AMERICA SERVICE GROUP INC /DE, PRE 14A, 1999-03-26

AMERICA SERVICE GROUP INC /DE
PRE 14A, 1999-03-26
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

AMERICA SERVICE GROUP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

AMERICA SERVICE GROUP INC.

105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To the Stockholders of
America Service Group Inc.:

The Annual Meeting of Stockholders of America Service Group Inc. (the
"Company") will be held at NationsBank Plaza, Third Floor, 414 Union Street,
Nashville, Tennessee, on , 1999, at 10:00 a.m., local time, to
consider and vote on:

1. The election of directors for the ensuing year;

2. To ratify the Company's issuance in a private placement of (i) $15
million aggregate principal amount of the Company's 12% Convertible Bridge
Notes due January 26, 2000 (the "Notes") with detachable warrants (the
"Warrants") to purchase shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), and (ii) 50,000 shares of the
Company's Series A Preferred Stock, par value $ .01 per share (the
"Preferred Stock," and collectively with the Notes and the Warrants, the
"Convertible Securities"), and to authorize the issuance of shares of
Common Stock and Preferred Stock upon the conversion or exercise, as
applicable, of the Convertible Securities;

3. The ratification of the appointment of Ernst & Young LLP as
independent auditors for 1999; and

4. Such other matters as may properly come before the meeting or any
adjournments thereof.

The close of business on , 1999, has been fixed as the
record date for determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting or any adjournments thereof. A list of stockholders
entitled to vote at the Annual Meeting will be maintained during the ten-day
period preceding the meeting at the offices of the Company in Brentwood,
Tennessee. Your attention is directed to the proxy statement accompanying this
notice.

You are cordially invited to attend the Annual Meeting in person. EVEN IF
YOU PLAN TO ATTEND IN PERSON, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. You may revoke your proxy at any
time prior to its use.

By Order of the Board of Directors,

JEAN L. BYASSEE
Secretary

Brentwood, Tennessee
, 1999
<PAGE> 3

AMERICA SERVICE GROUP INC.

105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027

PROXY STATEMENT
---------------------

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
---------------------

This Proxy Statement is furnished to the holders of shares of (i) the $.01
par value per share Common Stock (the "Common Stock") of America Service Group
Inc. (the "Company") and (ii) the $.01 par value per share Series A Convertible
Preferred Stock of the Company (the "Preferred Stock") in connection with the
solicitation by the Company's Board of Directors of proxies for use at the
Annual Meeting of Stockholders to be held at NationsBank Plaza, Third Floor, 414
Union Street, Nashville, Tennessee, on , 1999, at 10:00 a.m. local
time, and at any adjournments thereof (the "1999 Annual Meeting"). It is
anticipated that this Proxy Statement and accompanying form of proxy will be
first sent to stockholders on or about , 1999.

The cost of this solicitation will be borne by the Company. In addition to
solicitation by mail, certain officers and employees of the Company, who will
receive no compensation for their services other than their regular salaries,
may solicit proxies in person, by telephone or otherwise. The Company may also
make arrangements with brokerage houses, custodians, nominees and other
fiduciaries to send proxy materials to their principals at the Company's
expense. The Company has retained Chase Mellon Shareholder Services to aid in
solicitation of proxies at a fee of approximately $ , plus certain
expenses.

VOTING PROCEDURES

VOTING STOCK

Only holders of record of the Common and Preferred Stock, as of the close
of business on , 1999 (the "Record Date"), will be entitled to vote at
the 1999 Annual Meeting. The Company had outstanding 3,576,163 shares of Common
Stock and 50,000 shares of Preferred Stock on the Record Date. Each share of
Common Stock entitles the holder thereof to one vote on each matter submitted to
the stockholders. Each share of Preferred Stock entitles the holder thereof to a
number of votes equal to the number of shares of Common Stock into which such
share of Preferred Stock could be converted as of the Record Date. The holders
of shares of Preferred Stock are entitled to vote together with the holders of
the Common Stock as a single class on all matters being submitted to the
Company's stockholders, except as otherwise stated in this Proxy Statement. As
of the Record Date, the holders of the Preferred Stock were entitled to an
aggregate of votes.

Stockholders who do not expect to attend the 1999 Annual Meeting are urged
to execute and return the enclosed proxy card promptly. Any stockholder signing
and returning a proxy may revoke the same at any time prior to the voting of the
proxy by giving written notice to the Secretary of the Company or by voting in
person at the meeting. All properly executed proxy cards delivered by
stockholders and not revoked will be voted at the 1999 Annual Meeting in
accordance with the directions given. With respect to the proposal regarding
election of directors, stockholders may (a) vote in favor of all nominees, (b)
withhold their votes as to all nominees, or (c) withhold their votes as to
specific nominees by so indicating in the appropriate space on the enclosed
proxy card. With respect to each other proposal being submitted to the
stockholders for their consideration, stockholders may (i) vote "FOR" such
proposal, (ii) vote "AGAINST" such proposal, or (iii) abstain from voting on
such proposal. If no specific instructions are given with regard to the matters
to be voted upon, the shares represented by a signed proxy card will be voted
"FOR" the election of all nominees for
<PAGE> 4

director, "FOR" the proposal to ratify the Private Placement (as defined) and to
authorize the Stock Issuance (as defined) and "FOR" the proposal to ratify
appointment of Ernst & Young LLP as independent accountants for 1999. Management
knows of no other matters that may come before the meeting for consideration by
the stockholders. However, if any other matter properly comes before the
meeting, the persons named in the enclosed proxy card as proxies will vote upon
such matters in accordance with their judgment.

QUORUM AND VOTING REQUIREMENTS

A quorum at the 1999 Annual Meeting will consist of a majority of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are outstanding and entitled to vote. A plurality of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are present at the 1999 Annual Meeting and entitled to vote will be
necessary to elect the director-nominees listed herein. A majority of the votes
entitled to be cast by the holders of all shares of Common Stock that are
present at the meeting and entitled to vote will be necessary to ratify the
Private Placement and authorize the Stock Issuance. A majority of the votes
entitled to be cast by the holders of all shares of Common Stock and Preferred
Stock that are present at the meeting and entitled to vote will be necessary to
ratify the appointment of Ernst & Young LLP as independent auditors. Abstentions
and proxies relating to "street name" shares for which brokers have not received
voting instructions from the beneficial owner ("Broker Non-Votes") are counted
in determining whether a quorum is present. With respect to all matters
submitted to the stockholders for their consideration, other than the election
of directors, abstentions will be counted as part of the total number of votes
cast on such proposals in determining whether the proposals have received the
requisite number of favorable votes, whereas Broker Non-Votes will not be
counted as part of the total number of votes cast on such proposals. Thus,
abstentions will have the same effect as votes against any given proposal,
whereas Broker Non-Votes will have no effect in determining whether any given
proposal has been approved by the stockholders. In the election of directors,
the nominees receiving the highest number of votes will be elected. Therefore,
withholding authority to vote for a director nominee will have no effect.

INFORMATION AS TO DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

The following table sets forth certain information, including ownership of
the Common Stock, as of March 23, 1999, with respect to: (i) each director or
nominee; (ii) each executive officer; and (iii) all directors and executive
officers as a group. Except as set forth under the caption "Principal
Stockholders" with respect to David A. Freeman, none of such persons owned any
shares of Preferred Stock.

2
<PAGE> 5

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
from March 1995 to Septem-
ber 1, 1998; Chairman,
Manchester Associates, Ltd.,
an international consulting
company, since 1995; Of
Counsel to Kaye Scholer,
Fierman, Hays & Handler, a
law firm, since 1993.
David A. Freeman, 37 Member of Ferrer Freeman 1999(3) 664,100(4) 15.7%
Thompson & Co., General Part-
ner of Health Care Capital
Partners L.P. and Health Care
Executive Partners L.P., each
of which is an investment
management company, since
October 1995; Managing
Director of J.P. Morgan &
Co., Inc., an investment
banking firm, from Septem-
ber 1983 through September
1995.
John W. Gildea, 55(5) Managing Director, Gildea 1986 39,115 1.1%
Management Co., an investment
management company.
Carol R. Goldberg, 68(6) President, AVCAR Group, Ltd., 1991 23,000 *
a management consulting firm.
Jeffrey L. McWaters, 42 Chairman, President and Chief N/A 0 --
Executive Officer of
Amerigroup Corporation
(formerly Americaid, Inc.), a
managed health care company,
since October 1994; President
and Chief Executive Officer
of Options Mental Health, a
managed mental health care
company and a subsidiary of
First Hospital Corporation,
from 1991 through September
1994.
Richard M. Mastaler, 53 Chairman and Chief Executive N/A 0 --
Officer of CCN Managed Care,
Inc., a managed health care
company, since August 1997;
Executive Vice
President -- Mergers and
Acquisitions and Product
Development of Magellan
Health Services, Inc., a
managed behavioral health
care company, from September
1996 through August 1997;
President and Chief Execu-
tive Officer of Unilab
Corporation, a clinical and
pathological
</TABLE>

3
<PAGE> 6

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR NUMBER OF SHARES
EMPLOYMENT (BY THE COMPANY DIRECTOR OF COMMON
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE STOCK OWNED (1) PERCENTAGE
------------ ----------------------------- -------- ---------------- ----------
<S> <C> <C> <C> <C>
laboratory, from April 1994
through March 1996.
Scott L. Mercy, 37 Chairman and Chief Executive 1996 361,000(7) 9.6%
Officer of LifePoint
Hospitals, a group of rural
hospitals to be spun out of
Columbia/HCA Healthcare Corp.
during the second quarter of
1999, since September 1998;
Chairman of the Board of
Directors since September 1,
1998; President and Chief
Executive Officer of the Com-
pany from April 1, 1996
through September 1, 1998;
Senior Vice
President -- Financial
Operations of Columbia/HCA
Healthcare Corporation from
1994 through 1995; Vice
President -- Financial
Operations and
Director -- Financial
Operations Support of
Hospital Corporation of
America from 1987 through
1994.
Richard D. Wright, 53 Chairman, President and Chief N/A 0 *
Executive Officer of Covation
LLC, a provider of software
integration and data
management services for
health care providers and
organizations, since Decem-
ber 1998; Co-Founder and
Executive Vice President,
Corporate Services of PhyCor,
Inc., a physician practice
management company, from 1997
through December 1998;
Executive Vice President of
Operations from 1988 through
1997.
OTHER EXECUTIVE OFFICERS
Gerard F. Boyle, 44 Executive Vice President of -- 25,671 *
the Company since February
1998; President and Chief
Executive Officer of Prison
Health Services, Inc., a
wholly owned subsidiary of
the Company ("PHS"), since
March 1998; Vice President of
Operations of EMSA Correc-
tional Care, Inc., from
September 1996 through
February 1998; Vice President
and Administrator of Sales
for EMSA Correctional
</TABLE>

4
<PAGE> 7

- ---------------

* Less than 1%
(1) Includes the following shares subject to options exercisable presently or
within 60 days: Mr. Catalano, 44,000 shares; Mr. Eberle, 48,000 shares; Mr.
Gildea, 38,000 shares; Ms. Goldberg, 23,000 shares; Mr. Mercy, 175,000
shares; Mr. Boyle, 25,000 shares; Mr. Teal, 22,110 shares; and all
continuing directors and executive officers as a group, 375,110 shares.
(2) Mr. Eberle also serves on the Boards of Directors of Ampco-Pittsburgh
Corporation, Mitchell Energy & Development Corporation, Konover Property
Trust and Showscan Entertainment, Inc.
(3) Mr. Freeman was appointed to the Board of Directors on January 26, 1999
pursuant to the terms of the Securities Purchase Agreement (as defined
below). See "Certain Transactions."
(4) Mr. Freeman is deemed to beneficially own the shares of Common Stock which
are issuable upon the exercise of the Warrants and Preferred Stock issued to
Health Care Capital Partners L.P. and Health Care Executive Partners L.P.
See "Certain Transactions."
(5) Mr. Gildea also serves on the Boards of Directors of General Chemical Group
Inc. and Konover Property Trust.
(6) Ms. Goldberg also serves on the Board of Directors of The Gillette Company
and Selfcare, Inc.
(7) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(as defined), (which are presently held in the name of his spouse and
beneficial ownership of which he disclaims), and options to purchase 175,000
shares of Common Stock. The shares of Common Stock purchased by Mr. Mercy
and the shares of Common Stock issued under the Old Mercy Agreement are
subject to certain repurchase rights in favor of the Company and Mr. Mercy.
See "Executive Compensation -- Employment Agreements."

