individual Defendant was provided with copies of the documents alleged

herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the

Individual Defendants is responsible for the accuracy of the public reports and releases detailed

herein and are therefore primarily liable for the representations contained therein.

14. Each of the defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of ASG common stock by

disseminating materially false and misleading statements and/or concealing material adverse

facts. The scheme: (i) deceived the investing public regarding ASG’s business, operations,

management and the intrinsic value of ASG common stock; (ii) enabled the Company to

complete a $4.6 million private placement of its common stock at an artificially inflated price

during the period in which the Company has restated its financial statements, i.e. March 18, 2002

to March 16, 2006 (the “Restatement Period”); (iii) enabled the Individual Defendants to sell

338,172 shares of their personally-held common stock at artificially inflated prices, thereby

reaping over $6 million in gross proceeds; and (iv) caused plaintiff and other members of the

Class to purchase ASG’s common stock at artificially inflated prices.

- 6 -

PLAINTIFF’S CLASS ACTION ALLEGATIONS

15. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or

otherwise acquired the common stock of ASG between September 24, 2003 to March 16, 2006,

inclusive (“the Class”) and who were damaged thereby. Excluded from the Class are defendants,

the officers and directors of the Company, at all relevant times, members of their immediate

families and their legal successors or assigns and any entity in which defendants have or had a

representatives, heirs, controlling interest.

16. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, ASG common shares were actively traded on the

NASDAQ. While the exact number of Class members is unknown to plaintiff at this time and

can only be ascertained through appropriate discovery, plaintiff believes that there are hundreds

or thousands of members in the proposed Class. Record owners and other members of the Class

may be identified from records maintained by ASG or its transfer agent and may be notified of

the pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.

17. Plaintiff’s claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of

federal law that is complained of herein.

18. Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation.

- 7 -

19. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants’ acts as

alleged herein;

(b) whether statements made by defendants to the investing public during the

Class Period misrepresented material facts about the business, operations and management of

ASG;

(c) to what extent the members of the Class have sustained damages and the

proper measure of damages.

20. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

SUBSTANTIVE ALLEGATIONS

Background and Summary

21. Defendant ASG describes itself as a “leading provider of correctional healthcare

services in the United States. America Service Group Inc., through its subsidiaries, provides a

wide range of healthcare and pharmacy programs to government agencies for the medical care of

inmates.” The Company has two reportable segments: its Correctional Healthcare Services

segment and its Pharmaceutical Distribution Services segment.

- 8 -

22. The Company operates its Correctional Healthcare Services segment through its

subsidiary Prison Health Services (“PHS”). Through PHS, the Company contracts with state,

county, and local governmental agencies to provide healthcare services to inmates of prisons and

jails.

23. The Company operates its Pharmaceutical Distribution Services segment through

its subsidiary Secured Pharmacy Plus (“SPP”). Through SPP, the Company contracts with

federal, state and local governments, and certain private entities to distribute pharmaceuticals

and certain medical supplies to inmates of correctional facilities. SPP also contracts with PHS.

Approximately, 50% of its revenue comes from PHS.

24. Throughout the Class Period, defendants issued numerous positive statements

and filed quarterly reports with the SEC which described the Company’s increasing financial

performance. These statements were materially false and misleading because they failed to

disclose and misrepresented the following adverse facts, among others: (a) that ASG was not

charging its customers in accordance with applicable contracts; (b) that ASG failed to properly

credit customers with discounts, rebates or price savings resulting from purchases from

alternative sources; (c) that ASG failed to provide customers with proper credit for the return

of pharmaceutical products; (d) that defendants inappropriately established and used reserves

during various periods over the last five years to more closely match SPP’s reported earnings

to its budgeted results, among other things; (e) that the Company lacked adequate internal

controls and was therefore unable to ascertain its true financial condition; and (f) that as a

result, the values of the Company’s net income, retained earnings and reserves were materially

overstated at all relevant times.

- 9 -

25. On October 24, 2005, the Company issued a press release announcing that the

Audit Committee of its Board of Directors was conducting an internal investigation into certain

matters related to its subsidiary, SPP. The Company stated that the investigation would

determine whether SPP provided pricing of pharmaceuticals in accordance with applicable

client contract terms and whether some of the accruals and reserves maintained by SPP were

established and utilized in accordance with Generally Accepted Accounting Principles

(“GAAP”).

26. On March 15, 2006, after the markets closed, ASG shocked the market when it

issued a press release announcing the findings of its internal investigation into SPP. As a result

of the findings of the investigation, the Company has announced that it will restate earnings for

the years ended December 31, 2001 through December 31, 2004 and for the first six months of

2005 and issue refunds of $3.6 million, plus interest, to customers for instances in which it

failed to credit them with discounts, rebates or price savings to which they were entitled,

among other things.

27. In response to this announcement, the price of ASG common stock fell $5.65

per share, or almost 29%, to close at $13.95 per share, on unusually heavy trading volume.

Pre-Class Period Materially False and Misleading Statements

27. Prior to the Class Period, defendants issued a series of materially false and

misleading statements.

28. On March 18, 2002, the Company issued a press release announcing its financial

results for the fourth quarter and year end of 2001, the period ended December 31, 2001. For

the quarter, the Company reported healthcare revenues of $133.6 million, healthcare expenses

of $126.3 million, and earnings before interest, taxes, depreciation, and amortization

- 10 -

(“EBITDA”) of $3.2 million. Defendant Catalano, commenting on the results, stated, in

pertinent part, as follows:

Company performance is showing some improvement with debt levels significantly reduced from the prior quarter, strong same contract revenue growth for the year and improvements in gross margins and EBITDA, before nonrecurring charges, for the last two quarters.

29. ASG’s financial results for the fourth quarter and year end of 2001, the period

ended December 31, 2001, were repeated in the Company’s Report on Form 10-K filed with the

SEC on or about March 28, 2002, which was signed by defendants Catalano and Taylor, among

others. With regard to its revenue and cost recognition policy, the quarterly report stated, in


Revenue and Cost Recognition

The Company’s contracts with correctional institutions are principally fixed price contracts adjusted for census fluctuations. 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.

Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided based in part on estimates, including an accrual for unbilled medical services rendered through the balance sheet dates. The Company estimates this medical claims reserve using an actuarial analysis prepared by an independent actuary taking into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.

* * * *

During the second quarter of 2001, the Company recorded changes in accounting estimate charges of approximately $6 million to strengthen medical claims reserves due to adverse development of prior years’ medical claims primarily as a result of updated information that indicated actual utilization and cost data for inpatient and outpatient services were higher than the historical levels previously used to estimate the reserve.

