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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2000
OR
[ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from__________to__________.
Commission File No.: 0-23038
CORRECTIONAL SERVICES CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-3182580
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1819 Main Street, Sarasota, Florida 34236
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (941) 953-9199
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.01 per share Nasdaq National Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock (Common Stock) held by non-
affiliates of the Registrant as of the close of business on March 26, 2001 was
approximately $23,379,252 based on the closing sale price of the common stock
on the Nasdaq National Market consolidated tape on that date.
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of the close of business on March 26, 2001:
Common Stock, $.01 par value 10,248,664 Shares
1
TABLE OF CONTENTS
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PAGE
PART I
Item 1 Business 4
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners
and Management 32
Item 13 Certain Relationships and Related Transactions 32
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 34
Signature Page 37
2
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
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This document contains statements that are not historical but are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These include
statements regarding the expectations, beliefs, intentions or strategies for
the future. The Company intends that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements reflect the Company's views as of
the date they are made with respect to future events and financial
performance, but are subject to many uncertainties and risks which could cause
the actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Examples of such
uncertainties and risks include, but are not limited to: fluctuations in
occupancy levels and labor costs; the ability to secure both new contracts and
the renewal of existing contracts; the availability and cost of financing to
redeem common shares and to expand our business; and public resistance to
privatization. Additional risk factors include those discussed in reports
filed by the Company from time to time on Forms 10-K, 10-Q and 8-K. The
Company does not undertake any obligation to update any forward-looking
statements.
3
PART I
ITEM 1. Business.
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GENERAL
Correctional Services Corporation ("CSC" or the "Company") was
incorporated in Delaware on October 28, 1993 to acquire all of the outstanding
capital stock of a number of affiliated corporations engaged in the operation
of correctional and detention facilities. CSC later acquired Youth Services
International ("YSI"), a leading national provider of private educational,
developmental and rehabilitative programs to adjudicated juveniles, through a
merger accounted for as a pooling of interests. In the merger, CSC issued
3,114,614 shares of CSC common stock in exchange for all of the outstanding
common stock of YSI. The merger closed March 31, 1999.
The combined Company is one of the largest and most comprehensive
providers of juvenile rehabilitative services with 32 facilities and
approximately 4,300 juveniles in its care. In addition, the Company is a
leading developer and operator of adult correctional facilities operating 13
facilities representing approximately 4,700 beds. On a combined basis, as of
December 31, 2000, the Company provided services in 18 states and Puerto Rico,
representing approximately 9,000 beds including aftercare services.
Revenues for the year ended December 31, 2000 were $210.8 million versus
$233.9 million in 1999. Contribution from operations was $25.2 million for
2000 compared to $27.1 million in 1999, with net income of $5.8 million or
$0.51 per diluted share compared to net income of $5.7 million or $0.51 per
diluted share (excluding merger related charges of $9.2 million net of tax, or
$0.82 per diluted share) in the similar period of 1999. Diluted shares were
11,367,000 and 11,219,000 in 2000 and 1999, respectively.
CSC operates a wide range of correctional facilities targeted toward
solving the specialized needs of governmental agencies. CSC's adult/community
corrections division specializes in facilities that service, among other
populations:
substance abuse offenders;
parole violators;
pre-trial detainees;
sex offenders; and
community corrections.
CSC's juvenile division operates largely under the YSI brand name and
focuses on facilities that provide:
intensive treatment programs including educational and
vocational services;
treatment for habitual offenders;
specialized female services;
detention services;
sexually delinquent juvenile treatment programs;
academy training programs; and
high impact programs.
In addition to providing fundamental residential services for adult and
juvenile offenders, CSC has developed a broad range of programs intended to
reduce recidivism, including basic, special, and vocational education,
substance abuse treatment and counseling, life skills training, behavioral
modification counseling and comprehensive aftercare programs. In all of its
facilities, CSC strives to provide the highest quality services designed to
reduce recidivism. CSC continually evaluates and audits its programs and
believes the reputation of its programs will lead to continued business
opportunities.
CSC is also a leading provider of design and construction services for
juvenile and adult correctional facilities, including project consulting, the
design, development and construction of new correctional and detention
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facilities and the redesign and renovation of existing facilities. These
services usually are provided in conjunction with an agreement for CSC to
operate the facility upon completion of the construction or renovation.
OPERATIONAL DIVISIONS
CSC has organized its operations into two divisions: Adult/Community
Corrections and Juvenile (YSI).
ADULT/COMMUNITY CORRECTIONS. At year end 2000, the Adult/Community
Corrections Division operated 13 facilities, seven in Texas, two in New York,
two in Arizona and one each in Mississippi and Washington, for a total of
4,700 beds. During the year 2000, contracts and subcontracts with the Texas
Department of Criminal Justice comprised 10% of the Company's consolidated
revenue. In its 10 secure adult facilities, CSC not only provides adult
inmates with housing but also with other basic services, including health
care, transportation and food service. In addition, CSC remains committed to
providing a variety of rehabilitative and educational services, including
community service and recreational programs for adult inmates where
appropriate.
CSC's Community Corrections facilities are non-secure residential
facilities for adult male and female offenders transitioning from
institutional to independent living. Qualified offenders may spend the last
six months of their sentence in a community corrections program. These
programs assist the offender in the reunification process with family and the
community. Independent research has indicated that successful reunification
can play a key role in recidivism reduction. Recidivism reduction is the
primary goal of any corrections operation. To that end, CSC provides life
skills training, case management, home confinement supervision and family
reunification programs from these facilities. CSC believes that community
correctional facilities help reduce recidivism, result in prison beds being
available for more violent offenders and, in appropriate cases, represent
cost-effective alternatives for jurisdictions to prisons.
JUVENILE. The Juvenile Division operates 32 facilities in 14 states and
Puerto Rico. The addition of the YSI facilities to the combined Company
allowed CSC to expand its juvenile operations into 10 new states and increase
its presence in Florida and Texas. During the year 2000, the combined Company
expanded its operations into Nevada. Contracts with the Florida Department of
Juvenile Justice comprised over 10% of the Company's consolidated revenue in
2000 as did contracts with the Maryland Department of Juvenile Justice. The
Company's facilities house youths aged 10 to 20 and represent a total of
approximately 4,300 beds (excluding aftercare services provided by certain
facilities outside of Georgia). CSC manages secure and non-secure juvenile
offender facilities for low, medium, and high risk youths in highly structured
programs, including military-style boot camps, wilderness programs, secure
education and training centers; including academy programs, high impact
programs servicing lower level or first time offenders and detention
facilities. In addition, the Company also provides non-residential aftercare
programs. The Company provides services for over 600 juveniles in the State
of Georgia as well as for juveniles who have completed residential programs
throughout the Company's system.
CSC believes its programs, by instilling the qualities of self-respect,
respect for others and their property, personal responsibility and family
values, can help reduce the recidivism rate of program participants and
hopefully help to prevent adult incarceration. To that end, CSC's juvenile
programs are comprised of four major components: education; vocational
training; socialization; and recreation. Behavioral management principles
intended to dramatically change the thinking and behavior of program
participants are consistently applied throughout each segment of programming
in order to teach participants basic life skills while reinforcing the
principle that success begins with appropriate, acceptable behavior.
MARKETING AND BUSINESS DEVELOPMENT
CSC engages in extensive marketing and business development on a national
basis and markets selected projects in the international arena. Marketing
efforts are spearheaded by CSC's business development team in conjunction with
CSC's executive officers and outside consultants.
5
CSC receives frequent inquiries from or on behalf of governmental
agencies. Upon receiving such an inquiry, CSC determines whether there is an
existing or future need for CSC's services, whether the legal and political
climate is conducive to privatized correctional operations and whether or not
the project is commercially viable.
CONTRACT AWARD PROCESS
Most governmental procurement and purchasing activities are controlled by
procurement regulations that take the form of a Request for a Proposal
("RFP"), and to date most of CSC's new business has resulted from responding
to these requests. Interested parties submit proposals in response to an RFP
within a time period of 15 to 120 days from the time that the RFP is issued. A
typical RFP requires a bidder to provide detailed information, including the
services to be provided by the bidder, the bidder's experience and
qualifications and the price at which the bidder is willing to provide the
services. From time to time, CSC engages independent consultants to assist in
responding to the RFPs. Approximately six to eighteen months is generally
required from the issuance of the RFP to the contract award.
Before responding to an RFP, CSC researches and evaluates, among other
factors:
the current size and growth projections of the available
correctional and detention population;
whether or not a minimum capacity level is guaranteed;
the willingness of the contracting authority to allow CSC to
house populations of similar classification within the
proposed facility for other governmental agencies; and
the willingness of the contracting authority to allow CSC to
make adjustments in operating activities, such as work force
reductions in the event the actual population is less than the
contracted capacity.
Under the RFP, the bidder may be required to design and construct a new
facility or to redesign and renovate an existing facility at its own cost. In
such event, CSC's ability to obtain the contract award is dependent upon its
ability to obtain the necessary financing or fund such costs internally.
In addition to issuing formal RFPs, governmental agencies may use a
procedure known as Purchase of Services or Requests for Qualification ("RFQ").
In the case of an RFQ, the requesting agency selects a firm it believes is
most qualified to provide the necessary services and then negotiates the terms
of the contract, including the price at which the services are to be provided.