5
<PAGE> 8

PRINCIPAL STOCKHOLDERS

COMMON STOCK

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock, as of March 23, 1999, by each person
who was known by the Company to own beneficially more than 5% of the Common
Stock as of such date, based on information furnished to the Company. Except as
otherwise indicated, each person has sole voting and dispositive power with
respect to the shares beneficially owned by such person.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY % OF SHARES
NAME AND ADDRESS OWNED OUTSTANDING
- ---------------- ------------ -----------
<S> <C> <C>
A group comprised of Health Care Capital Partners L.P.
("Capital Partners")and Health Care Executive Partners
L.P. ("Executive Partners")............................... 664,100(1) 15.7%
A group comprised of J. Carlo Cannell D/B/A Cannell Capital
Management, Tonga Partners LP, Pleiades Investment
Partners, LP, the Cuttyhunk Fund Limited and Canal
Ltd.(2)................................................... 397,300(3) 11.1%
Scott L. Mercy.............................................. 361,000(4) 9.6%
Columbia/HCA
4526 Harding Road
Nashville, Tennessee 37205
Sirach Capital Management, Inc. ............................ 267,000(5) 7.5%
3323 One Union Square
Seattle, Washington 98101
A group comprised of Mark E. Brady, Robert J. Suttman, III
and Ronald Eubel.......................................... 190,170(6) 5.3%
777 Washington Village Drive
Suite 210
Dayton, Ohio 45459
A group comprised of Wachovia Corporation and Wachovia Bank,
N.A. (collectively, the "Wachovia Group")................. 183,500(7) 5.1%
100 North Main Street
Winston Salem, North Carolina 27104
A group comprised of Sandera Partners, L.P., Sandera Capital
Management, L.L.C., Sandera Capital, L.L.C., John A.
Bricker, Jr., Hunt Financial Partners, L.P. (collectively,
the "Sandera Group"), and Newcastle Partners, L.P. and
Mark Schwartz (collectively, the "Newcastle Group")(8).... 155,500(9) 4.4%
</TABLE>

- ---------------

(1) Includes shares of Common Stock issuable upon exercise of the Warrants and
the Preferred Stock issued to Capital Partners and Executive Partners on
January 26, 1999 which such entities are deemed to beneficially own. Based
on a Schedule 13D filed with the SEC on February 5, 1999, Capital Partners
beneficially owns 637,788 shares of Common Stock and Executive Partners
beneficially owns 26,312 shares of Common Stock. See "Ratification of the
Private Placement and Approval of the Stock Issuance -- Description of the
Proposal."
(2) The address of J. Carlo Cannell D/B/A Cannell Capital Management and Tonga
Partners LP is 600 California Street, Floor 14, San Francisco, California
94108. The address of Pleiades Investment Partners, LP is 6022 West Chester
Pike, Newtown Square, Pennsylvania 19073. The address of the Cuttyhunk Fund
Limited is 73 Front Street, Hamilton, HM12, Bermuda. The address of Canal,
Ltd. is 9 Church Street, HM 951, Hamilton HM DX, Bermuda.
(3) Based on a Schedule 13G filed with the SEC on March 1, 1999, J. Carlo
Cannell D/B/A Cannell Capital Management beneficially owns 397,300 shares of
Common Stock, Tonga Partners, LP beneficially owns 167,800 shares of Common
Stock, Pleiades Investment Partners beneficially owns 46,600 shares of

6
<PAGE> 9

Common Stock, the Cuttyhunk Fund Limited beneficially owns 146,200 shares of
Common Stock and Canal Ltd. beneficially owns 36,700 shares of Common Stock.
(4) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from the
Company, 40,000 shares of Common Stock issued under the Old Mercy Agreement
(which are presently held in the name of his spouse and beneficial ownership
of which he disclaims), and options to purchase 175,000 shares of Common
Stock. The shares of Common Stock purchased by Mr. Mercy and the shares of
Common Stock issued under the Old Mercy Agreement are subject to certain
repurchase rights in favor of the Company and Mr. Mercy. See "Executive
Compensation -- Employment Agreements."
(5) Based upon a Schedule 13G filed with the SEC on February 2, 1999.
(6) Based on a Schedule 13G filed with the SEC on March 11, 1999, each of Mark
E. Brady, Robert J. Suttman and Ronald Eubel beneficially owns 190,170
shares of Common Stock.
(7) Based on a Schedule 13G filed with the SEC on February 12, 1999, each of
Wachovia Corporation and Wachovia Bank, N.A. beneficially owns 183,500
shares of Common Stock.
(8) The address of each member of the Sandera Group is 1601 Elm Street, Suite
4000, Dallas, Texas 75201. The address of each member of the Newcastle Group
is 4650 Cole Avenue, Suite 331, Dallas, Texas 75205.
(9) Based upon Amendment No. 1 to Schedule 13G filed with the SEC on February
16, 1999, the Sandera Group beneficially owns 151,500 shares of Common
Stock, Newcastle Partners L.P. beneficially owns 4,000 shares and Mark
Schwartz beneficially owns 155,500 shares.

PREFERRED STOCK

Capital Partners owns 48,020 shares of Preferred Stock, which represents
approximately 96% of the outstanding shares of Preferred Stock. Executive
Partners owns 1,980 shares of Preferred Stock, which represents approximately 4%
of the outstanding shares of Preferred Stock. The principal business address of
Capital Partners and Executive Partners is c/o Ferrer Freeman Thompson & Co.
LLC, The Mill, 10 Glenville Street, Greenwich, Connecticut 06831. The shares of
Preferred Stock owned by Capital Partners and Executive Partners constitute all
of the outstanding shares of Preferred Stock. The general partner of each of
Capital Partners and Executive Partners is Ferrer Freeman Thompson & Co ("FFT").
David A. Freeman, a director and director-nominee of the Company, is a member of
FFT and is thereby deemed to beneficially own all of the Preferred Stock owned
by Capital Partners and Executive Partners.

7
<PAGE> 10

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the two most highly compensated
executive officers other than the CEO (the "Named Executives") for each of the
years 1996 through 1998. The Company has no executive officers other than the
individuals named below.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- -----------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION STOCK($) OPTIONS(#) COMPENSATION(1)
------------------ ---- -------- -------- ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy(2)............ 1998 $155,000 $175,375 $ -- $ -- -- $ --
1997 190,000 -- -- -- -- 16,533
1996 138,846 -- -- 350,000 175,000 9,223
Michael Catalano(3).......... 1998 $186,862 $187,832 $ -- $ -- -- $ 3,454
President and Chief 1997 165,500 -- 56,000(4) -- -- 13,384
Executive Officer 1996 83,077 -- -- -- 60,000 4,452
Gerard F. Boyle(5)........... 1998 $162,413 $ 71,445 $29,068(3) $ -- 85,000 $ 2,500
Executive Vice 1997 -- -- -- -- -- --
President and Chief 1996 -- -- -- -- -- --
Operating Officer
Bruce A. Teal(6)............. 1998 $159,259 $160,643 $ -- $ -- 33,000 $ 2,500
Senior Vice 1997 115,000 -- -- -- -- 102
President and Chief 1996 4,423 -- -- -- 17,000 9
Financial Officer
</TABLE>

- ---------------

(1) Includes matching contributions by the Company to its 401(k) Profit Sharing
Plan and life and health insurance premiums paid by the Company on behalf of
the Named Executives.
(2) Mr. Mercy became President and Chief Executive Officer of the Company on
April 1, 1996. Mr. Mercy resigned his position as President and Chief
Executive Officer on September 1, 1998.
(3) Mr. Catalano served as Executive Vice President of Development, General
Counsel and Secretary of the Company from July 12, 1996 through September 1,
1998. Mr. Catalano became President and Chief Executive Officer of the
Company on September 1, 1998.
(4) Represents reimbursement for relocation costs.
(5) Mr. Boyle became Executive Vice President and Chief Operating Officer of the
Company on February 12, 1998.
(6) Mr. Teal served as Vice President, Controller and Treasurer of the Company
from December 10, 1996 through February 20, 1998. Mr. Teal became Senior
Vice President and Chief Financial Officer of the Company on February 20,
1998.

8
<PAGE> 11

STOCK OPTION GRANTS AND VALUES

The following table sets forth certain information with respect to stock
options granted to the Named Executives during 1998 and the potential realizable
value of such options.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTION TERM
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------ ------------ ----------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael Catalano
Feb. 20, 1998........... 12,000 3.7 9.69 Feb. 20, 2008 73,080 185,280
Sept. 1, 1998........... 50,000 15.8 8.69 Sept. 1, 2008 273,000 692,000
Gerald Boyle
Feb. 12, 1998........... 75,000 23.4 9.376 Feb. 12, 2008 442,500 1,120,500
Sept. 1, 1998........... 10,000 3.1 8.69 Sept. 1, 2008 54,600 138,400
Bruce Teal
Feb. 20, 1998........... 33,000 10.3 9.69 Feb. 20, 2008 200,970 509,520
</TABLE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR-END OPTION VALUE TABLE

The following table sets forth certain information with respect to option
exercises by the Named Executives during 1998 and the value of options owned by
the Named Executives at December 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES --------------------- --------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Scott L. Mercy....................... -- $ -- 175,000/0 $ 743,750/-
Michael Catalano..................... -- -- 40,000/82,000 -/225,406
Gerard F. Boyle...................... -- -- 0/85,000 -/315,380
Bruce A. Teal........................ -- -- 11,220/38,780 41,374/130,643
</TABLE>

- ---------------

(1) Based on the closing price of the Common Stock on the Nasdaq National Market
System on December 31, 1998 of $13.00 per share.

EMPLOYMENT AGREEMENTS

Scott L. Mercy was employed as President and Chief Executive Officer of the
Company from April 1, 1996 through September 1, 1998 pursuant to an employment
agreement, which was amended on June 30, 1997 (the "Old Mercy Agreement"). The
Old Mercy Agreement provided for a minimum annual base salary of $190,000, an
annual bonus based upon performance objectives, and such additional compensation
as determined by the Compensation Committee from time to time. On September 1,
1998, Mr. Mercy and the Company amended and restated the Old Mercy Agreement
(the "New Mercy Agreement") pursuant to which Mr. Mercy was appointed Chairman
of the Board of Directors. Pursuant to the New Mercy Agreement, Mr. Mercy was
paid a base salary of $60,000 for his service as Chairman of the Board during
1998. For years after 1998, the New Mercy Agreement establishes a minimum annual
base salary of $24,000 and such additional compensation as may be determined by
the Compensation Committee from time to time. Pursuant to the Old Mercy
Agreement, Mr. Mercy purchased 146,000 shares of Common Stock from the Company
at $8.75 per share, the mean between the high and low sale prices for the Common
Stock on April 1, 1996, received 40,000 shares as a restricted stock award under
the Company's Incentive Stock Plan, and was awarded options to purchase 175,000
additional shares of Common Stock, at $8.75 per share. Pursuant to the Old Mercy
Agreement the restricted stock and stock options were to vest in installments
over four years, or

9
<PAGE> 12

earlier in one-third installments when the closing price of the Common Stock
reached $12, $14 and $16, respectively. Mr. Mercy's restricted stock and stock
options vested in 1996 when the closing price of the Common Stock exceeded $16
per share. Pursuant to the New Mercy Agreement, Mr. Mercy has the right to
require the Company to purchase (and the Company has the right to require Mr.
Mercy to sell), at a price not less than $9.90 per share, the purchased shares
and the award shares, but not the option shares, upon Mr. Mercy's termination of
employment. Mr. Mercy is subject to certain non-competition and confidentiality
agreements following termination. The New Mercy Agreement provides for perpetual
employment until terminated by 30 days written notice by either party. The New
Mercy Agreement also provides that the Board of Directors shall take all
necessary actions to ensure that Mr. Mercy is slated as a management nominee to
the Board and elected Chairman of the Board during his employment. Pursuant to
the New Mercy Agreement, Mr. Mercy may terminate his position as Chairman of the
Board, remain a director and otherwise continue his employment under the New
Mercy Agreement, unless it is otherwise terminated.

Michael Catalano was employed as Executive Vice President of Development,
General Counsel and Secretary of the Company from July 12, 1996 through
September 1, 1998 pursuant to an employment agreement (the "Old Catalano
Agreement") which established a minimum annual base salary of $160,000 and such
additional compensation as determined by the Compensation Committee from time to
time. On September 1, 1998, Mr. Catalano and the Company amended and restated
the Old Catalano Agreement (the "New Catalano Agreement") pursuant to which Mr.
Catalano was appointed President and Chief Executive Officer of the Company. The
New Catalano Agreement establishes a minimum annual base salary of $190,000 and
such additional compensation as may be determined by the Compensation Committee
from time to time. Pursuant to the Old Catalano Agreement, on July 12, 1996, the
Company awarded to Mr. Catalano options to purchase 60,000 shares of Common
Stock at an exercise price of $13.125 per share under the Company's Amended
Incentive Stock Plan. The stock options vest ratably on each of the succeeding
three anniversaries of the date of the options and shall be exercisable for a
period of ten years from the date of the grant. Upon termination without cause
or a change of control of the Company, all unexercised stock options granted to
Mr. Catalano under the Company's Amended Incentive Stock Plan shall accelerate
and immediately vest. The issuance of the Preferred Stock to Capital Partners
and Executive Partners upon conversion of the Notes would constitute a change of
control under the New Catalano Agreement. Also, in the event of termination as a
result of death or disability, termination without cause or termination
following a change in control of the Company, Mr. Catalano or his estate is
entitled to two-year's compensation plus an amount equal to the incentive
compensation that Mr. Catalano would have earned in the year of termination, not
to be less than 45% of Mr. Catalano's annual base salary on the date of
termination. Mr. Catalano is subject to certain non-competition and
confidentiality agreements following termination. The New Catalano Agreement
provides for perpetual employment until terminated by appropriate written notice
by either party. The New Catalano Agreement also provides that the Board of
Directors shall take all necessary actions to ensure that Mr. Catalano is slated
as a management nominee to the Board during his employment.