- 11 -

30. On April 22, 2002, the Company issued a press release announcing its financial

results for the first quarter of 2002, the period ended March 31, 2002. For the quarter, the

Company reported healthcare revenues of $137.9 million, healthcare expenses of $129.3

million, EBITDA of $4.5 million, net income of $2.0 million and earnings per share of $0.36

per basic and diluted share. Defendant Catalano, commenting on the results, stated, in


The initiatives we have implemented, coupled with an emphasis on strong fiscal discipline, are producing results. Our improved performance in the first quarter reflects the actions we are taking. Our management team is intensely focused, and our mission remains clear.

31. ASG’s financial results for the first quarter 2002, the period ended March 31,

2002, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about May

7, 2002, which was signed by defendants Catalano and Taylor. With regard to its revenue and

cost recognition policy, the quarterly report stated, in pertinent part, as follows:


The Company’s contracts with correctional institutions are principally fixed price contracts adjusted for census fluctuations. 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.

Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided based in part on estimates, including an accrual for unbilled medical services rendered through the balance sheet dates. The Company estimates this medical claims reserve using an actuarial analysis prepared monthly by an independent actuary taking into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.

32. On July 23, 2002, the Company issued a press release announcing its financial

results for the second quarter of 2002, the period ended June 30, 2002. For the quarter, the

- 12 -

Company reported EBITDA of $5.1 million, net income of $5.3 million, healthcare revenues of

$138.5 million, healthcare expenses of $129.9 million, net income of $5.3 million and earnings

per share of $0.97 per basic share and $0.95 per diluted share. Defendant Catalano,

commenting on the results, stated, in pertinent part, as follows:

The Company’s focus on improving its contract portfolio is producing solid results. Our progress accelerated during the second quarter as more contracts came up for renewal.

33. ASG’s financial results for the second quarter 2002, the period ended June 30,

2002, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about

August 14, 2002, which was signed by defendants Catalano and Taylor. With regard to its

revenue and cost recognition policy, the quarterly report stated, in pertinent part, as follows:


The Company’s contracts with correctional institutions are principally fixed price contracts adjusted for census fluctuations. The contracts may also contain certain risk sharing arrangement, such as stop- loss provisions and aggregate limits for off-site or pharmaceutical costs. 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.

Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided based in part on estimates, including an accrual for unbilled medical services rendered through the balance sheet date. The Company estimates the accrual for unbilled medical services using an actuarial analysis prepared monthly by an independent actuary. The analysis takes into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.

34. On October 21, 2002, the Company issued a press release announcing that it

closed the private placement financing announced on August 16, 2002, raising $4.6 million in

gross proceeds.

- 13 -

35. On October 23, 2002, the Company issued a press release announcing its financial

results for the third quarter of 2002, the period ended September 30, 2002. For the quarter, the

Company reported EBITDA of $ 5.1 million, net income of $2.3 million, healthcare revenues of

$141.4 million, healthcare expenses of $132.9 million and earnings per share of $0.41 per

basic and diluted share. defendant Catalano, commenting on the results, stated, in pertinent

part, as follows:

The Company remained on course with steady financial results for the quarter,” commented Michael Catalano, chairman, president and chief executive officer of America Service Group. “Debt was further reduced, our private placement was completed, and we are prepared for our refinancing. Also, the contract renewals, expansions and new business awarded this year have certainly been encouraging. We believe the market for our services remains strong.

36. ASG’s financial results for the third quarter 2002, the period ended September 30,


November 14, 2002, which was signed by defendants Catalano and Taylor. With regard to its



The Company’s contracts with correctional institutions are principally fixed price contracts adjusted for census fluctuations. Such contracts typically have a term of one to three years with subsequent renewal options. The contracts may also contain certain risk sharing arrangements, such as stop-loss provisions and aggregate limits for off-site or pharmaceutical costs. 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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. Under all contracts, the Company

- 14 -

records revenues net of any estimated contractual allowances for potential adjustments resulting from performance or staffing related criteria, as well as the impact of any risk sharing arrangements, on an accrual basis in the period the services are provided. If necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.

Revenues for the distribution of pharmaceutical and medical supplies are recognized upon delivery of the related products.


37. On February 19, 2003, the Company issued a press release announcing its

financial results for the fourth quarter and year end of 2002, the period ended December 31,

2002. For the quarter, the Company reported net income of $2.3 million, EBITDA of $5.6

million, healthcare revenues of $142.2 million, healthcare expenses of $133.2 million, net

income of $2.3 million, earnings per share of $0.39 per basic share and $0.38 per diluted share.

Defendant Catalano, commenting on the results, stated, in pertinent part, as follows:

Our goals for 2002 were to improve the Company’s financial position and demonstrate positive momentum for future growth. The market has recognized our progress, but there is still more work to be done. We understand our responsibilities to patients, clients and shareholders. The Company’s solid performance for the year should be attributed to the dedicated care provided by our clinicians and the focused commitment of our local managers. We look forward to another productive year providing a vital community service in partnership with our clients.

38. ASG’s financial results for the fourth quarter and year end 2002, the period ended

December 31, 2002, were repeated in the Company’s Report on Form 10-K filed with the SEC

on or about March 31, 2003, which was signed by defendants Catalano and Taylor, among

- 15 -

others. With regard to its revenue and cost recognition policy, the quarterly report stated, in




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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from performance or staffing related criteria, as well as the impact of any risk sharing arrangements, on an accrual basis in the period the services are provided, if necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.



- 16 -



Company reported net income of $2.9 million, diluted earnings per share of $0.46, EBITDA of

$5.2 million, healthcare revenues of $133.1 million and healthcare expenses of $124.6 million.


The Company posted strong financial results and excellent cash flow for the quarter. We were particularly pleased by the Rikers Island contract extension. Also, we continue to receive many positive client evaluations of the Company’s performance, reflecting the dedicated work of our clinicians and improving the prospects of expanding our services.

40. ASG’s financial results for the first quarter 2003, the period ended March 31,



cost recognition policy, the quarterly report stated, in pertinent part, as follows:



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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from performance or staffing related criteria, as well as the impact of any risk sharing arrangements, on an accrual basis in the period the

- 17 -

services are provided. If necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.





Company reported EBITDA of $4.9 million, healthcare revenues of $136.8 million, healthcare

expenses of $128.5 million, net loss of $1.9 million and net loss of $0.31 per basic and diluted

common share. Defendant Catalano, commenting on the results, stated, in pertinent part, as

follows:

The Company’s financial performance resulted in further debt reduction this quarter. More importantly, our consistent quality of operations has continued to strengthen the Company’s leading position in our industry. Substantial contracts have been renewed and preparations to begin a major new contract are already underway.