MARKET
Throughout the United States, there is a growing acceptance of
privatization of governmental services. Correctional and detention functions
traditionally performed by federal, state and local governments have faced
continuing pressure to control costs and reduce the number of governmental
employees. Further, despite recent decreases in the overall crime rate,
incarceration costs generally grow faster than many other parts of budget
items. In an attempt to address these pressures, governmental agencies
responsible for correctional and detention facilities are privatizing
facilities.
An estimated 1.9 million inmates are held in the nation's prisons and
local jails due to sentencing guidelines and the increased popularity of "3
strikes" laws. In recent years, both state and federal prisons have had
serious overcrowding issues. According to the Department of Justice, the
prison population rose an estimated 1,585 new inmates per week from 1990
through midyear 2000. During that same period, growth in female
representation in the adult inmate population has grown 110% compared to 77%
for men.
In addition to the current growth in the adult corrections population,
over the next several years, the number of juveniles approaching crime-
committing age is expected to increase significantly. The Company expects
that as juvenile crime continues to receive increasing levels of visibility,
the need for services for troubled youth will increase.
6
COMPETITION
CSC competes on the basis of cost, quality and range of services offered,
its experience in managing facilities, the reputation of its personnel and its
ability to design, finance and construct new facilities. Some of CSC's
competitors have greater resources than CSC. CSC also competes in some markets
with local companies that may have a better understanding of local conditions
and a better ability to gain political and public acceptance. In addition,
CSC's Community Corrections and Juvenile operations compete with governmental
and not-for-profit entities. CSC's main competitors include but are not
limited to Corrections Corporation of America, Wackenhut Corrections
Corporation, and Cornell Corrections.
FACILITIES
CSC operates adult and juvenile pre-disposition and post-disposition
secure and non-secure correctional and detention facilities and non-secure
community correctional facilities for federal, state and local correctional
agencies. Pre-disposition secure detention facilities provide secure
residential detention for individuals awaiting trial and/or the outcome of
judicial proceedings, and for aliens awaiting deportation or the disposition
of deportation hearings. Post-disposition secure facilities provide secure
incarceration for individuals who have been found guilty of a crime by a court
of law. CSC operates six types of post-disposition facilities: 1) secure
prisons (adult); 2) intermediate sanction facilities (adult); 3) high impact
programs (juvenile); 4) academies (juvenile); 5) military-style boot camps
(juvenile); 6) secure treatment and training facilities (adult and juvenile);
and 7) sexually delinquent juveniles (juvenile).
Secure prisons and intermediate sanction facilities provide secure
correctional services for individuals who have been found guilty of one or
more offenses. Offenders placed in intermediate sanction facilities are
typically persons who have committed a technical violation of their parole
conditions, but whose offense history or current offense does not warrant
incarceration in a prison. Both types of facilities offer vocational
training, substance abuse treatment and offense specific treatment. High
impact programs provide residential placement for juveniles who are either
first time offenders or who were unable to meet the terms of a non-residential
placement. High impact programs are generally short term with stays of 30 to
90 days, but involve all of the rehabilitative elements of an academy program.
Academies are secure facilities that range from hardware secure to staff
secure. These facilities typically service juveniles who are repeat offenders
and/or violent crime offenders. The academies emphasize rehabilitative
programming, including education, recreation and vocational training. Boot
camps provide intensely structured and regimented residential correctional
services which emphasize disciplined activities modeled after the training
principles of military boot camps and stress physical challenges, fitness,
discipline and personal appearance. Secure treatment and training facilities,
including specialized sex offender programs, provide numerous services
designed to reduce recidivism including: educational and vocational training,
life skills, anger control management, and substance abuse counseling and
treatment. Juvenile sex offender programs are generally locked secure and
involve a length of stay from 12 to 24 months.
CSC also operates non-secure residential and non-residential community
corrections programs. Non-secure residential facilities, known as halfway
houses, provide residential correctional services for offenders in need of
less supervision and monitoring than are provided in a secure environment.
Offenders in community corrections facilities are typically allowed to leave
the facility to work in the immediate community and/or participate in
community-based educational and vocational training programs during daytime
hours. Generally, persons in community correctional facilities are serving the
last six months of their sentence. Non-residential programs permit the
offender to reside at home or in some other approved setting under supervision
and monitoring by CSC. Supervision may take the form of either requiring the
offender to report to a correctional facility a specified number of times each
week and/or having CSC employees monitor the offender on a case management
basis at his/her work site and home. In the juvenile division, the non-
residential programs take the form of aftercare programs. Unlike the adult
division where a non-residential supervision program may replace the last part
of an adult's residential supervision, in the juvenile division counterpart,
the aftercare program is strictly post release. The goal of these programs,
like adult community corrections, is to assist the juvenile in effecting a
positive return to their families and communities. Aftercare programs
provide the contact, supervision and support that is needed to further instill
the principles learned by the juvenile during the longer residential program.
7
ADULT DIVISION
The following information is provided with respect to the facilities for
which CSC had management contracts as of March 26, 2001:
Facility Name, Design Contracting Owned,
Location and Year Capacity Governmental Leased, Or
Operations Commenced Beds(1) Type of Facility Agency Managed(2)
-------------------- ------- ---------------- ------------ ----------
Arizona State Prison, Florence 600 Prison State Owned
Florence, Arizona (1997)
Arizona State Prison, Phoenix West 400 Prison State Owned
Phoenix, Arizona (1996)
Bronx Community Corrections Center 60 Residential Community Federal Bureau Leased
Bronx, New York (1996) Correctional Facility of Prisons
Brooklyn Community Correctional 500 Residential Community Federal Bureau Leased
Center Correctional Facility of Prisons
Brooklyn, New York (1989)
Dickens County Correctional Center 489 Long Term Detention State Leased
Spur, Texas (1998)
Fort Worth Community Corrections 200 Residential State Leased
Center Correctional Facility
Fort Worth, Texas (1994)
Frio County Jail 391 Jail/Long Term County/State/Federal Part-Leased/
Pearsall, Texas (1997) Detention Part-Owned
Grenada County Jail 160 Jail County Managed
Grenada, Mississippi (1998)
Jefferson County Downtown Jail 500 Jail/Long Term County/State Managed
Beaumont, Texas (1998)
Newton County Correctional Facility 872 Prison State/Federal Managed
Newton, Texas (1998)
Salinas Treatment Center 144 Secure Treatment Commonwealth of Leased
Salinas, Puerto Rico (2000)(3) Facility Puerto Rico
Seattle INS Detention Center 150 Secure Detention INS Managed
Seattle, Washington (1989) Facility
South Texas Intermediate Sanction 450 Secure Intermediate State Managed
Facility Sanction Facility
Houston, Texas (1993)
Tarrant County Community 230 Secure Intermediate County Managed
Correctional Facility(4) Sanction Facility
Mansfield, Texas (1992)
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8
(1) Design capacity is based on the physical space available presently, or
licensure for offender or residential beds in compliance with relevant
regulations and contract requirements. In certain cases, the management
contract for a facility provides for a lower number of beds.
(2) A managed facility is a facility for which CSC provides management
services pursuant to a management contract with the applicable
governmental agency but, unlike a leased or owned facility, CSC has no
property interest in the facility.
(3) The status of the Company's Agreement with the Commonwealth of Puerto
Rico is uncertain. Originally, the Company was contracted by the
government of Puerto Rico to design and build a juvenile facility.
However, in November of 2000, the Puerto Rican government entered into
an agreement with the Company for an adult facility at that location.
Since that time, the new government of Puerto Rico has questioned
the enforceability of the contract and the Company has initiated
litigation to enforce it. Negotiations with the government are ongoing,
however, the Company cannot predict the outcome of the litigation or
collateral negotiations.
(4) This facility is listed both as part of CSC's Adult Division and its
Juvenile Division as the facility houses both adult and juvenile
offenders.