On February 12, 1998, Gerard F. Boyle entered into an employment agreement
(the "Boyle Agreement") with the Company pursuant to which he was appointed
Executive Vice President and Chief Operating Officer of the Company. The Boyle
Agreement establishes a minimum annual salary of $180,000 and such additional
compensation as may be determined by the Compensation Committee from time to
time. The Boyle Agreement provides for perpetual employment until terminated by
either party upon thirty days notice. If there is a change of control of the
Company, all unexercised stock options granted to Mr. Boyle under the Company's
Amended Incentive Stock Plan shall accelerate and immediately vest. The issuance
of the Preferred Stock to Capital Partners and Executive Partners upon
conversion of the Notes would constitute a change of control under the Boyle
Agreement. Also, in the event of a termination without cause, including
termination following a change in control, Mr. Boyle's options shall vest and
his annual base salary as of the date of his termination shall be continued for
one year following such termination date. Mr. Boyle is subject to certain
non-competition and confidentiality agreements following termination.

On February 20, 1998, Bruce Teal entered into an employment agreement (the
"Teal Agreement") with the Company pursuant to which he was appointed Senior
Vice President and Chief Financial Officer of the Company. Mr. Teal had been
serving as Vice President, Controller and Treasurer of the Company since

10
<PAGE> 13

December 1996; however, the Company and Mr. Teal had not entered into an
employment agreement for his service in that capacity. The Teal Agreement
establishes a minimum annual salary of $160,000 and such additional compensation
as may be determined by the Compensation Committee from time to time. The Teal
Agreement provides for perpetual employment until terminated by either party
upon thirty days notice. If there is a change of control of the Company, all
unexercised stock options granted to Mr. Teal under the Company's Amended
Incentive Stock Plan shall accelerate and immediately vest. The issuance of the
Preferred Stock to Capital Partners and Executive Partners upon conversion of
the Notes would constitute a change of control under the Teal Agreement. Also,
in the event of a termination without cause, including termination following a
change in control, Mr. Teal's options shall vest and his annual base salary as
of the date of his termination shall be continued for one year following such
termination date. Mr. Teal is subject to certain non-competition and
confidentiality agreements following termination.

COMPENSATION OF DIRECTORS

During 1998, the Company granted each non-employee Director options to
purchase 4,000 shares of Common Stock at an exercise price of $13.56 per share
for serving on the Board and its committees. The Chairman of the Board of
Directors of the Company until September 1, 1998, Mr. William D. Eberle, was
also paid $25,000 for consulting services which he provided to the Company
during 1998. Directors who are also employees of the Company receive no
additional compensation from the Company for attendance at Board or committee
meetings. Under the terms of the Company's Amended Incentive Stock Plan, any
person who is not an employee or independent contractor of the Company and who
becomes a Director will receive an option to purchase 15,000 shares of the
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date such person becomes a Director. Such options will vest with
respect to 25% of the shares covered thereby on each successive anniversary of
the date of grant. David A. Freeman was granted such options, effective January
26, 1999, upon his appointment to the Board.

CERTAIN TRANSACTIONS

David A. Freeman, a director and a director-nominee of the Company, is a
member of FFT. On January 26, 1999, the Company entered into the Securities
Purchase Agreement (as defined) and certain other agreements with Capital
Partners and Executive Partners, investment management companies whose general
partner is FFT, pursuant to which the Company issued the Convertible Securities
to Capital Partners and Executive Partners. See "Ratification of the Private
Placement and Approval of the Stock Issuance -- Description of the Proposal."
Capital Partners and Executive Partners currently own 100% of the outstanding
shares of the Preferred Stock, the Notes and the Warrants. In addition, if the
Stock Issuance is approved by the Company's stockholders at the 1999 Annual
Meeting, Capital Partners and Executive Partners will have the right to receive
additional shares of Preferred Stock upon conversion of the Notes and shares of
Common Stock upon conversion of the Preferred Stock and the Warrants. Mr.
Freeman is deemed to beneficially own the Convertible Securities currently owned
by Capital Partners and Executive Partners and will be deemed to beneficially
own any additional Convertible Securities or Common Stock acquired by Capital
Partners and Executive Partners.

On the January 26, 1999, the Board of Directors appointed Mr. Freeman to
the Board of Directors, pursuant to a provision of the Securities Purchase
Agreement which obligated the Company to appoint a designee of Capital Partners
and Executive Partners to the Board of Directors on the date of the closing of
the Securities Purchase Agreement. See "Ratification of the Private Placement
and Approval of the Stock Issuance -- Summary of the Securities Purchase
Agreement -- Board of Directors Representation." Pursuant to the Securities
Purchase Agreement, if the stockholders approve the Stock Issuance at the 1999
Annual Meeting, the Company will be obligated to increase the number of members
of the Board of Directors to nine and to nominate designees of Capital Partners
and Executive Partners to three of the nine directorships. Capital Partners and
Executive Partners have designated Mr. Freeman, Richard D. Wright and Jeffrey L.
McWaters to be nominated to directorships. FFT has a 17.3% ownership interest in
Amerigroup Corporation of which Mr. McWaters is Chairman, President and Chief
Executive Officer.

11
<PAGE> 14

Scott L. Mercy, Chairman of the Board of Directors, is a limited partner of
Executive Partners. His interest in Executive Partners represents 1.5% of
Executive Partners' capital.

Scott L. Mercy is Chairman and Chief Executive Officer of LifePoint
Hospitals, a group of rural hospitals owned by Columbia/HCA Healthcare Corp.
("Columbia"). Richard M. Mastaler, a director-nominee, is the Chairman and Chief
Executive Officer of CCN Managed Care, Inc. In ordinary course of its business,
the Company makes payments to Columbia and CCN for health care services rendered
by Columbia and CCN to the Company on terms no less favorable than those that it
would have received from independent third parties.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee (the "Committee") of the Board of Directors
consists of five non-employee members of the Board of Directors. The Incentive
Stock Committee (the "Stock Committee"), which is responsible for administering
the Company's Amended Incentive Stock Plan, is comprised of Ms. Goldberg, Mr.
Bogan, Mr. Bovender, and Mr. Gildea.

EXECUTIVE COMPENSATION POLICIES

Generally, the Company's executive compensation program is designed to be
competitive with that offered by other companies against which the Company
competes for executive resources. At the same time, the Company links a
significant portion of executive compensation to the achievement of the
Company's short- and long-term financial and strategic objectives and to the
performance of the Common Stock. The Company's executive compensation program
consists of three primary elements: base salary, annual incentive bonus and
stock options or other stock benefits. Base salary is intended to be competitive
in the marketplace. However, although the Committee considers competitive data,
salaries are determined subjectively by the Committee rather than by reference
to any specific target group of companies. Base salary is reviewed at a minimum
annually and adjusted based on changes in competitive pay levels, the
executive's performance as measured against individual, business group, and
Company-wide goals, as well as changes in the executive's role in the Company.
The Committee awards incentive bonuses to the Named Executives based on the
achievement of certain targets and objectives which are set at the beginning of
each year. The Company does not make annual stock option or other stock benefit
grants to all executives. Rather, the Stock Committee determines each year
which, if any, executives will receive benefits, based on individual performance
and each executive's existing stock option position.

EXECUTIVE OFFICER COMPENSATION

On September 1, 1998, the Company promoted Michael Catalano from Executive
Vice President of Development and General Counsel to President and Chief
Executive Officer of the Company. During February 1998, the Company recruited
Gerard F. Boyle to become Executive Vice President and Chief Operating Officer
of the Company and the Company promoted Bruce A. Teal from Vice President,
Controller and Treasurer to Senior Vice President and Chief Financial Officer of
the Company. The base compensation, incentive bonus and stock option agreements
entered into by the Company with such individuals were determined by
arm's-length negotiations between the Committee and other members of the Board
of Directors and such individuals. The Committee believes that the specific base
compensation, incentive bonus and stock option arrangements were necessary to
attract and retain management of the caliber sought by the Board. Future
adjustments of such arrangements will be made in accordance with the general
principles outlined above.

For 1998, the Committee authorized annual bonuses to the Named Executive
Officers in amounts equal to up to 45% of base compensation, based upon the
performance of the Company against defined objectives, plus certain additional
compensation if the Company exceeded the defined objectives. The Company
achieved the defined performance objectives. Accordingly, the Committee awarded
bonuses for 1998 equal to 45% of each executive officer's base compensation. The
amount of such bonuses paid to Messrs. Mercy, Catalano, Boyle and Teal was
$66,000, $85,500, $71,445 and $72,000, respectively.
12
<PAGE> 15

In October 1997, the Company entered into a merger agreement with
MedPartners, Inc. ("MedPartners"), pursuant to which the Company would have been
acquired by MedPartners. The Company terminated the merger agreement during the
first quarter of 1998 because of a material decline in the value of the proposed
merger consideration. The Company's management was required to negotiate a
release and settlement agreement with MedPartners pursuant to which the merger
agreement was terminated and the Company was compensated for damages it incurred
as a result of the termination of the proposed merger. The Committee awarded
Messrs. Mercy, Catalano and Teal cash bonuses of $109,375, $102,332 and $88,643,
respectively, and Messrs. Catalano and Teal options to purchase 12,000 and
33,000 shares of Common Stock, respectively, based on their performance in
connection with the negotiation of the settlement agreement.

COMPENSATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER

Michael Catalano has served as President and Chief Executive Officer of the
Company since September 1, 1998 pursuant to the New Catalano Agreement. See
"Executive Compensation -- Employment Agreements." The terms of the agreement
were approved by the Committee and the Stock Committee. During 1998, the Company
(i) paid Mr. Catalano a bonus of $102,332 and awarded him 12,000 stock options
in connection with negotiation of the settlement agreement with MedPartners
referred to above, (ii) awarded Mr. Catalano 50,000 stock options in connection
with his assumption of new responsibilities as President and Chief Executive
Officer and (iii) paid Mr. Catalano an incentive bonus of $85,500, equal to 45%
of his base annual compensation, based upon the Company achieving defined
performance objectives. The Committee believes that the incentive bonuses
awarded to Mr. Catalano's created an appropriate relationship between Mr.
Catalano's level of compensation and the Company's performance.

Scott L. Mercy served as President and Chief Executive Officer of the
Company from April 1, 1996, through September 1, 1998 pursuant to the Old Mercy
Agreement. See "Executive Compensation -- Employment Agreements." The terms of
the agreement, including the restricted stock awards and stock options issued
pursuant to the agreement, were approved by the Committee, the Stock Committee
and subsequently by the stockholders. The employment agreement provided for the
payment of an annual bonus to Mr. Mercy in an amount to be determined by the
Committee based upon the performance of the Company against defined objectives.
The target amount of the bonus was to be an amount equal to Mr. Mercy's base
compensation, in no event to exceed an amount equal to twice Mr. Mercy's base
salary. Amounts less than the target amount could be paid for performance less
than the pre-approved performance targets, and cash bonuses in excess of the
target amount were to be paid for performance in excess of the pre-approved
targets, or otherwise at the discretion of the Committee. Mr. Mercy received a
bonus of $66,000 for 1998. During 1998, the Company paid Mr. Mercy an additional
cash bonus of $109,375 for his work in connection with the negotiation of the
settlement agreement with MedPartners referred to above. The Committee believes
that the incentive bonuses awarded to Mr. Mercy created an appropriate
relationship between Mr. Mercy's level of compensation and the Company's
performance.

This report by the Committee shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts.

Respectfully submitted by
The Compensation Committee:

CAROL R. GOLDBERG, Chair
THOMAS F. BOGAN
JACK O. BOVENDER, JR.
WILLIAM D. EBERLE
DAVID A. FREEMAN
JOHN W. GILDEA

13
<PAGE> 16

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the Compensation Committee at any time during the
last fiscal year served as an officer of, or was employed by, the Company.
Furthermore, none of the executive officers of the Company currently serves as a
director or member of the compensation committee of any other entity or any
other committee of the board of directors of another entity performing similar
functions.

PERFORMANCE GRAPH

The following graph sets forth the total return (stock price plus
dividends) on a $100 investment in each of (i) the Company's Common Stock, (ii)
the Wilshire 5000 Index and (iii) the NASDAQ Health Care Services Index, from
December 31, 1993 through December 31, 1998.

AMERICA SERVICE GROUP INC.

STOCK PERFORMANCE GRAPH

CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1993
WITH DIVIDENDS REINVESTED

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
America Service Group Inc. $100 $180 $274 $369 $542 $467
- ---------------------------------------------------------------------------------------
Wilshire 5000 $100 $100 $136 $165 $217 $268
- ---------------------------------------------------------------------------------------
Nasdaq Health Services Index $100 $107 $136 $136 $138 $119
- ---------------------------------------------------------------------------------------
</TABLE>

14
<PAGE> 17

ELECTION OF DIRECTORS (PROPOSAL NO. 1)

On January 26, 1999, the Board of Directors increased the size of Board of
Directors from seven to eight directors and appointed David A. Freeman, a
designee of Capital Partners and Executive Partners, to the newly-created vacant
directorship pursuant to a provision of the Securities Purchase Agreement which
obligated the Company to so increase the size of the Board of Directors and
appoint a designee of Capital Partners and Executive Partners to the vacant
directorship. If Proposal No. 2 is approved by the Stockholders, the Notes will
be converted to Preferred Stock. Upon conversion of the Notes, pursuant to the
Securities Purchase Agreement, the Company will further be obligated to increase
the size of the Board of Directors to nine directors and to nominate designees
of Capital Partners and Executive Partners to three of the directorships. If,
however, the stockholders do not approve Proposal No. 2, the Notes will not be
converted to Preferred Stock and the Company will be obligated to maintain the
number of directors at eight members and to nominate a designee of Capital
Partners and Executive Partners to only one of the directorships.