42. ASG’s financial results for the second quarter 2003, the period ended June 30,




- 18 -



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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from performance or staffing related criteria, as well as the impact of any risk sharing arrangements, on an accrual basis in the period the services are provided. If necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.



43. The statements referenced above were materially false and misleading because

they misrepresented and failed to disclose the following adverse facts: (a) that ASG was not

charging its customers in accordance with applicable contracts; (b) that ASG failed to properly

- 19 -

credit customers with discounts, rebates or price savings resulting from purchases from

alternative sources; (c) that ASG failed to provide customers with proper credit for the return

of pharmaceutical products; (d) that defendants inappropriately established and used reserves

during various periods over the last five years to more closely match SPP’s reported earnings

to its budgeted results, among other things; (e) that the Company lacked adequate internal

controls and was therefore unable to ascertain its true financial condition; and (f) that as a

result of the foregoing, the values of the Company’s net income, retained earnings and reserves

were materially overstated at all relevant times.

44. The statements referenced above in ¶¶28-42 remained alive and uncorrected

throughout the Class Period.

Materially False And Misleading Statements Issued During The Class Period

45. The Class Period begins on September 24, 2003, the first day that ASG’s

common stock closed above $13.95 per share.



Company reported net income of $5.3 million, adjusted EBITDA of $5.8 million, healthcare

revenues of $140.2 million, healthcare expenses of $130.6 million and net income per common

share of $0.84 per basic share and $0.81 per diluted share. Defendant Catalano, commenting on

the results, stated, in pertinent part, as follows:

This was a quarter of improved operating performance and renewed growth. Improved operating results were reflected in our increased net income, cash flows and reduced debt levels. The Company demonstrated renewed growth by our successful startup of the Pennsylvania Department of Corrections contract, the largest correctional healthcare contract awarded this year. Marketing momentum was further demonstrated by the announcement that the Company has been selected for the award of the Alabama Department of Corrections contract, the second largest correctional healthcare contract offered for bid this year.

- 20 -

47. ASG’s financial results for the third quarter of 2003, the period ended September

30, 2003, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about





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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from performance or staffing related criteria, as well as the impact of any risk sharing arrangements, on an accrual basis in the period the services are provided. If necessary, the Company revises its estimates for such adjustments in future periods when the actual amount of the adjustment is determined.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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 an actuarial analysis prepared monthly by an independent actuary. The analysis takes into account historical claims experience

- 21 -

(including the average historical costs and billing lag time for such services) and other actuarial data.



2003. For the quarter, the Company reported net income of $5.6 million, adjusted EBITDA of

$7.5 million, healthcare revenues of $157.6 million and healthcare expenses of $144.6 million.


Our remarkable success this year should be attributed to the dedicated clinical care by our personnel and the informed commitment of our clients. We share the common goal of providing quality medical care to patients entrusted to the custody of our clients, bearing in mind the best value for taxpayers in providing this public health service. Clients can rely upon our Company to move quickly and effectively to implement advanced systems for medical care. We believe the recent start-up of the State of Alabama contract, only ten days after contract signing, has already resulted in significant improvements in the level of care.

With regard to its guidance, the press release continued, in pertinent part, as follows:

2004 Guidance

The Company today reaffirmed its previous guidance for 2004 full-year results. Consistent with past practice, the Company’s guidance only reflects contracts currently in operation and does not factor in any potential new business. The Company currently expects Total Revenues of approximately $650 million in 2004. Pre-tax income from continuing and discontinued operations is expected to be approximately $22.5 million in 2004, excluding any potential impact related to the Florida Attorney General’s office investigation discussed above. Depreciation, amortization and interest expense is expected to be approximately $6.1 million in 2004. The Company expects fully diluted shares outstanding to be approximately 7.35 million in 2004.




others. With regard to its revenue and cost recognition policy, the annual report stated, in


- 22 -


The Company’s contracts with correctional institutions are principally fixed price contracts adjusted for census fluctuations. Such contracts typically have a term of one to three years with subsequent renewal options and generally may be terminated by the correctional institution at will and without cause upon proper notice. The contracts typically contain certain risk sharing arrangements, such as stop-loss provisions and aggregate limits for off-site or pharmaceutical costs. 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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenue for population based contracts is calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. For contracts which include provisions limiting the Company’s exposure to off-site medical services utilization or pharmacy utilization, the Company recognizes the additional revenue that would be due from clients based on contract to date utilization compared to the corresponding pro rata contractual limit for such costs. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from 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.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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 a claims payment lag methodology based upon historical payment patterns using actual utilization data including hospitalization, one day surgeries, physician visits and emergency room and ambulance visits and their corresponding costs. For contracts which have sufficient claims payment history, an actuarial analysis is also prepared monthly by an independent actuary to

- 23 -

evaluate the adequacy of the accrual. The analysis takes into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.



Company reported a net loss of $358,000, including $5.2 million charge related to settlement

agreement, adjusted EBITDA of $6.7 million, healthcare revenues of $167.8 million and

healthcare expenses of $156.6 million. Defendant Catalano, commenting on the results, stated,

in pertinent part, as follows:

Our company produced solid results for the first quarter. We met our internal expectations for the quarter and are on track to meet them for the full year. Additionally, we moved into a net positive cash position with cash balances greater than total debt outstanding at quarter end.

With regard to the Company’s guidance, the press release continued, in pertinent part, as

follows:

2004 Guidance

The Company is increasing its previous guidance for 2004 full-year results. Consistent with past practice, the Company’s guidance only reflects contracts currently in operation and does not factor in any potential new business. The Company currently expects Total Revenues of approximately $658 million in 2004. Pre-tax income from continuing and discontinued operations is expected to be approximately $22.8 million in 2004, excluding the $5.2 million charge for the settlement of the Florida legal matter. Depreciation, amortization and interest expense is expected to be approximately $6.0 million in 2004. The Company expects fully diluted shares outstanding to be approximately 7.35 million in 2004.

51. ASG’s financial results for the first quarter of 2004, the period ended March 31,



cost recognition policy, the annual report stated, in pertinent part, as follows:

- 24 -



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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. For contracts which include provisions limiting the Company’s exposure to off-site medical services utilization or pharmacy utilization, the Company recognizes the additional revenues that would be due from clients based on contract to date utilization compared to the corresponding pro rata contractual limit for such costs. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from 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.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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. For contracts which have sufficient claims payment history, an actuarial analysis is also prepared monthly by an independent actuary to

- 25 -

evaluate the adequacy of the accrual. The analysis takes into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.




revenues of $171.9 million and healthcare expenses of $160.3 million. Defendant Catalano,

commenting on the results, stated, in pertinent part, as follows:

The Company’s financial position is improving as cash balances continue to build. We are pleased that the Company has been selected as the medical provider to negotiate renewed contracts with New York City; Alameda County, California; and the City of Philadelphia.