JUVENILE DIVISION
Facility Name, Design Contracting Owned,
Location and Year Capacity Governmental Leased, Or
Operations Commenced Beds(1) Type of Facility Agency Managed(2)
-------------------- ------- ---------------- ------------ ----------
Bartow Youth Training Center 74 Secure & Residential State Managed
Bartow, Florida (1995) Treatment Facility
Bayamon Treatment Center 141 Secure Treatment Commonwealth of Managed
Bayamon, Puerto Rico (1998) Facility Puerto Rico
Bell County Youth Training Center 96 Secure Detention County Managed
Killeen, Texas (1997) Facility
Bill Clayton Detention Center 152 Secure Treatment State Managed
Littlefield, Texas (2000) Facility
Chamberlain Academy 78 Non Secure Multi-State/ Owned
Chamberlain, South Dakota (1993) Academy Facility Federal
Chanute Transition Center 56 Non Secure Transition State Subleased
Rantoul, IL (1998)(3) Facility
Charles Hickey School 355 Secure Academy/High State Managed
Baltimore, Maryland(1993) Impact/Detention and
Sex Offender Facility
Colorado County Boot Camp 100 Secure Detention Multi-County/ Part Owned/
Eagle Lake, Texas (1998) Facility State Part Managed
Cypress Creek Academy 100 Secure Academy State Managed
Lecanto, Florida (1997) Facility
Dallas County Secure Post 96 Secure Treatment County Managed
Adjudication Facility Facility
Dallas, Texas (1998)
Dallas Youth Academy 96 Secure Treatment County Managed
Dallas, Texas (1998) Facility
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Elmore Academy 150 Non Secure Academy Multi-State Owned
Elmore, Minnesota (1998) Facility
Forest Ridge Youth Services 140 Non Secure Female Multi-State Owned
Wallingford, Iowa (1993) Academy Facility
Genesis Treatment Agency 75 Secure Sexual City/ Owned
Newport News, Virginia (1997) Delinquent Juveniles Multi-County
Treatment Facility
Hemphill County Juvenile 100 Secure Boot Camp County Leased
Detention Center Facility
Canadian, Texas (1994)
Hillsborough Academy 25 Secure Sexual Offender State Managed
Tampa, Florida (1997) Facility
Hondo Detention Center 15 Secure Detention County Managed
Hondo, Texas (1998)(4) Facility
JoAnn Bridges Academy 30 Secure Female State Managed
Greenville, Florida (1998) Academy Facility
Judge Roger Hashem Juvenile 64 Secure Detention Multi-County/ Managed
Justice Center Facility State
Rockdale, Texas (1997)
Keweenaw Academy 150 Non Secure Academy State Subleased
Mohawk, Michigan (1997) Facility
Lockhart Boot Camp 38 Secure Boot Camp Multi-County Leased
Lockhart, Texas (1998) Detention
Facility
Okaloosa County Juvenile 64 Secure Treatment State Managed
Residential Facility Facility
Okaloosa, Florida (1998)
Paulding Regional Youth 126 Secure Detention State Managed
Detention Center Facility
Paulding, Georgia (1999)
Polk City Youth Training 350 Secure Treatment State Managed
Center Facility
Polk City, Florida (1997)
Reflections Treatment Agency 52 Secure Sexual Offender State Leased
Knoxville, Tennessee (1992) Facility
Snowden Cottage Academy 18 Non Secure Academy State Managed
Wilmington, Delaware (1997) Facility
Springfield Academy 108 Non Secure Academy State/Federal Owned
Springfield, South Dakota (1993) Facility
10
Summit View Youth Facility 96 Secure Treatment State Managed
Las Vegas, Nevada (2000) Facility
Tarkio Academy 302 Secure Academy Multi-State Subleased
Tarkio, Missouri (1994) Sexual Offender
Facility
Tarrant County Community 120 Secure Boot Camp County Managed
Correctional Center Facility
Mansfield, Texas (1992)(5)
Texarkana Boot Camp 124 Secure Boot Camp Multi-County/ Leased
Texarkana, Texas (1998) Detention State
Facility
Victor Cullen Academy 225 Secure Academy State Managed
Sabillasville, Maryland (1992) Facility
___________________
(1) Design capacity is based on the physical space available presently, or
licensure for offender or residential beds in compliance with relevant
regulations and contract requirements. In certain cases, the management
contract for a facility provides for a lower number of beds.
(2) A managed facility is a facility for which CSC provides management
services pursuant to a management contract with the applicable
governmental agency but, unlike a leased or owned facility, CSC has no
property interest in the facility.
(3) The Company's contract with the State will terminate March 31, 2001. At
this time, the Company anticipates that it will then contract with other
agencies for use of the Facility or sublease the bulding.
(4) Operations will discontinue effective March 31, 2001.
(5) This facility is listed both as part of CSC's Adult Division and its
Juvenile Division as the facility houses both adult and juvenile
offenders.
FACILITY CHANGES DURING THE YEAR 2000
During 2000, the Company discontinued its operations of the following
adult facilities:
1) Crowley County Correctional Facility;
2) Central Oklahoma Correctional Facility;
3) South Fulton Municipal Jail;
4) Manhattan Community Corrections Facility;
5) LeMarquis Community Corrections Facility; and
6) McKinley County Jail
The Company discontinued its operations of the following juvenile
facilities during that same time period:
1) Camp Washington;
2) Everglades Academy;
3) Pompano Academy;
4) Woodward Academy; and
5) Cotulla County Boot Camp
The Company began operations at the following facilities:
1) Bill Clayton Detention Center and
2) Summit View Youth Correctional Facility.
11
FACILITY MANAGEMENT CONTRACTS
CSC is primarily compensated on the basis of the population in each of
its facilities on a fixed rate per inmate per day; however, some contracts
have a minimum revenue guarantee. Invoices are generally sent on a monthly
basis detailing the population for the prior month. Occupancy rates for
facilities tend to be low when first opened or when expansions are first
available. However, after a facility passes the start-up period, typically 3
months, the occupancy rate tends to stabilize.
CSC is required by its contracts to maintain certain levels of insurance
coverage for general liability, workers' compensation, vehicle liability and
property loss or damage. CSC is also required to indemnify the contracting
agencies for claims and costs arising out of CSC's operations and in certain
cases, to maintain performance bonds.
As is standard in the industry, CSC's contracts are short term in nature,
generally ranging from one to three years and contain multiple renewal
options. Most facility contracts also generally contain clauses that allow the
governmental agency to terminate a contract with or without cause, and are
subject to legislative appropriation of funds.
OPERATING PROCEDURES
CSC is responsible for the overall operation of each facility under its
management, including staff recruitment, general administration of the
facility, security of inmates and employees, supervision of the offenders and
facility maintenance. CSC, either directly or through subcontractors, also
provides health care, including medical, dental and psychiatric services and
food service.
CSC's contracts generally require CSC to operate each facility in
accordance with all applicable local, state and federal laws, and rules and
regulations. In addition, adult facilities are generally required to adhere
to the guidelines of the American Correctional Association ("ACA"). The ACA
standards, designed to safeguard the life, health and safety of offenders and
personnel, describe specific objectives with respect to administration,
personnel and staff training, security, medical and health care, food service,
inmate supervision and physical plant requirements. CSC believes the benefits
of operating its facilities in accordance with ACA standards include improved
management, better defense against lawsuits by offenders alleging violations
of civil rights, a more humane environment for personnel and offenders and
measurable criteria for upgrading programs, personnel and the physical plant
on a continuous basis. Several of our facilities are fully accredited by the
ACA and certain other facilities currently are being reviewed for
accreditation. It is the Company's goal to obtain and maintain ACA
accreditation for all of its adult facilities, and for its juvenile facilities
when applicable.
FACILITY DESIGN AND CONSTRUCTION
In addition to its facility management services, CSC also consults with
various governmental entities to design and construct new correctional and
detention facilities and renovate older facilities to provide enhanced
services to the population. CSC manages all of the facilities it has designed
and constructed or redesigned and renovated.
Pursuant to CSC's design, construction and management contracts, it is
responsible for overall project development and completion. Typically, CSC
develops the conceptual design for a project, then hires architects, engineers
and construction companies to complete the development. When designing a
particular facility, CSC utilizes, with appropriate modifications, prototype
designs CSC has used in developing other projects. Management of CSC believes
that the use of such prototype designs allows it to reduce cost overruns and
construction delays.
EMPLOYEES
At March 26, 2001, CSC had approximately 4,200 employees, consisting of
clerical and administrative personnel, security personnel, food service
personnel and facility administrators.
Each of CSC's facilities is led by an experienced facility administrator
or executive director. Other facility personnel include administrative,
security, medical, food service, counseling, classification and educational
12
and vocational training personnel. CSC conducts background screening checks
and drug testing on potential facility employees. Some of the services
rendered at certain facilities, such as medical services, education or food
service are provided by third-party contractors.
EMPLOYEE TRAINING
All jurisdictions require corrections officers and youth workers to
complete a specified amount of training. Generally, CSC employees must undergo
at least 160 hours of paid training before being allowed to work in a position
that will bring them in contact with offenders or detainees. This training
consists of approximately 40 hours relating to CSC policies, operational
procedures, management philosophy and ethics and compliance training and 120
hours relating to legal issues, rights of offenders and detainees, techniques
of communication and supervision, improvement of interpersonal skills and job
training relating to the specific tasks to be held. The Company believes that
its training programs meet or exceed the applicable licensing requirements.
INSURANCE
Each management contract with a governmental agency requires CSC to
maintain certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability and property loss or damage and to indemnify
the contracting agency for claims and costs arising out of CSC's operations.
CSC maintains general liability insurance in the amount of $5,000,000 and
an umbrella policy in the amount of $25,000,000, covering itself and each of
its subsidiaries. There can be no assurance that the aggregate amount and
kinds of CSC's insurance are adequate to cover all risks it may incur or that
insurance will be available in the future.
In addition, CSC is unable to secure insurance for some unique business
risks which may include, but not be limited to, riot and civil commotion, the
acts of an escaped offender, and potentially some types of punitive damages.
REGULATION
Generally, providers of correctional services must comply with a variety
of applicable federal, state and local regulations, including educational,
health care and safety regulations administered by a variety of regulatory
authorities. Management contracts frequently include extensive reporting
requirements. In addition, many federal, state and local governments are
required to follow competitive bidding procedures before awarding a contract.
Certain jurisdictions may also require the successful bidder to award
subcontracts on a competitive bid basis and to subcontract to varying degrees
with businesses owned by women or minorities.
Item 2. Properties.
----------
The Company leases office space for its corporate headquarters in
Sarasota, Florida. Additionally, the Company leases office space for a
regional office in New York, New York.
The Company also leases the space for the following facilities it
manages: Lockhart Boot Camp, Hemphill County Juvenile Detention Center,
Reflections Treatment Agency, Tarkio Academy, Keweenaw Academy, Chanute
Transition Center, Texarkana Boot Camp, Frio County Jail, Brooklyn Community
Correctional Center, Bronx Community Correctional Center, Fort Worth Community
Corrections Center, Salinas Treatment Center and Dickens County Correctional
Center.