Accordingly, the number of directors to be elected at the annual meeting
will be contingent on whether the stockholders approve Proposal No. 2. In
anticipation of the stockholders approving Proposal No. 2, the Board of
Directors has increased the size of the Board to nine members and has nominated
nine directors, six of whom are Company nominees and three of whom are designees
of Capital Partners and Executive Partners. The Company nominees are Michael
Catalano, William D. Eberle, John W. Gildea, Carol R. Goldberg, Scott L. Mercy
and Richard M. Mastaler. The designees of Capital Partners and Executive
Partners are David A. Freeman, Richard D. Wright, and Jeffrey L. McWaters. If
Proposal No. 2 is approved by the stockholders, each of these nine nominees, if
elected, will become a director and collectively those nine directors will
constitute the full Board of Directors.

If Proposal No. 2 is not approved, the Board of Directors will reduce the
number of members of the Board of Directors to eight and Capital Partners and
Executive Partners will only be entitled to one director-nominee. The six
Company nominees, if elected, will still become directors. In addition, Mr.
Freeman will be the one designee of Capital Partners and Executive Partners
nominated to the Board, and, if elected, Mr. Freeman will become a director. If
Proposal No. 2 is not approved by the stockholders, Messrs. Wright and McWaters
will not become directors, even if they otherwise receive sufficient votes from
the stockholders. If Proposal No. 2 is not approved by the stockholders, the six
Company nominees and Mr. Freeman, if elected, will constitute seven of the eight
members of the Board of Directors and the Board of Directors will thereafter
appoint a substitute director to fill the vacancy on the Board.

The Board has nominated the nine nominees listed above to serve as a
directors until the next annual meeting of stockholders in 2000 or until their
successors are elected and qualified. Each of the nominees other than Messrs.
Wright, McWaters and Mastaler is currently a member of the Board of Directors.
Each nominee has consented to serve on the Board until the next annual meeting
of stockholders or until his or her successor is duly elected and qualified. If
any of the nominees should be unable to serve for any reason (which management
has no reason to anticipate at this time), the Board of Directors may designate
a substitute nominee or nominees (in which case the persons named as proxies in
the enclosed proxy card will vote all valid proxy cards for the election of such
substitute nominee or nominees), allow the vacancy or vacancies to remain open
until a suitable candidate or candidates are located, or eliminate the vacancy.
The affirmative vote of a plurality of votes entitled to be cast by the holders
of all shares of Common and Preferred Stock that are present in person or by
proxy and entitled to vote at the 1999 Annual Meeting is required to elect the
persons nominated.

Mr. Catalano, the President and Chief Executive Officer of the Company, has
entered into the New Catalano Agreement which provides, among other things, that
the Board shall, during the term of such employment agreement, take all
necessary steps to ensure that Mr. Catalano is slated as a management nominee to
the Board. See "Executive Compensation -- Employment Agreements."

Mr. Mercy, the Chairman of the Board of Directors of the Company, has
entered into the New Mercy Agreement which provides, among other things, that
the Board shall, during the term of such employment agreement, take all
necessary steps to ensure that Mr. Mercy is slated as a management nominee to
the Board and is appointed Chairman of the Board. See "Executive
Compensation -- Employment Agreements."

The Board of Directors recommends a vote FOR each nominee for director.

15
<PAGE> 18

RATIFICATION OF THE PRIVATE PLACEMENT
AND APPROVAL OF THE STOCK ISSUANCE

("PROPOSAL NO. 2")

DESCRIPTION OF THE PROPOSAL

The Board of Directors is requesting that the stockholders ratify the
Company's issuance of (i) $15.0 million aggregate principal amount of the
Company's 12% Subordinated Convertible Bridge Notes due January 26, 2000 (the
"Notes") with detachable warrants (the "Warrants") to purchase an aggregate of
135,000 shares of the Common Stock and (ii) 50,000 shares of Preferred Stock
(the "Initial Preferred Stock") for an aggregate purchase price of $5.0 million.
The Notes, Warrants and Initial Preferred Stock were issued in a private
placement (the "Private Placement") which was consummated on January 26, 1999
simultaneously with the Company's acquisition of EMSA Government Services, Inc.
("EMSA"), which was a wholly-owned subsidiary of InPhyNet Administrative
Services, Inc. ("InPhyNet"). InPhyNet is a wholly-owned subsidiary of
MedPartners. The Board of Directors is also asking that the stockholders approve
the issuance of the shares of Preferred Stock that are issuable upon conversion
of the Notes and the shares of Common Stock that are issuable upon conversion or
exercise of the Warrants and Preferred Stock, as described below (the "Stock
Issuance"). The Notes, Warrants and Preferred Stock are referred to collectively
as the "Convertible Securities."

The summaries contained herein of certain provisions of the Securities
Purchase Agreement, the Notes, the Warrants, the Certificate of Designation of
the Preferred Stock (the "Preferred Stock Certificate"), the Registration Rights
Agreement, the "Stock Purchase Agreement" (as defined) and the "First Amendment"
(as defined) are qualified in their entirety by reference to all the provisions
of such documents, including the definitions therein of certain terms which are
not otherwise defined herein. Copies of all such documents except the Stock
Purchase Agreement, which was filed as an exhibit to the Company's Current
Report on Form 8-K which was filed on January 5, 1999, were filed as exhibits to
the Company's Current Report on Form 8-K which was filed on February 10, 1999.

RATIONALE FOR THE PROPOSAL

The Common Stock is currently traded on The Nasdaq Stock Market National
Market System maintained by the National Association of Securities Dealers, Inc.
("Nasdaq"). The rules of Nasdaq require that the Company obtain stockholder
approval in connection with the acquisition of the stock or assets of another
company if, due to the present or potential issuance of common stock, or
securities convertible into or exercisable for common stock, other than a public
offering for cash, the number of shares of common stock to be issued is or will
be equal to or in excess of 20% of the number of shares of common stock
outstanding before the issuance of the stock or securities. The conversion of
the Notes into shares of Preferred Stock and the issuance of shares of Common
Stock upon the conversion or exercise of the Convertible Securities would cause
the number of shares of Common Stock issuable in connection with the securities
issued in connection with the Company's acquisition of EMSA to exceed 20% of the
number of shares of Common Stock outstanding. Therefore, the Board of Directors
is seeking the stockholders' ratification of the Private Placement and the
approval of the Stock Issuance.

EFFECT OF THE ADOPTION OF THE PROPOSAL

If the stockholders adopt Proposal 2, the Company will convert the Notes
into shares of Preferred Stock. The issuance of shares of Common Stock upon the
conversion or exercise of the Convertible Securities may be dilutive to the
interests of the holders of the currently outstanding shares of Common Stock.
Stockholder ratification of the Private Placement will also, pursuant to
Delaware law, preclude a subsequent stockholder challenge to the Private
Placement. The Board of Directors is unaware of any pending or threatened
challenge to the Private Placement; it is seeking ratification of the Private
Placement and approval of the Stock Issuance for the reasons set forth above.
See "-- Rationale for the Proposal."

16
<PAGE> 19

If the stockholders fail to adopt Proposal No. 2, the Company will suffer
certain adverse financial consequences, as follows: (i) the Company will be
required to secure sufficient financing to redeem the Notes on their maturity
date, January 26, 2000; (ii) if the Notes are not so redeemed, effective as of
such maturity date, the interest rate on the Notes will increase by 0.05% per
month, to a maximum monthly interest rate of 1.5% (which is equivalent to an
annual interest rate of 18%) and the holders of the Initial Preferred Stock will
be entitled to receive annual dividends (in addition to any dividend otherwise
payable) at a rate of 7.0% until the Notes are redeemed; and (iii) the exercise
price of the Warrants will be reduced, effective on the maturity date of the
Notes, to $0.01. There can be no assurance that the Company will be able to
obtain the financing required to redeem the Notes on their maturity date, or, if
the Company is able to obtain such financing, that the terms of such financing
would be favorable to the Company. The Company's ability to obtain such
financing is restricted pursuant to the terms of the Credit Facility (as
defined). If the Company is unable to refinance the Notes, the Company could be
in default with respect to certain covenants contained in the Credit Facility.
Such defaults could permit acceleration of the indebtedness outstanding pursuant
to the Credit Facility. If the stockholders fail to adopt Proposal No. 2,
resulting in the Company not being able to convert the Notes into Preferred
Stock, the Company will continue to be obligated to comply with the Notes
Covenants (as defined), which currently restrict the ability of the Company and
its subsidiaries to incur additional indebtedness, enter into certain agreements
and take other actions which the Company may deem to be desirable in conduct of
its business. Furthermore, if the stockholders fail to adopt Proposal No. 2, the
stockholders of the Company, or any one or more of them, will retain the right
to challenge the Private Placement.

INTERESTS OF CERTAIN PERSONS

Certain members of the Board of Directors have interests in the approval of
Proposal No. 2 which are in addition to the interests of the Company's
stockholders. See "Certain Transactions" for a description of such interests.

RECOMMENDATION OF THE BOARD OF DIRECTORS

The Board of Directors unanimously recommends that each stockholder vote in
favor of Proposal No. 2. A majority of the votes entitled to be cast by the
holders of all shares of Common Stock that are present at the meeting and
entitled to vote will be necessary to adopt Proposal No. 2. In connection with
entering into the Securities Purchase Agreement, Capital Partners and Executive
Partners entered into a letter agreement with Scott L. Mercy, the Chairman of
the Board of Directors, pursuant to which Mr. Mercy agreed to vote his shares of
Common Stock, and granted Capital Partners and Executive Partners a proxy to
vote his shares of Common Stock, (i) to approve the Stock Issuance and any
transactions appropriate to implement the Stock Issuance, (ii) against actions
or agreements that would result in a material breach of the Securities Purchase
Agreement and (iii) against any action or agreement that would impede, interfere
with or attempt to discourage approval of the Stock Issuance. As of March 23,
1998, Mr. Mercy owned 146,000 shares of Common Stock, representing approximately
4.1% of the outstanding shares of Common Stock as of such date.

The Company consummated the Private Placement in order to finance, in part,
its acquisition of EMSA. In approving the Private Placement and the acquisition
of EMSA and in formulating its recommendation that the stockholders approve
Proposal No. 2, the Board of Directors considered, among other things, the
strategic and business reasons for such transactions described below and the
opinion (the "Fairness Opinion") rendered to the Board of Directors by SunTrust
Equitable Securities Corporation ("SunTrust Equitable") that the consideration
paid or received by the Company, as the case may be, (i) for EMSA, (ii) for the
Convertible Securities and (iii) for the Senior Debt (as defined), with all such
transactions being taken as a whole, was fair, from a financial point of view,
to the holders of shares of the Common Stock. Stockholders are urged to read
carefully the descriptions of such strategic and business reasons, the Fairness
Opinion, the EMSA acquisition and the terms of the Convertible Securities set
forth below.

Strategic and Business Reasons. The Company believes that, as a result of
its acquisition of EMSA, it will have access to new clients and new markets and
it will be able to offer additional services. The acquisition of EMSA has also
strengthened the Company's management team, particularly in the area of
marketing.
17
<PAGE> 20

From a financial standpoint, the Company believes that the EMSA will permit it
to increase its profitability by leveraging fixed corporate overhead over a
larger revenue base and an increased inmate population and by eliminating
duplicative corporate and regional selling, general and administrative expenses.
Furthermore, the Company believes that the EMSA acquisition will lessen its
dependence on a few significant contracts as a result of the diversification of
the Company's revenues. The Company's acquisition of EMSA is consistent with its
strategy of achieving growth through acquisitions.

The Fairness Opinion. The Company retained SunTrust Equitable to act as
financial advisor in connection with the EMSA acquisition, the issuance of the
Convertible Securities and the incurrence of the Senior Debt. On December 18,
1998, SunTrust Equitable delivered an oral opinion to the Board of Directors,
confirmed in writing, that, based upon and subject to factors and assumptions
set forth in the opinion, and as of the date of such opinion, the consideration
to be paid or received by the Company, as the case may be, (i) for the
outstanding shares of EMSA's common stock (the "EMSA Stock"), (ii) for the
Convertible Securities and (iii) for the Senior Debt, with all such transactions
being taken as a whole, is fair, from a financial point of view, to the holders
of shares of the Common Stock. SunTrust Equitable subsequently confirmed its
opinion in writing on January 26, 1999, the date of the consummation of the EMSA
acquisition.

The full text of the SunTrust Equitable opinion, which sets forth
assumptions made, procedures followed, matters considered and limits on the
review undertaken, is attached to this Proxy Statement as Annex A. The SunTrust
Equitable opinion is not a recommendation to any stockholder of the Company as
to how to vote on Proposal No. 2. This summary of the SunTrust Equitable opinion
is qualified in its entirety by reference to the full text of the SunTrust
Equitable opinion.

In arriving at its opinion, SunTrust Equitable considered certain
publicly-available information as well as other information concerning the
Company, MedPartners and EMSA, which was provided to SunTrust Equitable by the
Company. The information considered included:

- the Stock Purchase Agreement;

- the term sheet, dated November 13, 1998, entered into between the Company
and FFT regarding the Convertible Securities (the "Convertible Securities
Term Sheet");

- the term sheet, dated November 13, 1998, entered into between the Company
and NationsBank regarding the Senior Debt (the "Senior Debt Term Sheet");

- financial reports and forecasts provided by the Company and EMSA;

- the financial terms of precedent transactions involving public and
private companies, including both health maintenance organizations
("HMOs") and corrections companies ("Corrections Companies");

- the financial position and operating results of three different sets of
public companies comprising HMOs, physician practice management companies
("PPMs"), and Corrections Companies; and

- the anticipated pro forma financial effects of the EMSA acquisition to
the Company.