53. ASG’s financial results for the second quarter of 2004, the period ended June 30,



revenue and cost recognition policy, the annual report stated, in pertinent part, as follows:



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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus

- 26 -

contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. For contracts which include provisions limiting the Company’s exposure to off-site medical services utilization or pharmacy utilization, the Company recognizes the additional revenues that would be due from clients based on contract to date utilization compared to the corresponding pro rata contractual limit for such costs. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from 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.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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. For contracts which have sufficient claims payment history, an actuarial analysis is also prepared monthly by an independent actuary to evaluate the adequacy of the accrual. The analysis takes into account historical claims experience (including the average historical costs and billing lag time for such services) and other actuarial data.



Company reported net income of $293,000, reflecting a $6.0 million pre-tax increase in loss

contract reserve, adjusted EBITDA of $8.0 million, healthcare revenues of $174.1 million and

healthcare expenses of $162.2 million. Defendant Catalano, commenting on the results, stated,


We are disappointed in the additional reserve necessary to cover losses under our Maryland contract through its expiration on June 30, 2005. In the meantime, the Company will faithfully adhere to the terms of our contract and continue our commitment to provide quality healthcare to our patients. We remain confident in

- 27 -

the long-term prospects of the Company. The rest of our contract portfolio continues to produce expected financial results, cash balances are increasing and we are debt free as of the end of the quarter. We are further encouraged by our selection by the State of Vermont as the provider to negotiate a contract for healthcare services with the Agency of Human Services, Department of Corrections.

With regard to the Company’s guidance, the press release stated, in pertinent part, as

follows:

2004 Guidance

The Company is maintaining most aspects of its previous guidance for 2004 full-year results. Consistent with past practice, the Company’s guidance only reflects contracts currently in operation and does not factor in any potential new business. The Company is maintaining its guidance for pre-tax income from continuing and discontinued operations of approximately $24.0 million in 2004, excluding the $5.2 million charge for the settlement of the Florida legal matter in the first quarter and the $12.8 million increase in the Company’s loss contract reserve in the second and third quarters. Depreciation, amortization and interest expense is expected to be approximately $6.0 million in 2004, consistent with previous guidance. Based primarily upon the impact of aggregate cap revenues in the third quarter and the anticipation that they will continue to be recognized at a similar level in the fourth quarter, the Company is increasing its guidance for Total Revenues from continuing and discontinued operations to $685.0 million for 2004, an increase of $17.0 million from previous guidance. The Company expects fully diluted shares outstanding to be approximately 11.0 million in 2004, reflecting the three-for-two stock split payable October 29, 2004.

55. ASG’s financial results for the third quarter of 2004, the period ended September

30, 2004, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about




The Company’s contracts with 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 at will and without cause upon proper notice. Revenues earned under contracts with correctional institutions are recognized in the period that services

- 28 -

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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin. For contracts which include provisions limiting the Company’s exposure to off-site medical services utilization or pharmacy utilization, the Company recognizes the additional revenues that would be due from clients based on contract to date utilization compared to the corresponding pro rata contractual limit for such costs. Under all contracts, the Company records revenues net of any estimated contractual allowances for potential adjustments resulting from 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.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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. An actuarial analysis is also prepared monthly by an independent actuary to evaluate 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.



2004. For the quarter, the Company reported net income of $4.8 million, adjusted EBITDA of

- 29 -

$29.3 million, healthcare revenues from continuing contracts of $168.7 million and healthcare

expenses from continuing contracts of $156.8 million. Defendant Catalano, commenting on the

results, stated, in pertinent part, as follows:

2004 was a year of meeting the challenges of delivering vital public health services to our clients, providing quality medical care to our patients and building value for our shareholders. The Company’s success is based upon dedicated clinical care. This dedication was recognized by clients as the Company retained 91.2% of all contract revenues up for rebid or renewal during the year, and the Company started productive relationships with several new clients. The Company enters 2005 in solid financial shape with both the drive to grow and abundant marketing opportunities.


follows:

2005 Guidance

Consistent with past practice, the Company’s guidance for full-year 2005 results reflects only those contracts currently in operation and does not consider any potential new business. The Company’s guidance assumes that the two contracts covered under the Company’s loss contract reserve are not renewed subsequent to June 30, 2005. Additionally, the Company’s guidance does not include any potential pact of the expensing of stock options due to take effect under Statement of Financial Accounting Standards No. 123 (revised 2004).

In recognition of the increased levels of hospitalization and other off-site medical expenses incurred during 2004 and the resulting volatility in the contracts where the Company is still at risk for these costs, the Company currently expects 2005 earnings to be in a range of $1.42 to $1.53 per share on a diluted basis. The Company expects diluted shares outstanding to be approximately 11.25 million. Total Revenues from continuing and discontinued operations are expected to be in a range of $660 million to $700 million in 2005, dependent upon the level of aggregate cap revenues realized during the year. Pre-tax income from continuing and discontinued operations is expected to be in a range of $26.6 million to $28.6 million in 2005. The Company expects its effective tax rate to be approximately 40% for 2005. Depreciation, amortization and interest expense is expected to be approximately $5.4 million in 2005. The Company expects an increase in cash on hand to approximately $30 million by December 31, 2005, assuming days sales outstanding in accounts receivable are reduced to more normal leve is of approximately 40 days, as compared with 50 days at December 31, 2004.

- 30 -




others. With regard to its revenue and cost recognition policy, the annual report stated, in



The Company’s contracts with 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 at will and 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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin.

Normally, 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 for offsite expenses, stop loss provisions, cost plus fee arrangements or, in some cases, the entire exclusion of 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 which include such provisions, the Company recognizes the additional revenues that would be 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

- 31 -

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.


Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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. An actuarial analysis is also prepared periodically by an independent actuary to evaluate 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. 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.




revenues from continuing contracts of $168.7 million and healthcare expenses from continuing

contracts of $156.7 million. Defendant Catalano, commenting on the results, stated, in


- 32 -

The Company produced solid financial results in the first quarter that were consistent with our expectations. During the first quarter, the Company started operations on three new contracts. Also, during April, the Company commenced operations on another two new contracts.


follows:

2005 Guidance

The Company is maintaining its previous guidance for fu1~year 2005 results. Consistent with past practice, the Company’s guidance for full-year 2005 results reflects only those contracts currently in operation and does not consider any potential new business. The Company’s guidance assumes that the two contracts covered under the Company’s loss contract reserve are not renewed subsequent to June 30, 2005. The Company currently expects 2005 earnings to be in a range of $1.42 to $1.53 per diluted share on expected diluted shares outstanding of approximately 11.25 million. Total Revenues from continuing and discontinued operations are expected to be in a range of $660 million to $700 million in 2005, dependent primarily upon the level of aggregate cap revenues realized during the year. Pre-tax income from continuing and discontinued operations is expected to be range of $26.6 million to $28.6 million in 2005. The Company expects its effective tax rate to be approximately 40% for 2005. Depreciation, amortization and interest expense is expected to be approximately $5.4 million in 2005. The Company expects an increase in cash on hand to approximately $30 million by December 31, 2005, assuming days sales outstanding in accounts receivable are reduced to approximately 40 days.