The Company owns its facilities located in Florence, Arizona; Phoenix,
Arizona; Chamberlain, South Dakota; Springfield, South Dakota; Elmore,
Minnesota; portions of the Frio County, Texas facility; Forest Ridge, Iowa;
portions of Eagle Lake, Texas expansion; and Newport News, Virginia.
13
Item 3. Legal Proceedings.
-----------------
The nature of CSC's business results in numerous claims or litigation
against CSC for damages arising from the conduct of its employees or others.
Under the federal securities law and applicable SEC regulations, CSC is
obligated to disclose lawsuits which involve a claim for damages in excess of
10% of its current assets notwithstanding CSC's belief as to the merit of the
lawsuit and the existence of adequate insurance coverage.
In March 1996, former inmates at one of CSC's facilities filed suit in
the Supreme Court of the State of New York, County of Bronx on behalf of
themselves and others similarly situated, alleging personal injuries and
property damage purportedly caused by negligence and intentional acts of CSC
and claiming $500,000,000 for each compensatory and punitive damages, which
suit was transferred to the United States District Court, Southern District of
New York, in April 1996. In July 1996, seven detainees at one of CSC's
facilities, and certain of their spouses, filed suit in the Superior Court of
New Jersey, County of Union, seeking $10,000,000 each in damages arising from
alleged mistreatment of the detainees, which suit was transferred to the
United States District Court, District of New Jersey, in August 1996. In July
1997 former detainees of CSC's Elizabeth, New Jersey Facility filed suit in
the United States District Court for the District of New Jersey. The suit
claims violations of civil rights, personal injury and property damage
allegedly caused by the negligent and intentional acts of CSC. No monetary
damages have been stated. Through stipulation, all these actions will now be
heard in the United States District Court for the District of New Jersey.
This will streamline the discovery process, minimize costs and avoid
inconsistent rulings.
CSC believes the claims made in each of the foregoing actions to be
without merit and will vigorously defend such actions. CSC further believes
the outcome of these actions and all other current legal proceedings to which
it is a party will not have a material adverse effect upon its results of
operations, financial condition or liquidity. However, there is an inherent
risk in any litigation and a decision adverse to CSC could be rendered.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
The 2000 Annual Meeting of Stockholders of Correctional Services
Corporation was held on October 3, 2000.
At the meeting, two (2) proposals were considered and voted upon with the
following results:
(1) To elect seven (7) directors to serve until the next annual meeting
of stockholders;
Results:
VOTES CAST VOTES CAST BROKER
NAME IN FAVOR AGAINST ABSTAIN NON VOTES
---- ---------- ---------- ------- ---------
Stuart M. Gerson 8,929,754 540,640 0 0
Shimmie Horn 8,929,884 540,510 0 0
James F. Slattery 8,929,884 540,510 0 0
Aaron Speisman 8,929,871 540,523 0 0
Richard P. Staley 8,929,767 540,627 0 0
Melvin T. Stith 8,929,841 540,523 0 0
Bobbie L. Huskey 8,929,767 540,627 0 0
(2) To ratify the reappointment of Grant Thornton, LLP as Independent
Auditors of the Company for the year ending December 31, 2000.
Results:
NUMBER OF VOTES NUMBER OF VOTES
CAST IN FAVOR CAST AGAINST ABSTAIN
------------- ------------ -------
9,277,747 173,679 18,968
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
-------------------------------------------------------------
The common stock of CSC is traded on the Nasdaq National Market. Such
quotations represent inter-dealer prices without retail markup, markdown or
commission, and may not necessarily represent actual transactions. The
following table sets forth, for the calendar quarters indicated, the high and
low sale prices per share on the Nasdaq National Market, based on published
financial sources.
CSC Common Stock
Sale Price
----------------
High Low
---- ---
1999
First Quarter 15 3/4 10 3/16
Second Quarter 16 7/8 12 1/2
Third Quarter 15 1/2 8 7/8
Fourth Quarter 14 1/4 6 3/4
2000
First Quarter 5 1/4 3 3/4
Second Quarter 5 7/8 2 25/32
Third Quarter 5 3 1/8
Fourth Quarter 3 7/8 1 5/8
On December 31, 2000, there were 199 holders of record and approximately
4,275 beneficial shareholders registered in nominee and street name. The
Company has paid no cash dividends in the past two years.
15
Item 6. Selected Financial Data.
-----------------------
The information below is only a summary and should be read in conjunction
with Correctional Services Corporation's historical financial statements and
related notes (in thousands except per share data).
Year Ended December 31,
2000 1999 1998(1) 1997 1996
---- ---- ------- ---- ----
Revenues $210,812 $233,918 $188,454 $175,933 $ 99,349
Operating expenses 185,447 205,662 166,443 149,389 75,710
Startup costs (1) 155 1,177 8,171 211 -
General and administrative 13,670 13,899 21,119 18,167 16,519
Merger costs and related
restructuring charges - 12,052 1,109 - -
Loss on sale of behavioral health - - - 20,898
Other operating (income) expenses (1,115) 1,874 2,327 - 3,329
Operating income (loss) 12,655 (746) (10,715) (12,732) 3,791
Interest expense, net (3,157) (3,069) (2,611) (2,381) (3,317)
--------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary gain on
extinguishment of debt and
cumulative of change in
accounting 9,498 (3,815) (13,326) (15,113) 474
Income tax (provision) benefit (3,710) (429) 1,593 1,062 (323)
Income (loss) before extraordinary
gain on extinguishment of debt
and cumulative effect of change
in accounting principle 5,788 (4,244) (11,733) (14,051) 151
Extraordinary gain on extinguishment
of debt, net of tax of $467 - 716 - - -
Cumulative effect of change in
accounting, net of tax of $3,180 - - (4,863) - -
-------- -------- -------- -------- --------
Net earnings (loss) $ 5,788 $ (3,528) $(16,596) $(14,051) $ 151
======== ======== ======== ======== ========
Net earnings (loss) per share:
Basic $ 0.51 $ (0.31) $ (1.53) $ (1.32) $ 0.02
Diluted $ 0.51 $ (0.31) $ (1.53) $ (1.32) $ 0.01
Balance Sheet Data:
Working capital $ 18,831 $ 22,281 $ 23,167 $ 29,663 $ 36,355
Total assets 96,775 111,198 125,314 120,750 143,393
Long-term debt, net of current
portion 16,338 33,497 44,288 33,379 38,633
Shareholders' equity 53,738 50,738 51,006 65,503 71,818
___________________
(1) The 1998 amounts include the effect of the adoption of the AICPA
Statement of Position 98-5, Accounting for Startup Costs. (See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations.")
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
--------------------------------------------------------------------
GENERAL
The Company is one of the largest and most comprehensive providers of
juvenile rehabilitative services with 32 facilities and approximately 4,300
juveniles in its care. In addition, the Company is a leading developer and
operator of adult correctional facilities operating 13 facilities representing
approximately 4,700 beds. On a combined basis, as of December 31, 2000, the
Company provided services in 18 states and Puerto Rico, representing
approximately 9,000 beds including aftercare services.
The Company's primary source of revenue is generated from the operation
of its facilities pursuant to contracts with federal, state and local
governmental agencies, and management agreements with third parties that
contract directly with governmental agencies. Generally, the Company's
contracts are based on a daily rate per resident, some of which have
guaranteed minimum payments; others provide for fixed monthly payments
irrespective of the number of residents housed. In addition, the Company
receives revenue for educational and aftercare services. The Company
recognizes revenue at the time the Company performs the services pursuant to
its contracts.
The Company typically pays all facility operating expenses, except for
rent or lease payments in the case of certain government-provided facilities
or for facilities for which the Company has only a management contract.
Operating expenses are principally comprised of costs directly attributable to
the management of the facility and care of the residents, which include
salaries and benefits of administrative and direct supervision personnel,
food, clothing, medical services and personal hygiene supplies. Other
operating expenses are comprised of fixed costs, which consist of rent and
lease payments, utilities, insurance, depreciation and professional fees.
The Company also incurs costs as it relates to the start-up of new
facilities. Such costs are principally comprised of expenses associated with
the recruitment, hiring and training of staff, travel of personnel, certain
legal costs and other costs incurred after a contract has been awarded.
Contribution from operations consists of revenues minus operating
expenses and start-up costs. Contribution from operations, in general, is
lower in the initial stages of a facility's operations. This is due to the
need to incur a significant portion of the facility's operating expenses while
the facility is in the process of attaining full occupancy.
General and administrative costs primarily consist of salaries and
benefits of non-facility based personnel, insurance, professional fees, rent
and utilities associated with the operation of the Company's corporate
offices. In addition, general and administrative costs consist of development
costs principally comprised of travel, proposal development, legal fees, and
various consulting and other fees incurred prior to the award of a contract.