SunTrust Equitable also held discussions with the management and
representatives of the Company and EMSA concerning the historical and current
operations, financial condition, business, strategic objectives and prospects
and the anticipated benefits of the EMSA acquisition to the Company.
Furthermore, SunTrust Equitable conducted such additional financial analyses and
considered such other factors as it deemed appropriate.

In rendering its opinion, SunTrust Equitable relied upon, without
independent verification, the accuracy and completeness of the information
reviewed. SunTrust Equitable assumed that the financial projections provided by
the Company and EMSA were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the respective
managements of the Company and EMSA concerning the future financial performance
of the Company and EMSA and the potential strategic implications and operational
benefits anticipated from the EMSA acquisition. SunTrust Equitable has not made
any independent valuation or appraisal of the assets or liabilities of EMSA, nor
has SunTrust Equitable

18
<PAGE> 21

been furnished with such appraisals. The SunTrust Equitable opinion does not
address the solvency of the Company.

SunTrust Equitable further assumed that:

- the Company would acquire the EMSA Stock under the Stock Purchase
Agreement, with each of the parties performing everything required to be
done by it under the Stock Purchase Agreement and with all conditions to
each party's obligations being satisfied without waiver, except to the
extent that any non-compliance or waiver would not be material to
SunTrust Equitable's analysis;

- all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the EMSA acquisition
would be obtained, without any restrictions, amendments or waivers which
would have a material adverse effect on EMSA or the Company or materially
reduce the contemplated benefits of the EMSA acquisition;

- definitive documents would be negotiated and executed with respect to the
Convertible Securities and the Senior Debt which contain terms and
conditions reasonably customary for such securities and indebtedness that
currently are available to similarly situated entities; and

- the terms of the Convertible Securities and the Senior Debt in the
definitive documents relating thereto would not vary from the terms set
forth in the Convertible Securities Term Sheet or the Senior Debt Term
Sheet, as the case may be, in any regard that would be material to its
analysis.

The SunTrust Equitable opinion is based upon economic, monetary, stock
market and other conditions existing as of the date of such opinion and does not
address the fairness of the consideration to be paid or received by the Company,
as the case may be, in these transactions as of any other date. Furthermore,
forecasts of future financial performance prepared by the Company and EMSA and
relied on by SunTrust Equitable may not be indicative of future results because
such analyses contain assumptions as to industry performance, general business
and economic conditions and other matters beyond the control of the Company and
EMSA.

The SunTrust Equitable opinion encompasses the consideration to be paid or
received by the Company, as the case may be, (i) for the EMSA Stock, (ii) for
the Convertible Securities and (iii) for the Senior Debt, with all such
transactions being taken as a whole. As such, the SunTrust Equitable opinion
should be considered in its entirety.

The following paragraphs summarize the material quantitative analyses
performed by SunTrust Equitable in arriving at the opinion delivered to the
Company's Board.

Analysis of Certain Publicly-Traded Companies. Due to the unique nature of
the Company's business, SunTrust Equitable selected certain companies from
industries which it considered to have aspects of comparability to the Company
and EMSA and their respective businesses: HMOs, due to similarities between the
nature of their businesses and their funding sources; PPMs, because of the
market's view of EMSA as a subsidiary of MedPartners and the market's assessment
of PPMs generally; and Corrections Companies, which is the sector to which the
Company and EMSA provide their services. Using publicly-available information,
SunTrust Equitable reviewed the current stock prices, market capitalization and
debt levels relative to various historical operating measures and earnings
expectations forecasted by securities analysts. SunTrust Equitable noted that,
based upon closing stock market prices and multiples on December 15, 1998, the
$67.0 million in cash paid by the Company (the "Acquisition Consideration") was
within the range of multiples of the publicly-traded companies it considered.
The implied multiple of Acquisition Consideration to EMSA's 1998 estimated
EBITDA was 8.8x. To the extent the $27.6 million working capital surplus is

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<PAGE> 22

deducted from the Acquisition Consideration of $67.0 million (resulting in
adjusted Acquisition Consideration of $39.4 million), the EMSA acquisition
implies an EBITDA multiple of 5.2x.

<TABLE>
<CAPTION>
TRAILING 12 MONTH
EBITDA MULTIPLE
----------------------
HIGH LOW AVERAGE
----- ---- -------
<S> <C> <C> <C>
HMOs........................................................ 10.2x 3.9x 7.9x
PPMs........................................................ 17.0x 3.9x 8.2x
Corrections Companies....................................... 19.9x 7.4x 13.6x
</TABLE>

Discounted Cash Flow Analysis. Using the information provided by the
Company, SunTrust Equitable performed a standalone discounted cash flow analysis
for EMSA. Based upon this analysis, SunTrust Equitable noted that the value of
the Acquisition Consideration to be paid by the Company was below the range of
the values calculated by this analysis.

<TABLE>
<CAPTION>
EMSA
LOW HIGH PURCHASE PRICE
-------------- -------------- --------------
<S> <C> <C> <C>
Implied adjusted enterprise value(1)............... $102.6 million $141.9 million $67.0 million
</TABLE>

- ---------------

(1) Including a working capital surplus of $27.6 million.

Analysis of Precedent Acquisition Transactions. Using publicly-available
information, SunTrust Equitable reviewed precedent merger and acquisition
transactions involving public and private companies, including both HMOs and
Corrections Companies. SunTrust Equitable examined 47 transactions involving
HMOs since May 8, 1992, and 37 transactions involving Corrections Companies
since February 1, 1993. Each transaction was evaluated for the aggregate
transaction value relative to various financial measures for the targets in the
most recent twelve-month period preceding the acquisition.

<TABLE>
<CAPTION>
HMOS CORRECTIONS EMSA
---- ----------- ----
<S> <C> <C> <C>
Aggregate Transaction Value to:
Trailing 12 months revenues............................... 1.0x 0.9x 0.4x
Trailing 12 months gross profit........................... 5.8x 2.6x 5.5x
Trailing 12 months EBITDA................................. 9.9x 5.3x 8.8x(1)
</TABLE>

- ---------------

(1) Based upon Acquisition Consideration of $67.0 million. The deduction of a
working capital surplus of $27.6 million would imply Acquisition
Consideration of $39.6 million and an EBITDA multiple of 5.2x.

Pro Forma Combination Analysis. SunTrust Equitable analyzed certain pro
forma effects resulting from the EMSA acquisition. This pro forma combination
analysis involved estimating the potential financial impact of the proposed
transaction on the historical and projected financial performance of the
Company. This analysis incorporated purchase accounting adjustments, assumptions
with respect to structure and financing for the EMSA acquisition, and the
effects of the cash utilized to fund the EMSA acquisition as well as the
operating contribution of EMSA to the Company's financial performance. Based
upon this analysis and assuming conversion of the Notes, SunTrust Equitable
noted that the Company could contemplate a transaction in excess of the
Acquisition Consideration which would not be dilutive to the Company's
forecasted earnings for 1999.

20
<PAGE> 23

Evaluation of Financing

In its evaluation of the contemplated financing for the EMSA acquisition,
SunTrust Equitable considered that the Company intended to finance the EMSA
acquisition with a combination of (i) cash on hand, (ii) the Senior Debt and,
(iii) the proceeds from the sale of the Convertible Securities. SunTrust
Equitable noted that certain terms of the Convertible Securities, including the
ultimate conversion price of the Preferred Stock, were dependent upon the market
price for the Common Stock during certain periods set forth in the Convertible
Securities Term Sheet. These presently unascertainable variables could lead to a
number of different outcomes. Accordingly, SunTrust Equitable analyzed two
different scenarios:

- The base case assumed (i) Capital Partners and Executive Partners
acquired $15.0 million of Notes and $5.0 million of Preferred Stock from
the Company, (ii) the Company acquired EMSA for approximately $67.0
million, (iii) the Notes are converted into Preferred Stock on June 30,
1999 and (iv) the Common Stock price appreciates modestly during the
conversion price adjustment period.

- The pessimistic case assumed (i) Capital Partners and Executive Partners
acquired $15.0 million of Notes and $5.0 million of Preferred Stock from
the Company, (ii) the Company acquired EMSA for approximately $67.0
million, (iii) the Notes are not converted into Preferred Stock and (iv)
the Common Stock price does not appreciate during the conversion price
adjustment period.

SunTrust Equitable analyzed each of these scenarios with respect to (i) the
impact on the Company's future financial performance, (ii) the covenants
associated with the Senior Debt pursuant to the Credit Facility (as defined),
and (iii) the percentage ownership of the Common Stock which might be owned by
the purchasers of the Convertible Securities as a result of the potential
adjustment in the conversion price of the Preferred Stock. The following table
summarizes SunTrust Equitable's evaluation of the financing of the EMSA
acquisition with the Convertible Securities and the Senior Debt:

<TABLE>
<CAPTION>
BASE CASE PESSIMISTIC CASE
-------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Purchase price...................................... $ 67,000 $ 67,000
Estimated transaction costs......................... 2,500 2,500
------------- ------------
Total uses.......................................... 69,500 69,500
Notes issued........................................ 15,000 15,000
Initial Preferred Stock............................. 5,000 5,000
Senior Debt drawn................................... 47,000 47,000
Cash used........................................... 2,500 2,500
------------- ------------
Total sources....................................... 69,500 69,500
Notes converted..................................... June 30, 1999 No
Conversion price per share for Initial Preferred
Stock............................................. $ 9.45 $ 5.50
Common Shares issued upon conversion................ 2,116,402 909,091
Warrants issued..................................... 135,000 135,000
Capital Partners and Executive Partners percentage
ownership of ASG(1),(2)........................... 38.7% 22.6%
Covenants violated in 1999.......................... None None
Covenants violated in 2000 (and thereafter)......... None Fixed Charge
Senior Debt retired................................. 2002 2003
</TABLE>

- ---------------

(1) Based on approximately 3.6 million shares of Common Stock outstanding.
(2) Although the pessimistic case indicates Capital Partners and Executive
Partners ownership of 22.6%, the Convertible Securities Term Sheet limits
the ownership of Capital Partners and Executive Partners to 19.9% prior to
stockholder approval.

SunTrust Equitable, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate

21
<PAGE> 24

and other purposes. In the past, SunTrust Equitable has performed investment
banking and financial advisory services for the Company from time to time for
which it has received compensation. In the ordinary course of business, SunTrust
Equitable trades the equity securities of the Company and MedPartners for its
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such companies' securities.

Pursuant to the engagement letter between the Company and SunTrust
Equitable, the Company has paid SunTrust Equitable a fee of $325,000. The
Company has also agreed to reimburse SunTrust Equitable for the expenses
reasonably incurred by it in connection with its engagement (including
reasonable counsel fees) and to indemnify SunTrust Equitable and its officers,
directors, employees, agents and controlling persons against certain expenses,
losses, claims, damages or liabilities in connection with its services,
including those arising under federal securities laws.

THE EMSA ACQUISITION

On January 26, 1999, the Company purchased all of the outstanding stock of
EMSA for $67.0 million in cash pursuant to a Stock Purchase Agreement, dated as
of December 18, 1998 (the "Stock Purchase Agreement'), as amended by the First
Amendment to Stock Purchase Agreement, dated as of January 26, 1999 (the "First
Amendment"), between the Company and InPhyNet.

EMSA conducts its operations through two wholly-owned subsidiaries, EMSA
Correctional Care, Inc. ("EMSA Correctional") and EMSA Military Services, Inc.
("EMSA Military"), each of which the Company acquired pursuant to its
acquisition of EMSA. EMSA Correctional provides comprehensive managed health
care solutions to state and local correctional facilities, managing health care
for approximately 70,000 inmates. Following the EMSA acquisition, the Company,
through EMSA Correctional and Prison Health Services, Inc., the Company's
operating subsidiary, manages health care for approximately 133,000 inmates in
25 states. EMSA Military contracts with the U.S. Department of Defense (the
"DOD") and the Veterans Administration (the "VA") to provide emergency medicine
and primary health care services to active and retired military personnel and
their dependents at medical facilities operated by the DOD and the VA. EMSA
Military currently provides such services for military personnel and their
dependents at 10 DOD and VA medical facilities.

The purchase price paid to InPhyNet was subject to increase or decrease on
a dollar-for-dollar basis by an amount equal to the amount by which EMSA's
working capital (as defined in the Stock Purchase Agreement), as reflected on
its balance sheet as of January 25, 1999 (the "Closing Date Balance Sheet"), was
in excess of or was less than $27.6 million. The Closing Date Balance Sheet
reflected working capital of $24.0 million. Accordingly, InPhyNet repaid $3.6
million of the purchase price. The Company will account for the EMSA acquisition
using the purchase method of accounting.