59. ASG’s financial results for the first quarter of 2005, the period ended March 31,



cost recognition policy, the annual report stated, in pertinent part, as follows:


The Company’s contracts with 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 at will and without cause upon proper notice. Revenues earned under contracts with correctional institutions are recognized in the period that services

- 33 -

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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin.

Normally, 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 for offsite expenses, stop loss provisions, cost plus fee arrangements or, in some cases, the entire exclusion of 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 which include such provisions, the Company recognizes the additional revenues that would be 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.



Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are

- 34 -

recognized in the period in which they are provided 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. An actuarial analysis is also prepared periodically by an independent actuary to evaluate 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. 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.




revenues from continuing contracts of $161.0 million and healthcare expenses from continuing

contracts of $148.6 million. Defendant Catalano, commenting on the results, stated, in


The Company is pleased with its financial results for the second quarter and the knowledge that its cash flows should improve with the expiration of the Maryland contract. The Board and management are confident in the future of the Company, as demonstrated in the Board’s authorization of a stock repurchase program of up to $30 million.


follows:

2005 Guidance

The Company is updating its previous guidance for full-year 2005 results. Consistent with past practice, the Company’s guidance for full-year 2005 results does not consider the impact of any potential new business. Contracts currently in operation are included in the guidance for full-year 2005 results through the end of the year, unless the Company has previously been notified otherwise by the client.

- 35 -

The Company’s guidance for full-year 2005 results (adjusted for the items discussed in detail in the footnotes) is summarized below:

Total Revenues (1) $640.0 - $660.0 million

Depreciation, amortization and interest expense $5.1 million

Adjusted pre-tax income (2) $26.9 - $27.9 million

Effective tax rate 40%

Adjusted net income (2) $16.1 - $16.7 million

Weighted average common shares outstanding - diluted 11.0 million - 11.1 million

Adjusted net income per common share - diluted (2) $1.45 - $1.52

(1) From continuing and discontinued contracts

(2) From continuing and discontinued contracts and adjusted to exclude the pre-tax positive impact of the $249,000 of late fee income recorded in the second quarter, as well as the pre-tax negative impacts of the $451,000 of discontinued acquisition expenses recorded in the second quarter, the additional $150,000 to $250,000 of discontinued acquisition expenses expected to be recorded in the third quarter and the $1.3 million increase in the Company’s loss contract reserve recorded in the second quarter.

61. ASG’s financial results for the second quarter of 2005, the period ended June 30,





The Company’s contracts with 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 at will and without cause upon proper notice. Revenues earned under

- 36 -

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 margin. For fixed fee contracts, revenues are recorded based on fixed monthly amounts established in the service contract. Revenues for population based contracts are calculated either as a fixed fee adjusted using a per diem rate for variances in the inmate population from predetermined population levels or by a per diem rate times the average inmate population for the period of service. For cost plus a margin contracts, revenues are calculated based on actual expenses incurred during the service period plus a contractual margin.

Normally, 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 for offsite expenses, stop loss provisions, cost plus fee arrangements or, in some cases, the entire exclusion of 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 which include such provisions, the Company recognizes the additional revenues that would be 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.



Healthcare expenses include the compensation of physicians, nurses and other healthcare professionals including any related benefits and all other direct costs of providing the managed care including the costs of professional and

- 37 -

general liability insurance and other self-funded insurance reserves discussed more fully below. The cost of healthcare services provided or contracted for are recognized in the period in which they are provided 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. An actuarial analysis is also prepared at least quarterly by an independent actuary to evaluate 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. 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.

62. The statements referenced above in ¶¶46-61 were each materially false and

misleading when made because they failed to disclose and/or misrepresented the following

adverse facts, among others:

(a) that ASG was not charging its customers in accordance with applicable

contracts;

(b) that ASG failed to properly credit customers with discounts, rebates or

price savings resulting from purchases from alternative sources;

(c) that ASG failed to provide customers with proper credit for the return of

pharmaceutical products;

(d) that defendants inappropriately established and used reserves during

various periods over the last five years to more closely match SDP’s reported earnings to its

budgeted results, among other things;

(e) that the Company lacked adequate internal controls and was therefore

unable to ascertain its true financial condition; and

- 38 -

(f) that as a result of the foregoing, the values of the Company’s net income,

retained earnings and reserves were materially overstated at all relevant times.

The Truth Begins to Emerge

63. On October 24, 2005, the Company issued a press release announcing that the

Audit Committee of its Board of Directors was conducting an internal investigation into certain

matters related to its subsidiary, SPP. The Company stated that the investigation is primarily

being conducted to determine whether SPP provided pricing of pharmaceuticals in accordance

with applicable client contract terms and whether some of the accruals and reserves maintained

by SPP were established and utilized in accordance with GAAP. The press release continued,


Because the investigation is in its early stages, the Audit Committee and the Company have not yet determined whether the investigation is likely to result in a charge to current earnings or a change to the Company’s previously reported financial results. The Audit Committee and the Company currently expect that the investigation will not be completed in sufficient time to meet the Company’s normal schedule of reporting quarterly earnings and filing its quarterly report on Form 10-Q.

* * * *

Secure Pharmacy Plus provides pharmacy services to the Company, in facilities where the Company provides correctional medical services, as well as to third party clients who provide their own correctional medical services. The Audit Committee’s inquiry into whether SPP charged its clients in accordance with applicable contract terms includes reviewing whether discounts received from wholesalers, rebates received from manufacturers or wholesalers, certain temporary price reductions from alternate vendors and distributions received from a group purchasing organization of which SPP is a member should have been credited, under the terms of the contracts, to such clients.

This issue is not expected to have any effect in instances (a) where the Company is financially responsible for the cost of pharmaceuticals (which is the case in a majority of the contracts under which the Company provides correctional medical services), or (b) where SPP’s contracts with third party clients are based on published prices. Management currently estimates that less than 30% of SPP’s reported revenues, including intercompany sales, for the year ended December 31, 2004, and the six (6) months ended June 30, 2005, do not fall into these two

- 39 -

categories, and therefore warrant further review. The Audit Committee expects to conduct its review for all periods since the Company acquired SPP in September 2000.