17
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a
percentage of total revenues:
Percentage of Total Revenues
----------------------------
Years Ended December 31,
------------------------
2000 1999 1998
Revenues 100.0% 100.0% 100.0%
------ ------ ------
Facility expenses:
Operating 88.0 87.9 88.4
Startup costs 0.0 0.5 4.3
------ ------ ------
Contribution from operations 12.0 11.6 7.3
Other operating expenses:
General and administrative 6.5 5.9 11.2
College Station closure costs - - 1.2
Merger costs and related restructuring charges - 5.2 0.6
Gain on sale of assets (0.5) - -
Write-off of deferred financing costs - 0.8 -
Operating income (loss) 6.0 (0.3) (5.7)
Interest expense, net (1.5) (1.3) (1.4)
------ ------ ------
Income (loss) before income taxes, extraordinary gain
on extinguishment of debt and cumulative effect
of change in accounting principle 4.5 (1.6) (7.1)
Income tax (provision) benefit (1.8) (0.2) 0.9
------ ------ ------
Gain (loss) before extraordinary gain on extinguishment
of debt and cumulative effect of change
in accounting principle 2.7 (1.8) (6.2)
Extraordinary gain on extinguishment of debt, net of tax - 0.3 -
Cumulative effect of change in accounting principle - - (2.6)
------ ------ ------
Net income (loss) 2.7% (1.5)% (8.8)%
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue decreased by $23.1 million or 9.9% for the year ended December
31, 2000 to $210.8 million compared to the same period in 1999. The decrease
was primarily due to:
An increase of $1.3 million generated from the opening of 2
juvenile facilities (248 beds).
A net increase of $8.6 million generated from per diem rate and
net occupancy level increases in existing facilities.
A decrease of $33.0 million from the discontinuance of 16
programs (911 beds in 7 facilities discontinued in 2000, and
1,713 beds in 9 facilities discontinued in 1999.)
Operating expenses decreased $20.2 million or 9.8% for the year ended
December 31, 2000 to $185.4 million compared to the same period in 1999
primarily due to the closing of the 16 facilities mentioned above.
As a percentage of revenues, operating expenses remained relatively
constant, increasing to 88.0% for the twelve months ended December 31, 2000
from 87.9% for the twelve months ended December 31, 1999. Other factors
impacting operating expenses were increased labor, insurance and utility
costs.
Startup costs were $155,000 for the twelve months ended December 31, 2000
compared to $1.2 million for the twelve months ended December 31, 1999.
Startup costs for the twelve months ended December 31, 2000 were incurred
18
related to the Salinas, Puerto Rico (144 beds) and Las Vegas, Nevada (96 beds)
facilities. Startup for the twelve months ended December 31, 1999, related to
the startup of the South Fulton, Georgia facility (288 beds), 300-bed
expansion of the Crowley, Colorado facility and the 45 bed expansion of the
Bayamon, Puerto Rico treatment facility
General and administrative expenses decreased to $13.7 million for the
twelve months ended December 31, 2000 from $13.9 million for the twelve months
ended December 31, 1999. The decrease of $229,000 in general and
administrative expenses was primarily attributable to:
Lower costs associated with the full effect of the YSI merger
and a lower level of operations, primarily offset by a $927,000
increase in the reserve recorded against accounts receivable,
including $700,000 reserved against a receivable from a not-for-profit
entity.
As a percentage of revenues, general and administrative expenses
increased to 6.5% for the twelve months ended December 31, 2000 from 5.9% for
the twelve months ended December 31, 1999. The increase in general and
administrative expenses as a percentage of revenue is a result of the items
noted above and the decrease in revenues related to the discontinued
operations at the facilities noted above.
During the first quarter of 1999, the Company recorded merger costs and
related restructuring charges of approximately $12.1 million ($9.2 million,
after taxes or $0.82 per share) for direct costs related to the merger with
YSI and certain other costs resulting from the restructuring of the newly
combined operations. Direct merger costs consisted primarily of fees to
investment bankers, attorneys, accountants, financial advisors and printing
and other direct costs. Restructuring charges included severance and change
in control payments made to certain former officers and employees of YSI;
losses associated with the write-off of the carrying value of the software
used by YSI, which will not be used by the Company and computer equipment that
is incompatible with that used by the Company; and miscellaneous other costs
which included the cancellation of lease agreements and other long-term
commitments.
In September 1999, the Company wrote off $1.9 million of unamortized
deferred financing costs associated with the Company's previously established
credit facility, which was repaid in full on September 1, 1999.
The Company recognized a gain on the sale of assets of $1.1 million
during the year-ended December 31, 2000 primarily related to the
discontinuance of operations at the Crowley, Colorado and McLoud, Oklahoma
facilities, and the sale of undeveloped land in Pacific, Washington. These
gains were partially offset by the loss on the sale of the Tampa Bay Academy
and the write-off of leasehold improvements due to the closure of the
Manhattan, New York facility.
Interest expense, net of interest income, was $3.2 million for the twelve
months ended December 31, 2000 compared to $3.1 million for the twelve months
ended December 31, 1999, a net increase in interest expense of $88,000. This
increase resulted from a decrease in interest income as the Company used
available funds to repay debt and repurchase common stock and increases in the
Company's borrowing rates during 2000.
For the twelve months ended December 31, 2000, the Company recognized an
income tax provision of $3.7 million compared to an income tax provision of
$429,000 for the twelve months ended December 31, 1999. The provision in 1999
principally arose from nondeductible permanent differences and the recognition
of a valuation allowance for certain deferred tax assets. Additionally,
$467,000 related to the extraordinary gain on extinguishment of debt
associated with the YSI 7% Convertible Debt, was recognized for the twelve
months ended December 31, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue increased by $45.5 million or 24.1% for the year ended December
31, 1999 to $233.9 million compared to the same period in 1998. These
increases were primarily due to:
An increase of $51.1 million generated from the opening of 11
juvenile facilities (1,546 beds) and 7 adult facilities (4,283
beds).
A net increase of $4.7 million generated from per diem rate and
occupancy level increases in existing facilities.
A decrease of $10.3 million from the discontinuance of 7
programs (956 beds.)
19
Operating expenses increased $39.2 million or 23.6% for the year ended
December 31, 1999 to $205.7 million compared to the same period in 1998
primarily due to the opening of the 18 facilities mentioned above.
As a percentage of revenues, operating expenses decreased to 87.9% for
the twelve months ended December 31, 1999 from 88.3% for the twelve months
ended December 31, 1998. Operating costs for the twelve months ended December
31, 1998 were higher as a percentage of revenue than the comparable period in
1999 primarily due to the recording of approximately $6.6 million in charges
consisting of adjustments to accruals and reserves associated with the
collectibility of accounts receivable, recoverability of certain program
expenses and self-insurance of employee medical costs. The decrease in
operating expenses as a percentage of revenue from 1999 to 1998 was partially
offset by an increase in operating expenses from a number of facilities that
were in their early stages of operations during the fourth quarter of 1998 and
the first quarter of 1999 and were experiencing less than optimal utilization
rates. Depending on their cost structure, facilities that are experiencing
less than 85% utilization rates generally incur significantly higher operating
expenses as a percentage of revenue compared to those at or near capacity. A
portion of the decrease was also attributable to lower costs for resident and
operating expenses as a result of the Company's ability to negotiate better
rates due to its increased size after the merger. in addition, operating
costs as a percentage of revenue were reduced due to the implementation of
enhanced financial controls and oversight of the facilities acquired in the
merger.
Startup costs were $1.2 million for the twelve months ended December 31,
1999 compared to $8.2 million for the twelve months ended December 31, 1998.
Startup for the twelve months ended December 31, 1999, related to the startup
of the South Fulton, Georgia facility (288 beds), 300-bed expansion of the
Crowley, Colorado facility and the 45 bed expansion of the Bayamon, Puerto
Rico treatment facility. During the twelve months ended December 31, 1998,
there were fourteen facilities (5,596 beds) generating start up costs.
General and administrative expenses decreased from $21.1 million for the
twelve months ended December 31, 1998 to $13.9 million for the twelve months
ended December 31, 1999. The decrease of $7.2 million in general and
administrative expenses was primarily attributable to:
A $4.9 million reduction of deferred development costs.
A $1.1 million write-off on the fourth quarter of 1998 related
to the buyout of a YSI training contract.
The reduction of the administrative staff of the YSI subsidiary.
The synergies realized from the merger including costs for
insurance, office expenses and travel.
As a percentage of revenues, general and administrative expenses
decreased to 5.9% for the twelve months ended December 31, 1999 from 11.2% for
the twelve months ended December 31, 1998. The decrease in general and
administrative expenses as a percentage of revenue is a result of the items
noted above and leveraging of the remaining costs over a larger revenue base.
The Company recorded a charge of $2.3 million in the twelve months ended
December 31, 1998 relating to anticipated losses in connection with the
College Station program that the Company closed on September 15, 1998.
During the first quarter of 1999, the Company recorded merger costs and
related restructuring charges of approximately $12.1 million ($9.2 million,
after taxes or $0.82 per share) for direct costs related to the merger with
YSI and certain other costs resulting from the restructuring of the newly
combined operations. Direct merger costs consisted primarily of fees to
investment bankers, attorneys, accountants, financial advisors and printing
and other direct costs. Restructuring charges included severance and change
in control payments made to certain former officers and employees of YSI;
losses associated with the write-off of the carrying value of the software
used by YSI, which will not be used by the Company and computer equipment that
is incompatible with that used by the Company; and miscellaneous other costs
which included the cancellation of lease agreements and other long-term
commitments.
The Company incurred $1.1 million in merger related charges during the
twelve months ended December 31, 1998 in connection with the CSC and YSI
merger. In addition, a small portion of the merger charges related to costs
associated with the pooling transaction with CCI which was consummated on June
30, 1998.
20
In September 1999, the Company wrote off $1.9 million of unamortized
deferred financing costs associated with the Company's previously established
credit facility, which was repaid in full on September 1, 1999.
Interest expense, net of interest income, was $3.1 million for the twelve
months ended December 31, 1999 compared to $2.6 million for the twelve months
ended December 31, 1998, a net increase in interest expense of $.5 million.
This increase resulted from borrowings on the Company's credit facility to
finance the growth of the Company.