In connection with the EMSA acquisition, the Company and all of its
subsidiaries, including EMSA, EMSA Correctional and EMSA Military, entered into
an Amended and Restated Credit Agreement, dated as of January 26, 1999, with
NationsBank, as Administrative Agent and Issuing Bank, which provides for a
senior, secured revolving credit facility (the "Credit Facility") of up to $52.0
million (the "Senior Debt"). The Company also entered into a Securities Purchase
Agreement, dated as of January 26, 1999 (the "Securities Purchase Agreement"),
with Capital Partners and Executive Partners. The Company used approximately
$47.0 million in borrowings under the Credit Facility and the aggregate $20.0
million in proceeds received from the Private Placement to partially finance the
EMSA acquisition. The Company used its cash on hand to finance the remainder of
the purchase price for the EMSA acquisition

SUMMARY OF THE NOTES

General. The aggregate principal amount of the outstanding Notes is $15.0
million. The Notes will mature on January 26, 2000 and are subject to annual
interest on the unpaid principal at a rate of 12%. As long as the Notes remain
outstanding, interest on the Notes is due and payable monthly, in arrears, in
cash at the rate of 1% per month. At maturity, the aggregate principal amount of
the Notes, plus accrued and unpaid

22
<PAGE> 25

interest, is payable in cash. The Notes are unsecured and subordinated to all
indebtedness of the Company arising under the Credit Facility.

Timing of Stockholder Approval of the Convertible Securities. The
Securities Purchase Agreement obligates the Company to convene a meeting of the
Company's stockholders (the "Stockholder Meeting") to consider and vote upon
ratifying the issuance of the Warrants and the Initial Preferred Stock and to
authorize the Stock Issuance as soon as practicable following the Closing Date,
but no later than July 26, 1999. Within 30 days after the obtaining stockholder
approval of the Stock Issuance (the "Stockholder Approval"), the Company is also
obligated have the Common Stock issuable upon conversion of Preferred Stock
approved for listing on Nasdaq (the "Nasdaq Approval").

Conversion Rights. At the option of the holders of not less than 66-2/3%
of the outstanding Notes, the Notes are convertible into shares of Preferred
Stock at a conversion ratio of one share of Preferred Stock for each $100 of
outstanding principal amount of Notes (the "Conversion Ratio") at any time after
the Closing Date, provided that the Stockholder Approval has been obtained. At
the option of the Company, the Notes are convertible at any time into shares of
Preferred Stock at the Conversion Ratio, provided (i) the Stockholder Approval
and Nasdaq Approval have been obtained, (ii) the Current Market Price (as
defined) of the Common Stock exceeded $5.50 per share during the 30 consecutive
Trading Days (as defined) immediately preceding the Stockholder Meeting, and
(ii) certain other conditions are satisfied. Upon conversion of the Notes, the
Company will pay all accrued and unpaid interest in cash to the holders thereof.

Penalty Interest. If the Company (i) fails to convene the Stockholders
Meeting on or before July 26, 1999, (ii) fails to take other actions with
respect to convening the Stockholders Meeting and seeking Stockholder Approval
on or before July 26, 1999, (iii) fails to obtain the Nasdaq Approval within 30
days after the Stockholder Approval (the "Conversion Defaults"), or (iv) fails
to pay the principal of and accrued and unpaid interest due on the Notes at
maturity, the interest on the Notes will immediately increase by 0.05% per month
and will further increase by 0.05% per month during which such Conversion
Default or failure to pay principal and interest on the Notes at maturity
continues, but in no event will the monthly interest rate exceed 1.5% (which is
equivalent to an annual interest rate of 18%) (the "Penalty Interest"). The
Company will not be obligated to pay the Penalty Interest until the maturity of
the Notes if (i) the sole reason the Company fails to obtain Stockholder
Approval is the failure of the holders of the Common Stock to approve the Stock
Issuance at a meeting duly called and convened in accordance with the Securities
Purchase Agreement (a "Stockholder Rejection"), and (ii) prior to the
Stockholder Rejection, none of the Conversion Defaults exists and SunTrust
Equitable has not withdrawn the Fairness Opinion.

Redemption. The Company may redeem the Notes at its option at any time
following the Closing Date at a redemption price equal to the outstanding
principal amount of the Notes plus any accrued but unpaid interest to the date
of redemption, in cash (the "Redemption Price") (i) prior to the Stockholder
Meeting and (ii) thereafter, if and so long as either (a) the Notes are then
convertible into shares of Preferred Stock at the option of the Company pursuant
to the terms described above or (b) the Company is entitled to defer the payment
of the Penalty Interest until the maturity of the Notes, as described above. If
a Change of Control (as defined) occurs prior to the Company providing notice to
the holders of the Notes that it will redeem the Notes, the Redemption Price of
each Note shall be equal to the Notes Change of Control Price (as defined) for
90 days following the date the Company mails notice of such Change of Control to
the holders of the Notes.

Change of Control. In the event that there is a Change of Control, any
record holder of Notes may require the Company to redeem any or all of the Notes
held by such holder for an amount (the "Notes Change of Control Price") equal to
the greater of (i) the outstanding principal amount of such Notes or (ii) the
form and amount of consideration that such holder would have received had such
holder converted such Notes into Preferred Stock and converted such Preferred
Stock into Common Stock, plus all accrued and unpaid interest on the Notes being
redeemed, to and including the date of redemption, in cash.

Acceleration of the Notes. Pursuant to the Securities Purchase Agreement,
the holders of 66-2/3% of the outstanding principal amount of the Notes may
declare the entire outstanding principal balance of the Notes to be due and
payable upon the occurrence of an Event of Default (as defined). In addition to
certain other
23
<PAGE> 26

Events of Default described in the Securities Purchase Agreement, the receipt of
the Nasdaq Approval by the Company and the requirement that the Company convene
the Stockholder Meeting by July 26, 1999 are each Events of Default under the
Securities Purchase Agreement.

SUMMARY OF THE WARRANTS

The Warrants entitle the holder thereof to purchase 135,000 shares of
Common Stock, at any time following the Closing Date until January 26, 2006, at
the price per share equal to the lower of (i) $9.45 and (ii) the closing sale
price of the Common Stock for the thirty (30) consecutive Trading Days prior to
the Stockholder Meeting, provided that such price shall in no event be less than
$5.50 per share (the "Warrant Exercise Price").

Upon the occurrence of any of the Conversion Defaults, the Warrant Exercise
Price will be reduced to $.01; provided, however, that the Warrant Exercise
Price will not be reduced to $.01 until the maturity of the Notes, if (i) the
sole reason the Company fails to obtain Stockholder Approval is a Stockholder
Rejection and (ii) prior to the Stockholder Rejection, none of the Conversion
Defaults exists and SunTrust Equitable has not withdrawn the Fairness Opinion.
In addition, unless by such time the Company has converted or redeemed all of
the Notes, the Warrant Exercise Price will decrease by $1.00 on the last
business day of each month, beginning on July 31, 1999 through and including
December 31, 1999, provided that the Warrant Exercise Price will not be
decreased below the par value of the Common Stock. The Warrant Exercise Price
will also be reduced to $.01 per share upon a Change of Control, the maturity
date of the Notes or the Company giving notice that it will redeem the Notes.

In any event, the Warrant Exercise Price will be adjusted if there is a
stock split, stock dividend, combination, reclassification or similar event with
respect to the Common Stock, if certain distributions with respect to the Common
Stock are made, if the Company issues shares of Common Stock or securities
convertible into Common Stock under certain terms and in the event of certain
mergers, certain consolidations, or a sale or transfer of all or substantially
all of the Company's assets.

SUMMARY OF THE PREFERRED STOCK

The rights, preferences and privileges of the Preferred Stock are set forth
in the Preferred Stock Certificate which the Company filed with the Secretary of
State of the State of Delaware simultaneously with the issuance of the Initial
Preferred Stock.

Designation, Number and Rank. The Preferred Stock Certificate authorizes
500,000 shares of Preferred Stock, which number may be decreased (but not
increased) by the Board of Directors without a vote of stockholders; provided,
however, that such number may not be decreased (i) prior to conversion or
redemption of all of the Notes and (ii) after conversion or redemption of all of
the Notes, below the number of then outstanding shares of Preferred Stock. The
Company may issue (i) up to 50,000 shares of the Preferred Stock as an original
issuance, (ii) up to 150,000 shares of the Preferred Stock upon conversion of
the Notes, and (iii) such number of additional shares as may be required to pay
dividends on the Preferred Stock in shares of Additional Preferred Stock (as
defined).

Subject to certain exceptions, the Preferred Stock ranks senior to the
Common Stock and all other existing or future capital stock of the Company with
respect to dividend rights and rights on liquidation, dissolution or winding up
of the Corporation.

Dividends. Each share of Preferred Stock entitles the holder thereof to
receive cumulative dividends at an annual rate equal to 5% from and after the
date of issuance of such share of Preferred Stock (the "Issue Date"). Dividends
shall be (i) computed on the basis of the Liquidation Preference (as defined);
(ii) accrue and be payable quarterly (each, a "Quarterly Dividend"), and (iii)
payable in cash; provided, however, that if payment of cash dividends is
restricted by the terms of any instrument or agreement relating to the Senior
Debt or any other senior indebtedness of the Company, such dividends shall be
payable in additional Preferred Stock ("Additional Preferred Stock"), which
shall be issued on the date such dividend would otherwise be paid.

24
<PAGE> 27

The Company may not pay dividends or make distributions in cash, shares of
stock or other property on the Common Stock or other capital stock of the
Company unless (i) all accumulated and unpaid dividends on the Preferred Stock
have been paid and (ii) at the same time, the same dividend or distribution is
declared or paid or set apart, as the case may be, on the Preferred Stock and is
payable on the same date, at the rate per share of Preferred Stock based upon
the number of shares of Common Stock into which each share of Preferred Stock is
convertible on the record date for such dividend or distribution (a "Permitted
Dividend").

In the event that (i) any Quarterly Dividend shall not have been paid in
full, whether in cash or in kind, (ii) an event of default under the Securities
Purchase Agreement (an "Event of Default") shall have occurred and be continuing
for 30 days following the date notice of such event is required to be given, or
(iii) the Company fails to redeem in full the shares of Preferred Stock on the
Mandatory Redemption Date (as defined), whether or not by reason of the absence
of legally available funds, then, in any such case, the holders of Preferred
Stock shall be entitled to annual dividends (in addition to any dividend
otherwise payable) at a rate of 7.0% from the applicable payment date for the
Quarterly Dividend or date of such breach, or Event of Default or failure to
redeem, as the case may be, through the date of payment of such dividend, cure
of such breach or Event of Default or redemption, as the case may be (a "Penalty
Dividend").

Voting. Each share of Preferred Stock entitles the holder thereof to vote
on all matters submitted to a vote of the stockholders of the Company, voting
together as a single class with the holders of Common Stock. Each share of
Preferred Stock entitles the holder thereof to the number of votes equal to the
number of shares of Common Stock into which such share of Preferred Stock is
convertible on the record date for such vote.

So long as all of the shares of the Initial Preferred Stock and the shares
of Preferred Stock issuable upon conversion of the Notes (collectively, the "FFT
Preferred Stock") are outstanding, the Company may not take any of the following
actions (each, a "Fundamental Change") without first obtaining the approval of
the holders of 66-2/3% of the outstanding shares of Preferred Stock (the
"66-2/3% Holders"): (i) sell all or substantially all of the assets of the
Company or undertake a merger or consolidation transaction in which the
stockholders of the Company immediately prior to the transaction possess less
than 50% of the voting securities of the surviving entity immediately after the
transaction; (ii) effect a reclassification or recapitalization of the issued
and outstanding capital stock of the Company; or (iii) file a petition in
bankruptcy for relief pursuant to the Federal Bankruptcy Code of 1978, as
amended, consent to the appointment of or taking possession by a receiver (or
other similar official) of the Company or an assignment for the benefit of the
Company's creditors or take any similar action.

The affirmative vote of the 66-2/3% Holders is necessary to: (i)
authorize, increase the authorized number of shares of, or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of any class or classes or series within a class of
the Company's capital stock ranking prior to (either as to dividends or upon
voluntary or involuntary liquidation, dissolution or winding up), or pari passu
with, the Preferred Stock, subject to certain exceptions; (ii) increase the
authorized number of shares of, or issue (including on conversion or exchange of
any convertible or exchangeable securities or by reclassification) any shares
of, Preferred Stock other than upon the conversion of the Notes or to issue
Additional Preferred Stock; or (iii) authorize, adopt or approve an amendment to
the Company's Certificate of Incorporation or the Preferred Stock Certificate
which would increase or decrease the par value of the Preferred Stock, or alter
or change the powers, preferences or special rights of the Preferred Stock.

Certain Restrictions. The Company shall not declare or pay dividends, or
make any other distributions, on any shares of Parity Stock or Junior Stock,
except for Permitted Dividends, at any time when (i) any Quarterly or Penalty
Dividend payable on the Preferred Stock has not been paid in full, (ii) an Event
of Default has occurred and has continued 30 days following the date notice of
such event is required to be given, (iii) the Company has failed to redeem in
full the shares of Preferred Stock on the Mandatory Redemption Date, (iv) the
Company has defaulted on certain of its indebtedness, (v) the occurrence of an
early termination date with respect to any interest rate swap agreement entered
into by the Company as the result of the occurrence of an event of default
pursuant to the swap agreement or (vi) a Fundamental Change has occurred and is
continuing. "Parity Stock" means any capital stock of the Company ranking on a
parity

25
<PAGE> 28

(either as to dividends or upon liquidation, dissolution or winding up) with the
Preferred Stock. "Junior Stock" means any capital stock of the Company ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Preferred Stock.

Subject to certain exceptions, the Company shall not, and shall not permit
any of its subsidiaries to, redeem, repurchase or otherwise acquire any shares
of Preferred Stock, Parity Stock or Junior Stock at any time when dividends on
the payable Preferred Stock have not been paid in full, whether in cash or in
kind, or any of the events set forth in clauses (i) through (iv) in the
preceding paragraph has occurred and is continuing.