The Audit Committee also is examining whether returns of unused pharmaceuticals were appropriately credited to clients.

On the matter of reserves, the Audit Committee is examining whether or not some of the accruals and reserves maintained by SPP were established and utilized in accordance with generally accepted accounting principles.

As part of its investigation, the Audit Committee also is conducting a review of operational issues encountered in the June 18, 2005, implementation of a new computer operating system at SPP to determine if there was any impact on the accuracy of financial reporting. The Committee also is reviewing the travel and expense reports of SPP employees to assure compliance with Company policy.

The Audit Committee’s investigation and review of the aforementioned matters may be expanded depending upon the outcome of the process currently under way.

64. Upon this announcement, shares of the Company’s stock fell $5.11 per share, or

28%, to close at $13.05 per share, on unusually heavy trading volume.

65. On November 9, 2005, the Company issued a press release announcing that the

filing of its 2005 third quarter report on Form 10-Q for the three months ended September 30,

2005 and the release of its financial results for the same period will be delayed pending the

conclusion of its internal investigation being conducted under the direction of the Audit

Committee of its Board of Directors.

66. Then, on March 15, 2006, after the markets closed, the Company shocked the

market when it issued a press release providing the findings of internal investigation into SPP.

The press release stated, in pertinent part, as follows:

America Service Group Inc. (NASDAQ: ASGRE) reported today the results of an internal investigation by the Audit Committee of the Board of Directors into certain matters related to the Company’s pharmacy subsidiary, Secure Pharmacy Plus (“SPP”), resulting in the Company’s decision to restate previously filed financial statements for the years ended December 31, 2001 through December 31, 2004 and for the first six months of 2005. The restatement will reduce

- 40 -

previously reported net income for these periods by $2.1 million in the aggregate, as reflected in the Effects of Restatement schedule attached as well as reduce previously reported retained earnings as of January 1, 2001 by $347,000. The Company also announced today preliminary unaudited financial results for the third and fourth quarters and the year ended December 31, 2005. The announcement of the Company’s third quarter results had been previously delayed pending the final results of the internal investigation. Additionally, the Company announced today its initial guidance for full-year 2006 results, the potential resumption of the Company’s stock repurchase program and an update on the status of its regulatory filings.

Commenting on today’s announcement, Michael Catalano, chairman, president and chief executive officer of America Service Group, said, “The completion of the Audit Committee’s thorough investigation and the Company’s actions related to its findings demonstrate our commitment to conducting business with the highest integrity. This has been a difficult period for the Company, with disappointing financial results. However, the challenges are clearly defined and will be addressed in the coming year. We remain confident in our business model and the Company’s prospects.”

Findings of Internal Investigation into Pharmacy Subsidiary

As previously disclosed, the Audit Committee of the Company’s Board of Directors retained outside counsel, who in turn engaged independent accountants with significant forensic experience, to assist the Audit Committee in conducting an investigation into certain allegations at SPP, the Company’s pharmaceutical subsidiary. The Audit Committee’s investigation is complete. The investigation’s principal findings are as follows:

-- In certain instances, SPP did not charge its customers in accordance with applicable contracts. The Audit Committee’s investigation involved testing what SPP charged for pharmaceuticals against the invoice cost of products purchased or the applicable third-party reference price. The Audit Committee’s investigation also estimated rebates received by the Company from manufacturers for the purchase of certain pharmaceuticals; savings that SPP realized in purchasing certain pharmaceuticals from alternative sources; and the dollar amounts of returns to SPP of pharmaceutical products. The Company, in consultation with special pharmaceutical counsel, determined the-requirements of each of Prison Health Services’ or SPP’s contracts with respect to the pricing of pharmaceuticals sold as well as the sharing of rebates, savings and credits for returns described above. Applying that information to the results of the testing, the Company then concluded that, in certain instances, it failed to properly credit customers with discounts, rebates or price savings resulting from purchases from alternative sources, and, in certain instances, failed to provide customers with proper credit for the return of pharmaceutical products. As a result, the Company intends to provide aggregate refunds of $3.6 million, covering all periods since the Company’s acquisition of SPP in September 2000, plus interest at the

- 41 -

applicable federal rate (which ranged from 4% to 9%) during the period covered by the investigation. The Company also concluded that SPP charged some customers less than should have been charged under applicable contracts in the total amount of $5.9 million, but collectibility is uncertain and these amounts have not been recognized as revenue.

-- The Audit Committee’s investigation found that key members of SPP’s senior management inappropriately established and used reserves during various periods over the last five years to more closely match SPP’s reported earnings to its budgeted results. The aggregate effect of the adjustments necessitated by the Audit Committee findings has been determined by the Company to be an increase in previously reported pre-tax income of $355,000 in the aggregate since January 1, 2001 although it should be noted that different periods are affected by different amounts and that certain of the adjustments necessitated by the Audit Committee’s findings related to the third quarter of 2005 which had not been previously reported. The employees who were responsible for these actions are no longer employed by the Company or SPP.

-- The Audit Committee’s investigation found that in a number of instances, SPP management did not follow either SPP’s or the Company’s stated policies with respect to corporate expenditures and disbursements.

-- The Audit Committee noted that there were significant operational issues in the implementation of SPP’s new operating system in the summer of 2005. Both the Company’s internal audit group and another outside accounting firm have conducted significant testing on the new system to determine if it functions properly. Throughout this process, the internal audit group and the accounting firm identified a number of issues which have been, or are being, corrected.

-- The Audit Committee’s investigation identified certain other issues, relating to accruals for rebates and inventory valuation, which will result in changes to the Company’s previously reported financial results. Based on the Audit Committee’s findings, the Company has determined that adjustments representing an increase in previously reported pre-tax income of $146,000 in the aggregate since January 1, 2001 are needed.

-- The Audit Committee has recommended significant strengthening to the Company’s system of internal controls and compliance function. The Company has begun the process of reviewing and implementing enhancements to internal controls. The Company expects that management’s assessment of internal controls for the year ended December 31, 2005 and the independent auditor’s report thereon may include disclosures of material weaknesses in the Company’s internal control structure. The Company has taken numerous steps to mitigate the effect of any such weaknesses at year end and is committed to eliminating any such weaknesses as part of its efforts to implement enhancements to its internal controls.

- 42 -

As previously reported, the Company contacted the Securities and Exchange Commission (the “SEC”) to inform it of the issues being investigated, and since that time the Company has cooperated with the SEC in an informal inquiry that it is conducting as well as with the Office of the U.S. Attorney for the Middle District of Tennessee in the inquiry it is conducting. Both the Audit Committee and the Company intend to continue to cooperate with those government entities.