For the twelve months ended December 31, 1999 the Company recognized an
income tax provision of $429,000 and an income tax provision of $467,000
related to the extraordinary gain on extinguishment of debt associated with
the YSI 7% Convertible Debt. For the twelve months ended December 31, 1998
the Company recognized a benefit for income taxes of $1.6 million and an
income tax benefit of $3.2 million related to the cumulative effect of change
in accounting principle representing an effective tax benefit of 32.4%. The
increase in the effective tax rate was a result of expensing certain merger
costs that are non-deductible for tax purposes.
In September 1999, the Company recorded an extraordinary gain on the
early extinguishment of debt of $716,000 (net of tax of $467,000). In
anticipation of entering into the new financing arrangement, the Company
agreed with certain holders of the 7% Convertible Subordinated Debentures (who
had previously agreed to postpone the redemption of their Debentures until
March 31, 2000) to redeem their Debentures upon the closing of the new credit
facilities. The agreed upon redemption price was equal to 90% of the original
principal amount plus accrued but unpaid interest. In September 1999, the
Company used approximately $14.8 million of its available credit to redeem
$16.3 million face value of Debentures leaving a balance of $14.2 million.
Due to the early adoption of SOP 98-5, for the year ended December 31,
1998 the Company expensed startup and deferred development costs totaling
$11.6 million. In addition, the Company was required to record a cumulative
effect of change in accounting principle of $4.9 million (net of tax of
$3.2 million) retroactively to January 1, 1998 (See Note A of the notes to the
consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through bank
borrowings, private placements, the sale of public securities and cash
generated from operations.
The Company had working capital at December 31, 2000 of $18.8 million
compared to $22.3 million at December 31, 1999. The Company's current ratio
decreased to 1.70 to 1 at December 31, 2000, from 1.83 to 1 at December 31,
1999. The decrease in the current ratio is attributable to cash used to pay
down debt and the purchase of treasury stock, partially offset by other
changes in working capital.
Net cash of $10.0 million was provided by operating activities for the
year ended December 31, 2000 as compared to $6.5 million provided by
operations for the year ended December 31, 1999. The $3.5 million change was
attributed primarily to:
The payment of cash expenses related to the merger of $7.7
million in 1999.
The reduction in accrued liabilities related to a monthly
resident fee that is contractually prepaid, but was paid by
the customer after December 31, 2000.
A decrease in accrued expenses and accounts payable of
approximately $1.8 million during 2000.
The payment of $1.2 million for Federal and State income taxes
in 2000.
Net cash of $326,000 was provided by investing activities during the year
ended December 31, 2000 as compared to $2.8 million being used in the year
ended December 31, 1999. The $3.1 million increase in cash provided was
primarily attributable to proceeds from the sale of assets in 2000.
Net cash of $17.3 million was used in financing activities in the year
ended December 31, 2000 as compared to $4.3 million used in financing
activities in the year ended December 31, 1999. During 2000 the Company's
primary financing activities consisted of:
21
Net repayment of senior debt of $750,000.
Repayment of subordinated debt of $14.2 million.
Repurchase of common stock of $2.8 million.
During 1999 the Company's primary funding activities consisted of:
Proceeds of $3.3 million from the exercise of stock warrants and
options.
Net proceeds from senior debt of $11.9 million.
Redemption of subordinated debt totaling $17.5 million.
Payment of debt issuance costs of $2.4 million.
On August 31, 1999, the Company finalized a financing arrangement with
Summit Bank, N.A, which was amended in November 2000. The amendment to the
Credit Agreement will allow the Company the option of utilizing a percentage
of both: (i) excess cash flow (as defined by the agreement) and (ii) the
proceeds of the sale of certain assets, to repurchase Company stock in
furtherance of the Company's stock repurchase plan (see Treasury Stock below).
Borrowings under the line are subject to compliance with various financial
covenants and borrowing base criteria (which were also amended). The amended
Credit Agreement is effective retroactive to September 30, 2000. The Company
is in compliance with the amended loan covenants as of December 31, 2000.
This financing arrangement is secured by all of the assets of the Company and
consists of the following components:
$25 million (as amended) revolving line of credit to be used by
the Company and its subsidiaries for working capital and general
corporate purposes and to finance the acquisition of facilities,
properties and other businesses. At December 31, 2000 the Company
had $10.0 million outstanding under the revolving line of credit.
$20 million delayed drawdown credit facility which provided the
Company with additional financing to be used to fund the redemption of
the outstanding 7% Convertible Subordinated Debentures due March 31,
2000 that were issued by Youth Services International, Inc., a
subsidiary of the Company (the "Debentures"). At December 31, 2000,
the Company had $12.7 million outstanding on the delayed drawdown
credit facility.
$35 million (as amended) in financing which may be used to purchase
land and property and to finance the construction of new facilities
through an operating lease arrangement. The Company currently has
approximately $24.9 million outstanding under this operating lease
financing facility.
The $25 million revolving line of credit and the $35 million operating
lease financing facility mature on August 31, 2002. They bear a variable rate
of interest on a margin over the prime rate or LIBOR rate. The margin is
determined by the ratio of funded debt to adjusted EBITDA and ranges from 1.0%
to 2.0% for prime rate and from 2.5% to 3.5% for LIBOR rate loans. The
Company has the discretionary ability to elect either prime rate or LIBOR
rate.
The $20 million Delayed Drawdown note matures March 31, 2003. This
credit facility bears interest at 1% over the prime rate with payments of
principal and interest payable quarterly.
The Company's ability to compete for future capital intensive projects
and repurchase stock is dependent upon, among other things, its ability to
meet certain financial covenants included in the Credit Agreement. A
continued decline in the Company's financial performance, as a result of
decreased occupancy or an increase in operational expenses, could negatively
impact the Company's ability to meet these covenants, and could, therefore,
limit the Company's access to capital or ability to repurchase stock.
22
7% CONVERTIBLE SUBORDINATED DEBENTURES
On March 31, 1999, in connection with the merger, the Company assumed
$32.2 million of 7% Convertible Subordinated Debentures Due February 1, 2006
originally issued during the year ended June 30, 1996 by YSI. Due to certain
provisions in the indenture, the change of control as a result of the merger
enabled the holder to demand immediate redemption by the Company. Agreements
were reached with certain holders representing $30.5 million of the total debt
to defer payment until March 31, 2000.
In anticipation of entering into the credit facilities with Summit Bank,
the Company agreed with certain holders of the Debentures (who had previously
agreed to postpone the redemption of their Debentures until March 31, 2000) to
redeem their Debentures upon the closing of the credit facilities at a
redemption price equal to 90% of the original principal amount thereof, plus
accrued but unpaid interest. The Company used approximately $14.8 million of
its available credit under the Delayed Drawdown facility and other resources
to redeem $16.3 million face value of these Debentures. A total of $1.7
million was repaid from working capital during the second quarter of 1999. An
additional $312,000 was paid on the delayed drawdown facility in December
leaving an available balance of $5.6 million at December 31, 1999 to be used
to redeem additional Debentures on or before March 31, 2000.
Substantially all of the remaining $14.2 million in principal amount of
these Debentures was paid on March 31, 2000 at 100% of the original principal
amount. As of December 31, 2000, $10,000 remains outstanding pending receipt
of the original Debentures from the Debenture holders.
TREASURY STOCK
On October 20, 2000, the Company announced that its Board of Directors
had authorized a share repurchase program of up to $10.0 million. The
repurchases are funded from the proceeds of asset sales and excess cash flow.
In conjunction with the stock repurchase plan, the Company renegotiated its
Credit Agreement (see above). The Company repurchased 1.1 million shares
during the quarter ended December 31, 2000.
RISK FACTORS
Investors should carefully consider the following factors that may affect
future results, together with the other information contained in this Annual
Report on Form 10-K, in evaluating the Company before purchasing its
securities. In particular, prospective investors should note that this Annual
Report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and that actual results
could differ materially from those contemplated by such statements. See "Safe
Harbor Statement under the Private Securities Litigation Reform Act of 1995"
on page 3 of this Annual Report on Form 10-K. The factors listed below
represent certain important factors the Company believes could cause such
results to differ. These factors are not intended to represent a complete
list of the general or specific risks that may affect the Company. It should
be recognized that other risks may be significant, presently or in the future,
and the risks set forth below may affect the Company to a greater extend than
indicated.
DECREASES IN OCCUPANCY LEVELS AT OUR FACILITIES OR RISING COSTS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
While the non-personnel cost structures of the facilities we operate are
relatively fixed, a substantial portion of our revenues are generated under
facility management contracts with government agencies that specify a net rate
per day per inmate or a per diem rate, with no minimum guaranteed occupancy
levels. Under this per diem rate structure, a decrease in occupancy levels may
have a material adverse effect on our financial condition, results of
operations and liquidity. We are each dependent upon the governmental agencies
with which we have management contracts to provide inmates for, and maintain
the occupancy level of, our managed facilities. We cannot control those
occupancy levels. In addition, our ability to estimate and control our costs
with respect to all of these contracts is critical to our profitability.
During 2000, the Company experienced a significant decline in the
occupancy levels of certain of its facilities, which has caused its
contributions from operations to decline. Occupancy levels may decline at the
23
Company's facilities in the future and facilities might not reach occupancy
levels required to produce profitability. In addition, personnel expenses are
a material cost of the Company's operation.