Redemption. On July 26, 2006 (the "Mandatory Redemption Date"), the
Company shall be required to redeem each outstanding share of Preferred Stock by
paying the Liquidation Preference (as defined) in cash (the "Redemption Price")
for each such share of Preferred Stock.

The Company has the right, at its sole option, to redeem the Preferred
Stock, in an amount not less than one-third of the amount of FFT Preferred
Stock, for a per share amount equal to the Redemption Price; provided, however,
that, (i) the Company shall not be permitted to redeem any shares of Preferred
Stock on or prior to June 30, 2001 unless the Current Market Price per share of
the Common Stock is equal to or greater than the Conversion Price multiplied by
225% for at least 45 consecutive Trading Days immediately preceding the date of
the notice of redemption from the Company (the "Redemption Notice") and (ii) the
Company shall not be permitted to redeem any shares of Preferred Stock any time
after June 30, 2001 unless the Current Market Price per share of the Common
Stock is equal to or greater than the Conversion Price multiplied by 225% for at
least 30 consecutive Trading Days immediately preceding the date of the
Redemption Notice.

If a Change of Control occurs prior to the delivery of a Redemption Notice,
the Redemption Price of each share of Preferred Stock shall be equal to the
Change of Control Price for 90 days following the date the Company mails notice
of such Change of Control to the holders of the Preferred Stock.

Change of Control. In the event that there occurs a Change of Control, any
record holder of Preferred Stock may require the Company to redeem any or all of
the Preferred Stock held by such holder for an amount ("Change of Control
Price") equal to the greater of (i) $150.00 per share of Preferred Stock, plus
any accrued and unpaid dividends or (ii) the form and amount of consideration
that such holder would have received had such holder converted such Preferred
Stock into Common Stock prior to the Change of Control.

Liquidation Preference. Upon any liquidation, dissolution or winding of
the Company, each holder of outstanding shares of Preferred Stock is entitled to
receive $100.00 per share (as adjusted for any stock dividends, combinations or
splits with respect to such share), plus an amount equal to all accrued but
unpaid dividends on such share ("Liquidation Preference") before any
distribution shall be made to the holders of shares of Junior Stock or Parity
Stock.

Conversion. Each share of Preferred Stock is convertible into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing $100.00 by the Conversion Price (as defined) at the option of the
holder at any time after the Issue Date and prior to the close of business on
the day prior to a date which the Company has set to redeem such shares of
Preferred Stock. If the Company elects to redeem any shares of Preferred Stock,
the right of the holders of the Preferred Stock to convert such shares of
Preferred Stock will terminate the close of business on the business day
preceding the date fixed for redemption. The Company shall pay to each holder of
shares of Preferred Stock an amount equal to any accrued and unpaid dividends on
the shares of Preferred Stock surrendered for conversion to the date of such
conversion.

The Conversion Price is equal to the lower of (i) $9.45 per share and (ii)
the Current Market Price of the Common Stock during the 30 consecutive Trading
Days prior to the Stockholders Meeting; provided that, the Conversion Price
shall in no event be less than $5.50 per share. Notwithstanding the foregoing,
the Warrants and the terms of the Preferred Stock each provide that, prior to
the date of Stockholder Approval, the maximum number of shares of Common Stock
that will be issued or be issuable upon exercise of the Warrants together with
the shares of Common Stock that will be issued or be issuable upon conversion of
the Preferred
26
<PAGE> 29

Stock, may not exceed 19.9% of the Company's outstanding Common Stock. However,
if prior to Stockholder Approval the total number of shares of Common Stock
which are issuable upon exercise of the Warrants and conversion of the Preferred
Stock would exceed 19.9% but for the 19.9% limitation described in the previous
sentence, following Stockholder Approval the number of shares of Common Stock
which are issuable will be recalculated to give effect to the full amount of
shares of Common Stock that would have been issuable but for such limitation.

Except with respect to the shares of Preferred Stock which have been
converted or redeemed prior to June 30, 2001, if (i) the Conversion Price
exceeds $8.00 per share and (ii) during the period beginning on the earlier of
(x) June 30, 2000 and (y) the date twelve months after the Stockholders Meeting
and ending on June 30, 2001, the Current Market Price of Common Stock per share
does not exceed 225% of the Initial Conversion Price for 45 consecutive Trading
Days, the Conversion Price shall be reduced to $8.00. Except with respect to the
shares of Preferred Stock which have been converted or redeemed prior to June
30, 2001, if (i) the Conversion Price exceeds $8.00 per share and (ii) during
the period beginning on the earlier of (x) June 30, 2000 and (y) the date twelve
months after the Stockholders Meeting and ending on June 30, 2001, the Current
Market Price of Common Stock per share is more than 225% but less than 250% of
the Initial Conversion Price for 45 consecutive Trading Days, the Conversion
Price shall be reduced to an amount equal to the product of the Conversion Price
multiplied by a quotient, the numerator of which shall equal the sum of (x) the
Initial Conversion Price and (y) $8.00 and the denominator of which shall be 2.

In any event, the Conversion Price will be adjusted if there is a stock
split, stock dividend, combination, reclassification or similar event with
respect to the Common Stock, if certain distributions with respect to the Common
Stock are made, if the Company issues shares of Common Stock or securities
convertible into Common Stock under certain terms and in the event of certain
mergers, certain consolidations, or a sale or transfer of all or substantially
all of the Company's assets.

SUMMARY OF THE SECURITIES PURCHASE AGREEMENT

Board of Directors Representation. Pursuant to the Securities Purchase
Agreement, on the Closing Date, the Board of Directors increased the size of the
Board of Directors from seven to eight directors and appointed David A. Freeman,
a designee of Capital Partners and Executive Partners, to the newly-created
vacant directorship. Following the conversion of the Notes and for so long as
Capital Partners and Executive Partners and their affiliates and affiliates of
FFT own the percentage of FFT Preferred Stock or the Common Stock issuable upon
conversion of the FFT Preferred Stock specified in the table below, the Company
will be obligated to appoint the number of designees of Capital Partners and
Executive Partners specified in such table (the "FFT Directors").

<TABLE>
<CAPTION>
PERCENTAGE OF FFT PREFERRED NUMBER OF FFT
STOCK/COMMON STOCK SIZE OF BOARD DIRECTORS
- --------------------------- ------------- -------------
<S> <C> <C>
Greater than or equal to 66-2/3%............................ 9 3
Less than 66-2/3%, but greater than 33-1/3%................. 8 2
Less than or equal to 33-1/3%, but greater than 25%......... 7 1
</TABLE>

At each subsequent annual meeting of the Company, the Company will be
obligated to nominate and recommend the number of designees of Capital Partners
and Executive Partners as directors corresponding to the ownership of the FFT
Preferred Stock by Capital Partners and Executive Partners at such time and to
maintain the corresponding size of the Board, as indicated above. Executive
Partners and Capital Partners will not have the right to designate a nominee to
the Board if they, their affiliates and affiliates of FFT own less than 25% of
the FFT Preferred Stock. If this Proposal No. 2 is approved by the stockholders,
the Company will convert the Notes into shares Preferred Stock, and, as Capital
Partners and Executive Partners will own all of the FFT Preferred Stock, or the
resulting Common Stock, the Company will be obligated to maintain a nine member
Board of directors and FFT will be entitled to designate three nominees to the
Board of Directors.

Additional Agreements Contingent on Conversion of the Notes. At any time
any Notes remain outstanding, the Securities Purchase Agreement, among other
things, prohibits (i) the Company from

27
<PAGE> 30

violating certain financial ratios and tests, (ii) subject to certain
exceptions, any of the Company's subsidiaries from incurring any indebtedness or
guaranteeing any indebtedness of the Company other than any borrowings under the
Credit Facility or the outstanding principal amount of the Notes, (iii) the
Company from incurring any additional indebtedness unless such indebtedness is
pari passu with, or subordinate in right of payment to, the Notes; (iv) the
Company and its subsidiaries from extending credit or making any form of
investment in any other entity; (v) the Company from permitting any of its
subsidiaries to issue any capital stock and (vi) the Company and its
subsidiaries from taking any action which might restrict the ability of the
Company's subsidiaries to pay dividends, make distributions, repay indebtedness,
make loans or transfer assets to the Company or its other subsidiaries or
guarantee any indebtedness of the Company or its other subsidiaries
(collectively, the "Notes Covenants").

Continuing Agreements. At any time that any Notes or one-third of the FFT
Preferred Stock remains outstanding, the Securities Purchase Agreement obligates
the Company to, among other things (i) satisfy certain financial ratios and
tests, (ii) not issue any debt securities convertible or exchangeable into
Common Stock or any equity securities ranking senior to or on a parity with the
Preferred Stock, (iii) not to, and not permit any of its subsidiaries to,
declare or pay any dividend on, or make any other distribution in respect of, or
redeem, purchase or otherwise acquire any shares of Common Stock or any shares
of Parity Stock or Junior Stock.

Registration Rights Agreement. The Company entered into a Registration
Rights Agreement, dated January 26, 1999 (the "Registration Rights Agreement"),
with Capital Partners and Executive Partners pursuant to which it agreed to
register the Common Stock issuable upon conversion of the FFT Preferred Stock
and the Warrants for resale by the holders thereof.

CERTAIN DEFINITIONS.

The following terms have the meanings indicated:

"Change of Control" means: (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becoming, in a
transaction or series of related transactions, the beneficial owner of
voting securities entitled to exercise 50% or more of the total voting
power of all outstanding voting securities of the Company (including any
voting securities that are not then outstanding of which such person or
group is deemed the beneficial owner) (the "Control Party"); (ii) the
acquisition of beneficial ownership of 20 percent or more of the number of
voting securities of the Company by any person or group, together with
contractual rights, which would enable such person or group to prevent a
merger, consolidation or sale of all or substantially all of the assets or
other sale of the Company; (iii) individuals who at the beginning of any
period of two consecutive calendar years constituted the Board of Directors
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the members of the Board of Directors
then still in office who either were members of the Board of Directors at
the beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a majority
of the members of the Board of Directors then in office, or (iv) sale of
all or substantially all of the assets of the Company.

"Current Market Price" when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing sale price
per share of Common Stock or such other securities on such date and, when
used with reference to shares of Common Stock or other securities for any
period shall mean the average of the daily closing sale prices per share of
Common Stock or such other securities for such period. The closing price
for each day shall be the closing sale price in the over-the-counter
market, as reported by Nasdaq or such other system then in use, or, if on
any such date the Common Stock or such other securities are not quoted by
any such organization, the closing sale price as furnished by a
professional market maker making a market in the Common Stock or such other
securities selected by the Board of Directors. If the Common Stock is
listed or admitted to trading on a national securities exchange, the
closing price shall be the closing sale price, regular way, as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the

28
<PAGE> 31

New York Stock Exchange or, if the Common Stock or such other securities
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which the Common Stock or such other securities are listed or admitted
to trading. If the Common Stock or such other securities are not publicly
held or so listed or publicly traded, "Current Market Price" shall mean the
Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors based on an opinion of
an independent investment banking firm acceptable to holders of a majority
of the shares of Preferred Stock.

"Fair Market Value" means, as to shares of Common Stock or any other
class of capital stock or securities of the Company or any other issuer
which are publicly traded, the average of the Current Market Prices of such
shares of securities for each day of the five consecutive Trading Days
preceding the date as of which the Fair Market Value of a security is to be
determined. The "Fair Market Value" of any security which is not publicly
traded or of any other property shall mean the fair value thereof as
determined by an independent investment banking or appraisal firm
experienced in the valuation of such securities or property selected in
good faith by the Board of Directors or a committee thereof.

"Trading Day" means any day other than a Saturday, Sunday, or a day on
which banking institutions in the States of New York or Tennessee are
authorized or obligated by law or executive order to close or, if the
Common Stock is listed or admitted to trading on any national securities
exchange, a day on which such exchange is open for the transaction of
business.

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

(PROPOSAL NO. 3)

The Board of Directors has appointed Ernst & Young LLP as independent
accountants for the Company for 1999. Although stockholder ratification is not
required, the Board of Directors has directed that such appointment be submitted
to the stockholders for ratification. If the proposal is not adopted, the Board
of Directors may reconsider the appointment. A representative of Ernst & Young
LLP is expected to attend the 1999 Annual Meeting. Such representative will be
given the opportunity to make a statement and will be available to respond to
appropriate questions.

The affirmative vote of a majority of the votes entitled to be cast by the
holders of all shares of Common and Preferred Stock that are present in person
or represented by proxy and entitled to vote at the 1999 Annual Meeting is
required to adopt the proposal.

ADDITIONAL INFORMATION

PROPOSALS FOR 2000 MEETING

Any proposal of stockholders that is intended to be presented at the
Company's 2000 Annual Meeting of Stockholders must be received at the Company's
principal executive offices no later than , 1999 and must comply
with all other applicable legal requirements in order to be included in the
Company's proxy statement and form of proxy for that meeting. The Company will
have the right to confer to the persons named in its proxy cards for the
Company's 2000 Annual Meeting discretionary authority to vote on any stockholder
proposal that is not received at the Company's principal executive offices by
, 2000.