67. Upon this announcement, shares of the Company’s stock fell $5.65 per share, or

almost 29%, to close at $13.95 per share, on unusually heavy trading volume.

68. The market for ASG’s common stock was open, well-developed and efficient at

all relevant times. As a result of these materially false and misleading statements and failures to

disclose, ASG’s common stock traded at artificially inflated prices during the Class Period.

Plaintiff and other members of the Class purchased or otherwise acquired ASG common stock

relying upon the integrity of the market price of ASG’s common stock and market information

relating to ASG, and haw been damaged thereby.

69. During the Class Period, defendants materially misled the investing public,

thereby inflating the price of ASG’s common stock, by publicly issuing false and misleading

statements an omitting to disclose material facts necessary to make defendants’ statements, as set

forth herein, not false and misleading. Said statements and omissions were materially false and

misleading in that they failed to disclose material adverse information and misrepresented the

truth about the Company, its business and operations, as alleged herein.

70. At all relevant times, the material misrepresentations and omissions

particularized in this Complaint directly or proximately caused or were a substantial

contributing cause of the damages sustained by plaintiff and other members of the Class. As

described herein, during the Class Period, defendants made or caused to be made a series of

materially false or misleading statements about ASG’s business, prospects and operations.

These material misstatements and omissions had the cause and effect of creating in the market

- 43 -

an unrealistically positive assessment of ASG and its business, prospects and operations, thus

causing the Company’s common stock to be overvalued and artificially inflated at all relevant

times. Defendants’ materially false and misleading statements during the Class Period resulted

in plaintiff and other members of the Class purchasing the Company’s common stock at

artificially inflated prices, thus causing the damages complained of herein.

ADDITIONAL SCIENTER ALLEGATIONS

71. As alleged herein, defendants acted with scienter in that defendants knew that

the public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or

acquiesced in the issuance or dissemination of such statements or documents as primary

violations of the federal securities laws. As set forth elsewhere herein in detail, defendants, by

virtue of their receipt of information reflecting the true facts regarding ASG, their control over,

and/or receipt and/or modification of ASG’s allegedly materially misleading misstatements

and/or their associations with the Company which made them privy to confidential proprietary

information concerning ASG, participated in the fraudulent scheme alleged herein.

72. Defendants were further motivated to engage in this course of conduct in order

to complete a $4.6 million private placement of the Company’s common stock at an artificially

inflated price during the Restatement Period.

73. Moreover, the Individual Defendants sold 338,172 shares of their personally-held

common stock at artificially inflated prices, thereby reaping over $6 million in gross proceeds.

The chart below details the Individual Defendants’ trades in ASG common stock:

- 44 -

Defendant Date Shares Price Proceeds Michael Catalano, CEO 10/30/2003 75,000 $17.36 $1,302,450 10/30/2003 18,000 $17.36 $312,588 10/30/2003 15,213 $17.36 $264,189 11/4/2003 64,800 $17.20 $1,114,560 11/7/2003 47,367 $17.50 $828,923 11/7/2003 9,987 $17.50 $174,773 11/10/2003 7,050 $19.33 $136,300 11/13/2003 8,653 $19.86 $171,902 11/13/2003 3,646 $19.86 $72,438 11/19/2003 42,507 $19.90 $846,071 292,224 $5,224,193

Michael W. Taylor, CFO 10/30/2003 3,099 $18.23 $56,505 10/30/2003 1,500 $18.00 $27,000 11/7/2003 7,500 $18.03 $135,250 11/7/2003 5,349 $18.00 $96,282 11/7/2003 4,500 $18.04 $81,180 11/7/2003 3,000 $18.04 $54,140 11/10/2003 7,500 $18.13 $136,000 11/10/2003 4,002 $18.00 $72,036 11/10/2003 3,000 $18.14 $54,440 11/10/2003 1,998 $18.00 $35,964 11/10/2003 750 $18.10 $13,575 11/24/2003 3,750 $21.47 $80,525 45,948 $842,897 Total: 338,172 $6,067,090

LOSS CAUSATION/ECONOMIC LOSS

74. During the Class Period, as detailed herein, defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated ASG’s common stock price

and operated as a fraud or deceit on Class Period purchasers of ASG’s common stock by

failing to disclose that the Company was not charging its customers in accordance with

applicable contracts, failing to properly credit customers with discounts, rebates or price

savings resulting from purchases from alternative sources, failing to provide customers with

proper credit for the return of pharmaceutical products, and inappropriately establishing and

using reserves during various periods over the last five years to more closely match SPP’s

- 45 -

reported earnings to its budgeted results, among other things, which would lead to a

restatement of their financials for the years ended December 31, 2001 through December 31,

2004 and for the first six months of 2005. When defendants’ prior misrepresentations and

fraudulent conduct were disclosed and became apparent to the market, ASG’s common stock

fell precipitously as the prior artificial inflation came out of ASG’s common stock price. As a

result of the it purchases of ASG’s common stock during the Class Period, Plaintiff and the

other Class members suffered economic loss, i.e., damages under the federal securities laws.

75. By not charging its customers in accordance with applicable contracts, failing to

properly credit customers with discounts, rebates or price savings resulting from purchases from

alternative sources, failing to provide customers with proper credit for the return of

pharmaceutical products, and inappropriately establishing and using reserves during various

periods over the last five years to more closely match SPP’s reported earnings to its budgeted

results, among other things, defendants presented a misleading picture of ASG’s business and

prospects. Thus, instead of truthfully disclosing during the Class Period the true risks that

ASG was exposed to, defendants caused ASG to conceal its true financial condition.

76. Defendants’ false and misleading statements had the intended effect and caused

ASG’s common stock to trade at artificially inflated levels throughout the Class Period,

reaching as high as $30.00 per share on February 3, 2005.

77. As a direct result of defendants’ admissions and the public revelations on

October 24, 2005 and March 15, 2006 regarding the Company’s internal investigation

concerning certain matters related to SPP, which materially inflated its financial results for the

years ended December 31, 2001 through December 31, 2004 and for the first six months of

2005, ASG’s common stock price plummeted approximately 28% and 29%, respectively.

- 46 -

These drops removed the inflation from ASG’s common stock price, causing real economic

loss to investors who had purchased the Company’s common stock during the Class Period.

78. The approximate 29% decline in ASG’s common stock price at the end of the

Class Period was a direct result of the nature and extent of defendants’ fraud finally being

revealed to investors and the market. The timing and magnitude of ASG’s common stock price

declines negate any inference that the loss suffered by Plaintiff and the other Class members was

caused by changed market conditions, macroeconomic or industry factors or Company-specific

facts unrelated to the defendants’ fraudulent conduct. The economic loss, i.e., damages, suffered

by Plaintiff and the other Class members was a direct result of defendants’ fraudulent scheme to

artificially inflate ASG’s common stock price and the subsequent significant decline in the value

of ASG’s common stock when defendants’ prior misrepresentations and other fraudulent conduct

was revealed.