THE NON-RENEWAL OR TERMINATION OF OUR FACILITY MANAGEMENT CONTRACTS, WHICH
GENERALLY RANGE FROM ONE TO THREE YEARS, COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS.
As is typical in our industry, our facility management contracts are
short-term, generally ranging from one to three years, with renewal or
extension options as well as termination for convenience clauses in favor of
the contracting governmental agency. Many YSI contracts renew annually. Our
facility management contracts may not be renewed or our customers may
terminate such contracts in accordance with their right to do so. The non-
renewal or termination of any of these contracts could materially adversely
affect our financial condition, results of operations and liquidity, including
our ability to secure new facility management contracts from others. Of the
multi-year contracts in place as of December 31, 2000, seventeen contracts
representing approximately 2,700 beds are up for renewal in 2001.
A contracting governmental agency often has a right to terminate a
facility contract with or without cause by giving us adequate notice. At
times a contracting government agency may notify us that we are not in
compliance with certain provisions of a facility contract. Our failure to cure
any such noncompliance could result in termination of the facility contract,
which could materially adversely affect our financial condition, results of
operations and liquidity. If a governmental agency does not receive necessary
appropriations, it could terminate its contract or reduce the management fee
payable to us. Even if funds are appropriated, delays in payments may occur
which could have a material adverse effect on our financial condition, results
of operations and liquidity. We currently lease many of the facilities that we
manage. If a management contract for a leased facility were terminated, we
would continue to be obligated to make lease payments until the lease expires.
OUR ABILITY TO SECURE NEW CONTRACTS TO DEVELOP AND MANAGE CORRECTIONAL
DETENTION FACILITIES DEPENDS ON MANY FACTORS WE CANNOT CONTROL.
Our growth is generally dependent upon our ability to obtain new contracts
to develop and manage new correctional and detention facilities. This depends
on a number of factors we cannot control, including crime rates and sentencing
patterns in various jurisdictions and acceptance of privatization. Certain
jurisdictions recently have required successful bidders to make a significant
capital investment in connection with the financing of a particular project, a
trend which will require the combined company to have sufficient capital
resources to compete effectively. We may not be able to obtain these capital
resources when needed.
WE FACE RISKS AND UNCERTAINTIES IN EXPANDING OUR OPERATIONS OUTSIDE OF THE
UNITED STATES AND ITS TERRITORIES, INCLUDING NEW AND UNFAMILIAR REGULATORY
REQUIREMENTS, CURRENCY EXCHANGE ISSUES, POLITICAL AND ECONOMIC ISSUES, AND
STAFFING AND MANAGING THESE OPERATIONS.
Our business plan includes the possible expansion of our operations into
markets outside of the United States and its territories. We may not succeed
in entering any of these markets, and if we are successful, we will be subject
to the risks of international operations. These risks include various new and
unfamiliar regulatory requirements, issues relating to currency exchange,
political and economic changes and disruptions, tariffs or other barriers, and
difficulties in staffing and managing foreign operations.
FUTURE ACQUISITIONS MAY INVOLVE SPECIAL RISKS, INCLUDING POSSIBLE ADVERSE
SHORT-TERM EFFECTS ON OUR OPERATING RESULTS, DIVERSION OF MANAGEMENT'S
ATTENTION FROM EXISTING BUSINESS, DEPENDENCE ON KEY PERSONNEL, UNANTICIPATED
LIABILITIES AND COSTS OF AMORTIZATION OF INTANGIBLE ASSETS. ANY OF THESE RISKS
COULD MATERIALLY ADVERSELY AFFECT US.
The Company also intends to grow through selective acquisitions of
companies and individual facilities although there are no current plans or
agreements to acquire any other companies. We may not be able to identify or
acquire any new company or facility and we may not be able to profitably
manage acquired operations. Acquisitions involve a number of special risks,
including possible adverse short-term effects on our operating results,
diversion of management's attention from existing business, dependence on
retaining, hiring and training key personnel, risks associated with
unanticipated liabilities, and the costs of amortization of acquired
intangible assets, any of which could have a material adverse effect on our
financial condition, results of operations and liquidity.
24
PUBLIC RESISTANCE TO PRIVATIZATION OF CORRECTIONAL AND DETENTION FACILITIES
COULD RESULT IN OUR INABILITY TO OBTAIN NEW CONTRACTS OR THE LOSS OF EXISTING
CONTRACTS.
The operation of correctional and detention facilities by private entities
is a relatively new concept and has not achieved complete acceptance by either
governments or the public. The movement toward privatization of correctional
and detention facilities has also encountered resistance from certain groups,
such as labor unions and others that believe that correctional and detention
facility operations should only be conducted by governmental agencies.
Political changes or changes in attitudes toward private correctional and
detention facilities management in any market in which we will operate could
result in significant changes to the previous acceptance of privatization in
such market and the subsequent loss of facility management contracts. Further,
some sectors of the federal government and some state and local governments
are not legally permitted to delegate their traditional operating
responsibilities for correctional and detention facilities to private
companies.
OPPOSITION TO FACILITY LOCATION MAY ADVERSELY IMPACT THE COMPANY'S ABILITY TO
DEVELOP SITES FOR NEW FACILITY LOCATIONS.
The Company's success in opening new facilities is dependent in part upon
its ability to obtain facility sites that can be leased or acquired on
economically favorable terms. Some locations may be in or near populous areas
and, therefore, may generate legal action or other forms of opposition from
residents in areas surrounding a proposed site. Certain facilities are
already located in or adjacent to such areas and, in one instance, the Company
abandoned its plan to expand a facility after consulting with community
leaders who raised concerns about the expansion. There can be no assurance
the Company will be able to open new facilities or expand existing facilities
in any particular location.
ADVERSE PUBLICITY COULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company's business is subject to public scrutiny. An escape, riot or
other disturbance at a Company-managed facility or another privately-managed
facility may result in publicity adverse to the Company and the industry in
which it operates, which could materially adversely affect the Company's
business.
OUR FAILURE TO COMPLY WITH UNIQUE GOVERNMENTAL REGULATION COULD RESULT IN
MATERIAL PENALTIES OR NON-RENEWAL OR TERMINATION OF OUR FACILITY MANAGEMENT
CONTRACTS.
The industry in which we operate is subject to extensive federal, state and
local regulations, including education, health care and safety regulations,
which are administered by many regulatory authorities. Some of the regulations
are unique to our industry, and the combination of regulations we face is
unique. We may not always successfully comply with these regulations, and
failure to comply can result in material penalties or non-renewal or
termination of our facility management contracts. Our contracts typically
include extensive reporting requirements, and supervision and on-site
monitoring by representatives of the contracting governmental agencies.
Corrections officers and youth care workers are customarily required to meet
certain training standards and, in some instances, facility personnel are
required to be licensed and subject to background investigation. Certain
jurisdictions also require us to award subcontracts on a competitive basis or
to subcontract with businesses owned by members of minority groups. Our
businesses also are subject to operational and financial audits by the
governmental agencies with which we have contracts. The outcomes of these
audits could have a material adverse effect on our business, financial
condition or results of operations.
DISTURBANCES AT ONE OR MORE OF OUR FACILITIES COULD RESULT IN CLOSURE OF THESE
FACILITIES BY THE RELEVANT GOVERNMENTAL ENTITIES AND A LOSS OF OUR CONTRACTS
TO MANAGE THESE FACILITIES.
An escape, riot or other disturbance at one of our facilities could have
a material adverse effect on our financial condition, results of operations
and liquidity. Among other things, the adverse publicity generated as a result
any such event could have a material adverse effect on our ability to retain
an existing contract or obtain future ones. In addition, if such an event
occurs, there is a possibility that the facility where the event occurred may
be shut down by the relevant governmental entity. A closure of any of our
facilities could have a material adverse effect on our financial condition,
results of operations and liquidity.
25
INSURANCE COVERAGE MAY BE INADEQUATE OR UNAVAILABLE TO COVER POTENTIAL
LIABILITY RELATED TO MANAGEMENT OF CORRECTIONAL AND DETENTION FACILITIES OR
ITS COSTS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS.
Our management of correctional and detention facilities exposes us to
potential third-party claims or litigation by prisoners or other persons for
personal injury or other damages, including damages resulting from contact
with our facilities, programs, personnel or students (including students who
leave our facilities without our authorization and cause bodily injury or
property damage). Currently, we are subject to actions initiated by former
employees, inmates and detainees alleging assault, sexual harassment, personal
injury, property damage, and other injuries. In addition, our management
contracts generally require us to indemnify the governmental agency against
any damages to which the governmental agency may be subject in connection with
such claims or litigation. We maintain insurance programs that provide
coverage for certain liability risks faced by us, including personal injury,
bodily injury, death or property damage to a third party where we are found to
be negligent. There is no assurance, however, that our insurance will be
adequate to cover potential third-party claims. In addition, we are unable to
secure insurance for some unique business risks including riot and civil
commotion or the acts of an escaped offender.
Committed offenders often seek redress in federal courts pursuant to
federal civil rights statutes for alleged violations of their constitutional
rights caused by the overall condition of their confinement or by specific
conditions or incidents. We may be subject to liability if any such claim or
proceeding is made or instituted against us or the state with which we
contract or subcontract.
The Company continues to incur increased costs for insurance. Workers'
compensation and general liability insurance represent significant costs to
the Company.
STAFF RECRUITMENT DIFFICULTIES MAY IMPACT OPERATIONS.