COMMITTEE AND MEETINGS

The Board of Directors of the Company held 12 meetings during the year
ended December 31, 1998. The Audit Committee, which consists of Messrs. Bogan,
Bovender, Eberle and Gildea, and Ms. Goldberg, held four meetings during 1998.
The functions of the Audit Committee are (i) to recommend the appointment of the
Company's independent accountants, (ii) to meet periodically with the Company's
management and its independent accountants on matters relating to the annual
audit, internal controls, and accounting principles

29
<PAGE> 32

of the Company, and the Company's financial reporting and (iii) to review
potential conflict of interest situations, where appropriate. The Compensation
Committee, which during 1998 consisted of Messrs. Bogan, Bovender, Eberle and
Gildea, and Ms. Goldberg, held two meetings during 1998. The functions of the
Compensation Committee are (i) to review and approve all employment and
termination of executive officers, (ii) to monitor compensation of all
management staff and (iii) to review and approve compensation of the Chief
Executive Officer and other senior management. The Stock Committee, which
consists of Messrs. Bogan, Bovender, and Gildea, and Ms. Goldberg, held three
meetings during 1998. The function of the Stock Committee is to administer the
Company's Amended Incentive Stock Plan and the Employee Stock Purchase Plan. The
Company does not have a standing nominating committee. The Executive Committee,
which consists of Messrs. Mercy and Eberle, held two meetings during 1998. The
function of the Executive Committee is to exercise all powers and authority of
the Board of Directors in the management of the business and affairs of the
Company except as may be limited by the Delaware General Corporation Law. During
1998, each director, except Messrs. Bogan and Bovender, attended more than 75%
of all meetings of the Board of Directors and the committees on which he or she
served.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by law to furnish the Company copies of all Forms 3, 4
and 5 they file. Based solely on the Company's review of the copies of such
forms it has received and representations from certain reporting persons that
they were not required to file Forms 5 for specified fiscal years, the Company
believes that its officers, directors and greater than ten percent beneficial
owners complied with all filing requirements applicable to them with respect to
transactions during 1998.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's audited financial statements, supplementary financial
information, management's discussion and analysis of financial condition and
results of operations and quantitative and qualitative disclosures about market
risk are incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, a copy of which is being mailed with
this Proxy Statement. Certain unaudited financial information of the Company is
incorporated herein by reference to the Company's Current Report on Form 8-K,
dated March 26, 1999, a copy of which is being mailed with this Proxy Statement.

30
<PAGE> 33

[LETTERHEAD OF SUNTRUST EQUITABLE SECURITIES]

ANNEX A
JANUARY 26, 1999

Board of Directors
America Service Group
105 Westpark Drive, Ste. 300
Brentwood, Tennessee 37027

Lady and Gentlemen:

You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock of America Service Group Inc., a Delaware corporation (the
"Company"), of the consideration to be paid or received by the Company, as the
case may be, with all such transactions being taken as a whole:

(i) in exchange for all the outstanding capital stock (the "EMSA Stock") of
EMSA Government Services, Inc., a Florida corporation ("EMSA"), pursuant
to the Stock Purchase Agreement, dated as of December 18, 1998 (the
"Purchase Agreement"), by and between Inphynet Administrative Services,
Inc. ("Seller") and the Company (the "Acquisition");

(ii) for the issuance of $15,000,000 aggregate principal amount of
Subordinated Convertible Bridge Notes (the "Notes") with detachable
warrants for the purchase of shares of Common Stock of the Company (the
"Warrants") and $5,000,000 of convertible preferred stock (the
"Preferred Stock") to funds managed by Ferrer, Freeman, Thompson & Co.
("FFT"), on the terms and subject to the conditions set forth in the
term sheet dated November 13, 1998 and executed by FFT and the Company
(the "FFT Securities Term Sheet"); and

(iii) in borrowing up to $52,000,000 (the "Senior Debt") from NationsBank of
Tennessee, N.A. ("NationsBank") pursuant to an Amended and Restated
Credit Agreement, on the terms and subject to the conditions set forth
in the term sheet issued by NationsBank, dated November 13, 1998 (the
"Senior Debt Term Sheet").

The purchase price to be paid for the EMSA Stock under the Purchase
Agreement is $67,000,000, subject to adjustment, upwards or downwards, based
upon EMSA's working capital as of the closing date. The terms and conditions of
the Acquisition are more fully set forth in the Purchase Agreement. The FFT Term
Sheet provides for the issuance of $15,000,000 principal amount of Notes with
detachable Warrants to purchase 135,000 shares of the Company's Common Stock for
a purchase price of $15,000,000, and shares of Preferred Stock for a purchase
price of $5,000,000. The Notes, Warrants and Preferred Stock are sometimes
referred to collectively as the "FFT Securities". The Notes are convertible into
additional shares of Preferred Stock for a period of one year from closing
subject to certain conditions, including approval by the Company's stockholders.
The terms of the FFT Securities and certain conditions to their issuance,
including the delivery to the Company of a fairness opinion of its financial
advisor and the negotiation and execution of definitive agreements and
documentation, are summarized in the FFT Securities Term Sheet. The terms and
conditions of the Senior Debt are summarized in the Senior Debt Term Sheet, and
the availability to the Company of the Senior Debt is subject to the negotiation
and execution of definitive agreements and documentation.

SunTrust Equitable Securities Corporation ("SunTrust Equitable"), as part
of its investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We will receive a fee for rendering this opinion. In the past,
SunTrust Equitable has performed investment banking and financial advisory
services for the Company from time to time for which we have received
compensation. In the ordinary course of our business, we may trade the equity
securities of the Company and MedPartners, Inc., a Delaware corporation

A-1
<PAGE> 34

and the parent of EMSA ("MedPartners"), for our own account and for the accounts
of our customers and, accordingly, may at any time hold a long or short position
in such securities.

In connection with our opinion, we have reviewed, among other things, (i)
the Purchase Agreement; (ii) the FFT Securities Term Sheet; (iii) the Senior
Debt Term Sheet; (iv) certain financial and other information with respect to
EMSA, MedPartners and the Company that was publicly available; and (v) certain
financial analyses, financial forecasts, reports and other information prepared
by the respective managements and representatives of the Company and EMSA which
was furnished to us by you. We held discussions with the management and
representatives of the Company and EMSA concerning the historical and current
operations, financial condition, business, strategic objectives and prospects of
EMSA and the Company. In addition, we (a) conducted a comparable companies
analysis in which we reviewed three different sets of publicly traded companies,
comprising health maintenance organizations, physician practice management
companies and corrections companies, including an analysis of historical
financial information, historical stock market prices and current market
capitalization and debt levels relative to various operating measures and
earnings estimates, and earnings expectations forecasted by securities analysts;
(b) performed a discounted cash flow analysis; (c) reviewed the financial terms
of certain recent acquisitions involving public and private companies, including
both health maintenance organizations and corrections companies; (d) performed a
pro forma combination analysis which involved estimating the potential financial
impact of the Acquisition on the historical and projected earnings per share of
the Company, based upon factors which included the anticipated accounting
treatment for the Acquisition, the source of funds to effectuate the
Acquisition, and the anticipated operating contribution of EMSA to the Company's
financial performance; and (e) conducted such other financial studies, and
analyses and considered such other factors as we deemed appropriate in arriving
at out opinion. We note that certain terms of the FFT Securities, including the
ultimate conversion price of the Preferred Stock, are dependent upon the market
price for the Company's Common Stock during certain periods set forth in the FFT
Securities Term Sheet. These presently unascertainable variables could lead to a
number of different outcomes. Accordingly, we analyzed two different scenarios:
(A) a "base case" in which we assumed that the Notes are converted into
Preferred Stock on June 30, 1999, and that there is a modest increase in the
market price of the Company's Common Stock during the period within which the
conversion price of the Common Stock would be subject to adjustment (the
"Adjustment Period"); and (B) a "pessimistic case" in which we assumed that the
Notes are not converted into Preferred Stock and that the market price of the
Company's Common Stock does not appreciate during the Adjustment Period. Each of
these scenarios was analyzed with regard to (1) the impact on the Company's
diluted earnings per share; (2) the anticipated financial covenants under the
Senior Debt credit facility; and (3) the percentage of the Common Stock of the
Company which might be owned by the purchasers of the FFT Securities as a result
of the potential adjustment in the conversion price of the Preferred Stock.

In rendering this opinion, we have relied, without assuming any
responsibility for independent verification, on the accuracy and completeness of
all financial and other information reviewed by us that was publicly available
or furnished to us concerning the Company or EMSA. We have assumed that the
financial forecasts and other information and data furnished to us and which we
examined were reasonably prepared on bases reflecting the best currently
available estimates and good faith judgment of the respective managements of the
Company and EMSA with respect to the future financial performance of the Company
and EMSA and the potential strategic implications and operational benefits
anticipated from the Acquisition. We have also assumed, with your consent, (I)
that the Company will acquire the EMSA Stock under the Purchase Agreement, that
each of the parties thereto will perform all of the covenants and agreements to
be performed by it under the Purchase Agreement, and that all conditions to the
obligations of each party will be satisfied without any waiver thereof, except
to the extent that any non-compliance or waiver would not be material to our
analysis; (II) that all material governmental, regulatory or other approvals and
consents required in connection with the consummation of the Acquisition will be
obtained, and that in connection with obtaining any such approvals and consents,
no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made, that would have a material adverse effect on EMSA
or the Company or materially reduce the contemplated benefits of the
Acquisition; and (III) definitive documents will be negotiated and executed with
respect to the FFT Securities and the Senior Debt that contain terms and
conditions reasonably customary for such securities and indebtedness that
currently are available to similarly
A-2
<PAGE> 35

situated entities, and that the terms of the FFT Securities and the Senior Debt
in the definitive documents relating thereto will not vary from the terms set
forth in the FFT Securities Term Sheet or the Senior Debt Term Sheet, as the
case may be, in any regard that would be material to our analysis. We have not
made an independent evaluation or appraisal of the assets or liabilities
(individually or collectively, contingent or otherwise) of EMSA, nor were we
furnished with any such evaluations or appraisals. We understand that the
purchase price for the EMSA Stock was determined in arms-length negotiations
between the Company and the Seller. Our opinion does not address the solvency of
the Company. Our opinion is baed upon economic, monetary, stock market and other
conditions existing on the date hereof.

It is understood that this opinion is addressed to and for the use and
benefit of the Board of Directors of the Company in evaluating each of the
contemplated transactions. This opinion is not a recommendation to the
stockholders of the Company with respect to any aspect of the contemplated
transactions for which the approval of stockholders of the Company may be sought
or required.

Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the consideration to be paid or received by
the Company, as the case may be, (i) for the EMSA Stock, (ii) for the FFT
Securities and (iii) for the Senior Debt, with all such transactions being taken
as a whole, is fair, from a financial point of view, to the holders of shares of
the Company's Common Stock.

Very truly yours,

/s/ SunTrust Equitable Securities Corporation

SUNTRUST EQUITABLE SECURITIES CORPORATION

A-3
<PAGE> 36

AMERICA SERVICE GROUP INC.

PROXY

PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON JUNE , 1999

The undersigned hereby appoints MICHAEL CATALANO and JEAN L. BYASSEE and
each of them, proxies, with full power of substitution and resubstitution, for
and in the name of the undersigned, to vote all shares of stock of America
Service Group Inc. (the "Company"), which the undersigned would be entitled to
vote if personally present at the Annual Meeting of Stockholders to be held on
, , 1999, at 10:00 a.m., Central Daylight Time, at
NationsBank Plaza, 414 Union Street, 3rd Floor, Nashville, Tennessee 37219, and
at any adjournment thereof, upon the matters described in the accompanying
Notice of Annual Meeting of Stockholders and Proxy Statement, receipt of which
is hereby acknowledged, and upon any other business that may properly come
before the meeting or any adjournment thereof. Said proxies are directed to vote
on matters described in the Notice of Annual Meeting and Proxy Statement as
follows, and otherwise in their discretion upon such other business as may
properly come before the meeting or any adjournment thereof.

(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)
<PAGE> 37

- FOLD AND DETACH -

THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSALS.

Please mark your votes as [X] indicated in this example

<TABLE>
<C> <S> <C> <C> <C> <C>
1. TO ELECT NINE (9) DIRECTORS TO TERMS EXPIRING AT THE 2000 ANNUAL MEETING OF STOCKHOLDERS:
Michael Catalano Carol R. Goldberg Richard M. Mastaler
William D. Eberle David A. Freeman Scott L. Mercy
John W. Gildea Jeffrey L. McWaters Richard D. Wright

[ ] FOR ALL NOMINEES LISTED (EXCEPT AS [ ] WITHHOLD AUTHORITY TO VOTE FOR ALL
MARKED TO THE CONTRARY BELOW) NOMINEES LISTED

(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST
ABOVE.)
2. TO RATIFY THE PRIVATE PLACEMENT AND APPROVE THE STOCK ISSUANCE (TO BE VOTED ON BY HOLDERS OF COMMON STOCK ONLY):
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR 1998:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>

(Continued on reverse side)

(continued from other side)

<TABLE>
<C> <S> <C> <C> <C> <C>
4. IN THE DISCRETION OF THE PROXIES, ON ANY MATTER THAT MAY PROPERLY COME BEFORE THE MEETING.
</TABLE>

Dated: , 1999
----------------------

--------------------------------
Signature(s) of Shareholder(s)

Please sign exactly as your name
or names appears hereon. Where
more than one owner is shown
above, each should sign. When
signing in a fiduciary or
representative capacity, please
give full title. If this proxy
is submitted by a corporation,
it should be executed in the
full corporate name by a duly
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.

PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND
THE MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.