Applicability Of Presumption Of Reliance: Fraud On The Market Doctrine

79. At all relevant times, the market for ASG’s common stock was an efficient

market for the following reasons, among others:

(a) ASG’s stock met the requirements for listing, and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

(b) as a regulated issuer, ASG filed periodic public reports with the SEC and

the NASDAQ;

(c) ASG regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public

- 47 -

disclosures, such as communications with the financial press and other similar reporting

services; and

(d) ASG was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firms. Each of these reports was publicly available and

entered the public marketplace.

80. As a result of the foregoing, the market for ASG’s common stock promptly

digested current information regarding ASG from all publicly available sources and reflected

such information in ASG’s stock price. Under these circumstances, all purchasers of ASG’s

common stock during the Class Period suffered similar injury through their purchase of ASG’s

common stock at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

81. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking

statements” as communications with the when made. To the extent there were any forward-

looking statements, there were no meaningful cautionary statements identifying important

factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements. Alternatively, to the extent that the statutory safe harbor does

apply to any forward-looking statements pleaded herein, defendants are liable for those false

forward- looking statements because at the time each of those forward-looking statements was

made, the particular speaker knew that the particular forward- looking statement was false,

- 48 -

and/or the forward-looking statement was authorized and/or approved by an executive officer

of ASG who knew that those statements were false when made.

COUNT I

Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5

Promulgated Thereunder Against All Defendants

82. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

83. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public regarding ASG’s business, operations, management and the intrinsic value of ASG

common stock; (ii) enable the Company to complete a $4.6 million private placement of the

Company’s common stock at an artificially inflated price during the Restatement Period; (iii)

enable the Individual Defendants to sell 338,172 shares of their personally-held common stock

at artificially inflated prices, thereby reaping over $6 million; and (iv) cause plaintiff and other

members of the Class to purchase ASG’s common stock at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them,

took the actions set forth herein.

84. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the Company’s common stock in an

effort to maintain artificially high market prices for ASG’s common stock in violation of

Section 10(b) of the Exchange Act and Rule l0b-5. All defendants are sued either as primary

- 49 -

participants in the wrongful and illegal conduct charged herein or as controlling persons as

alleged below.

85. Defendants, individually and in concert, directly and indirectly, by the use,

means or instrumentalities of interstate commerce and/or of the mails, engaged and

participated in a continuous course of conduct to conceal adverse material information about

the business, operations and future prospects of ASG as specified herein.

86. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of ASG’s value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about ASG and its business operations

and future prospects in the light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of ASG common

stock during the Class Period.

87. Each of the Individual Defendants’ primary liability, and controlling person

liability, arises from the following facts: (i) the Individual Defendants were high-level executives

and/or directors at the Company during the Class Period and members of the Company’s

management team or had control thereof, (ii) each of these defendants, by virtue of his

responsibilities and activities as a senior officer and/or director of the Company was privy to and

participated in the creation, development and reporting of the Company’s internal budgets, plans,

projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and

- 50 -

familiarity with the other defendants and was advised of and had access to other members of

the Company’s management team, internal reports and other data and information about the

Company’s finances, operations, and sales at all relevant times; and (iv) each of these

defendants was aware of the Company’s dissemination of information to the investing public

which they knew or recklessly disregarded was materially false and misleading.

88. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants’ material misrepresentations and/or omissions were done knowingly or recklessly

and for the purpose and effect of concealing ASG’s operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its common

stock. As demonstrated by defendants’ overstatements and misstatements of the Company’s

business, operations and earnings throughout the Class Period, defendants, if they did not have

actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

89. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of ASG’s common

stock was artificially inflated during the Class Period. In ignorance of the fact that market

prices of ASG’s publicly-traded common stock were artificially inflated, and relying directly

or indirectly on the false and misleading statements made by defendants, or upon the integrity

of the market in which the common stock trades, and/or on the absence of material adverse

information that was known to or recklessly disregarded by defendants but not disclosed in

- 51 -

public statements by defendants during the Class Period, plaintiff and the other members of the

Class acquired ASG common stock during the Class Period at artificially high prices and were

damaged thereby.

90. At the time of said misrepresentations and omissions, plaintiff and other members

of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the

other members of the Class and the marketplace known the truth regarding ASG’s financial

results, which were not disclosed by defendants, plaintiff and other members of the Class

would not have purchased or otherwise acquired their ASG common stock, or, if they had

acquired such common stock during the Class Period, they would not have done so at the

artificially inflated prices which they paid.

91. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

92. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s common stock during the Class Period.

COUNT II

Violation Of Section 20(a) Of The Exchange Act Against the Individual Defendants

93. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

94. The Individual Defendants acted as controlling persons of ASG within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the false financial statements filed by the

- 52 -

Company with the SEC and disseminated to the investing public, the Individual Defendants

had the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company’s reports, press releases,

public filings and other statements alleged by plaintiff to be misleading prior to and/or shortly

after these statements were issued and had the ability to prevent the issuance of the statements

or cause the statements to be corrected.

95. In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

96. As set forth above, ASG and the Individual Defendants each violated Section

10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of

their positions as controlling persons, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of defendants’ wrongful conduct,

plaintiff and other members of the Class suffered damages in connection with their purchases of

the Company’s common stock during the Class Period.

WHEREFORE, plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, designating plaintiff as Lead

Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of

Civil Procedure and plaintiff’s counsel as Lead Counsel;

- 53 -

B. Awarding compensatory damages in favor of plaintiff and the other Class

members against all defendants, jointly and severally, f)r all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding plaintiff and the Class their reasonable costs and expenses incurred in

this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: May 2, 2006 Respectfully submitted,

BRAMLETT LAW OFFICES By: _____________________________________ PAUL KENT BRAMLETT P.O. Box 150734 Nashville, TN 37215-0734 Telephone: (615) 248-2828 Facsimile: (615) 254-4116 TN Sup. Ct. #7387/ MS Sup. Ct. #4291 COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. Steven J. Toll Daniel S. Sommers Jason M. Leviton 1100 New York Avenue, N.W. West Tower, Suite 500 Washington, DC 20005 Telephone: (202) 408-4600 Facsimile: (202) 408-4699

Documents

NATURE OF THE ACTIONsecurities.stanford.edu/.../200652_o01c_Waggoner.pdf6. Plaintiff David Waggoner, as set forth in the accompanying certification, purchased the common stock of ASG