Many of our facilities are located in areas where there are smaller
populations and/or where there are more jobs than available workers. Our
choice of employees is further limited by our drug free workplace status, and
licensure and other policy prohibitions against hiring individuals with past
criminal histories. However, many of our contracts require the Company to
have certain numbers and certain types of employees on duty at the facility at
all times. Although the Company makes rigorous efforts to recruit and retain
a sufficient work force, it is sometimes unable to achieve adequate staffing
without significant overtime expense. This additional expense may adversely
effect the Company's results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company's current financing is subject to variable rates of interest
and is therefore exposed to fluctuations in interest rates. The Company's
subordinated debt and mortgage on property accrues interest at fixed rates of
interest.
The table below presents the principal amounts, weighted average interest
rates, fair value and other terms, by year of expected maturity, required to
evaluate the expected cash flows and sensitivity to interest rate changes.
Actual maturities may differ because of prepayment rights.
Expected Maturity Dates
-----------------------
There Fair
2001 2002 2003 2004 2005 after Total Value
---- ---- ---- ---- ---- ---- ----- -----
Fixed rate debt
(in thousands) 6,679 6,029 3 3 4 299 13,017 13,017
===== ====== ===== ===== ===== ===== ====== ======
Weighted average Interest
Rate at December 31, 2000 10.49%
======
Variable rate LIBOR
debt (in thousands) - 10,000 - - - - 10,000 10,000
===== ====== ===== ===== ===== ===== ====== ======
Weighted average interest
Rate at December 31, 2000 9.15%
=====
26
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The information required by this item is contained on Pages F-1 through
F-27 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
---------------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
Information Regarding Directors and Officers
The following table sets forth the Directors and Executive Officers
of the Company, together with their respective ages and positions.
Name Age Position with CSC
- ---- --- -----------------
James F. Slattery(1) 51 President, Chief Executive Officer and
Chairman of the Board
Michael C. Garretson 53 Executive Vice President and
Chief Operating Officer
Ira M. Cotler 37 Executive Vice President and
Chief Financial Officer
Aaron Speisman 52 Executive Vice President and Director
Richard P. Staley 69 Senior Vice President and Director
Stuart M. Gerson(1)(2)(3)(4)(5) 57 Director
Shimmie Horn(2) 28 Director
Bobbie L. Huskey(2)(4)(5) 52 Director
Melvin T. Stith(3)(4)(5) 54 Director
(1) Member of the Rights Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Stock Options Committee
(5) Member of the Strategic Alternatives Committee
James F. Slattery co-founded CSC in October 1987 and has been its
President, Chief Executive Officer and a director since CSC's inception and
Chairman since August 1994. Prior to co-founding CSC, Mr. Slattery had been a
managing partner of Merco Properties, Inc., a hotel operation company, Vice
President of Coastal Investment Group, a real estate development company, and
had held several management positions with the Sheraton Hotel Corporation.
Michael C. Garretson joined the Company in August 1994 as its Vice
President of Business Development. In October 1995, he became the Director of
Planning and Economic Development for the City of Jacksonville, Florida and
served in such position until rejoining the Company in January 1996, during
which period he also acted as a consultant to the company. Mr. Garretson was
elected Executive Vice President and Chief Operating Officer in March 1996.
From September 1993 to August 1994, Mr. Garretson was Senior Vice President of
Wackenhut Corrections Corporation and from August 1990 to August 1993 was
Director of Area Development for Euro Disney S.C.A.
Ira M. Cotler was elected Chief Financial Officer in January 1998. He had
served as the Company's Executive Vice President-Finance since joining CSC in
March 1996. Prior to joining the Company, from June 1989 to February 1996, Mr.
Cotler was employed by Janney Montgomery Scott Inc., an investment banking
firm, serving in several capacities, most recently as Vice President of
Corporate Finance.
27
Aaron Speisman co-founded CSC in October 1987 and has been its Executive
Vice President and a director since CSC's inception. From October 1987 to
March 1994, Mr. Speisman also served as Chief Financial Officer of CSC. Since
June 1, 1996, Mr. Speisman has been employed by CSC on a part-time basis.
Richard P. Staley has served as a Director since May 1994. From 1988 to
1998, Mr. Staley was the Company's Senior Vice President of Operations and in
1999 was named Senior Vice President of Strategic Planning. From 1984 to
1987, Mr. Staley was the Evaluation and Compliance Director for Corrections
Corporation of America and, from 1953 to 1983, held various positions with the
United States Department of Justice, Immigration and Naturalization Service.
Mr. Staley is a certified American Correctional Association standards auditor
for jail and detention facilities.
Stuart M. Gerson was elected a director of CSC in June 1994. Since March
1993, Mr. Gerson has been a member of the law firm of Epstein Becker & Green,
P.C. From January 1993 to March 1993, he was acting Attorney General of the
United States. From January 1989 to January 1993, Mr. Gerson was the
Assistant U.S. Attorney General for the Civil Division of the Department of
Justice.
Shimmie Horn was elected a director of CSC in June 1996. Mr. Horn is
President of Iroquois Properties, Inc. a real estate holding company. Mr.
Horn, received a B.A. degree in Economics from Yeshiva College in 1993, and
graduated from the Benjamin Cardozo School of Law in 1996. He is the son of
the late Morris Horn, the former Chairman of the Board and a founder of CSC,
and Esther Horn, a principal stockholder of CSC.
Bobbie L. Huskey was a director of Youth Services International, Inc.,
which was acquired by CSC in March 1999, at which time Ms. Huskey became a
director of the Company. Ms. Huskey has been president of Huskey & Associates
since 1984 and has 29 years in corrections, specializing in juvenile justice
planning, facilities and program development. She has served as a consultant
to more than one-half of the states in the U.S. Ms. Huskey has hands-on
experience in juvenile justice facilities, having worked with delinquent girls
in a treatment facility in Kentucky and has served in executive leadership
positions in corrections in Virginia, Indiana and Chicago. She has held every
elective office in the American Correctional Association, including president,
and was a member of the association's executive committee for 12 years. Ms.
Huskey has authored numerous articles and appeared on national news programs
discussing corrections and juvenile justice issues. She has won national
awards including the E.R. Cass Award for outstanding achievement in the
correctional field.
Melvin T. Stith was elected a director of the Company in November 1994.
Since July 1991, Mr. Stith has been Dean of the Florida State University
College of Business. From December 1989 to July 1991, Mr. Stith was Chairman
of the Marketing Department of the Florida State University College of
Business where he was also a Professor. Mr. Stith is also a director of
Sprint and United Telephone of Florida.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 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 (collectively, the
"Reporting Persons"), to file reports of ownership and changes in ownership
with the Securities and Exchange Commission and to furnish the Company with
copies of these reports. Based solely on the Company's review of the copies
of such forms received by it during the Company's fiscal year ended December
31, 2000, the Company believes that the Reporting Persons complied with all
filing requirements applicable to them.
28
Item 11. Executive Compensation.
----------------------
The following table sets forth a summary of the compensation paid or
accrued by CSC during the three fiscal years ended December 31, 2000, 1999 and
1998 with respect to CSC's Chief Executive Officer and for CSC's executive
officers whose total cash compensation for 2000 exceeded $100,000 (the "Named
Executives"):
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Number of
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Position Year ($) ($) ($)(1) Options (2)
- --------------------------- ---- ------- ----- ------------ ---------- ------------
James F. Slattery 2000 288,744 160,000 4,311 0 29,109
Chairman, Chief 1999 270,000 200,000 11,815 40,000 9,625
Executive Officer 1998 260,519 200,000 11,815 150,000 18,365
and President
Michael Garretson(3) 2000 213,692 0 5,077(3) 0 516
Executive Vice President, 1999 194,307 0 12,000(3) 0 292
Chief Operating Officer 1998 128,814 75,000 12,000(3) 0 292
Ira Cotler 2000 208,461 23,334 6,000 0 76
Executive Vice President, 1999 191,077 82,827 6,000 25,000 67
Chief Financial Officer 1998 141,431 75,000 6,000 0 67
- -----------------
(1) Consists of car lease payments.
(2) Consists of life insurance premiums.
(3) Also includes housing allowance.
29
EMPLOYMENT AGREEMENTS
On September 29, 1999, CSC entered into an employment agreement with its
Chief Executive Officer, James F. Slattery, replacing the existing employment
agreement between the Company and Mr. Slattery dated February 17, 1998. The
new agreement has a term of three years with automatic annual renewal
provisions. Mr. Slattery's minimum annual compensation is $270,000 until
September 29, 2000, thereafter the base compensation will be adjusted through
annual costs of living increases of at least 3.5%. Mr. Slattery also receives
use of an automobile, reimbursement of business expenses, health insurance,
related benefits and a bonus equal to 5% of CSC's pre-tax profits in excess of
$1,000,000, such bonus not to exceed $200,000.
Also, on September 29, 1999, CSC entered into a Change in Control
Agreement with Mr. Slattery which provides for payments of specified benefits
to Mr. Slattery in the event his employment terminates under specified
circumstances following a change in control of CSC. For the purposes of this
agreement, a change in control is deemed to take place whenever:
for any period of two consecutive years beginning on any date
from and after September 29, 1999, if the Board of Directors at any
time during or at the end of such period is not comprised so that a
majority of the directors are either (i) individuals who constitute
the Board of Directors at the beginning of such period or (ii)
individuals who joined the Board during such period who were elected
or nominated for election pursuant to a vote of at least two-thirds of
the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved (but not including, for purposes of (i) or
(ii), a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause
(B) of Subsection 1(b) of the Change in Control Agreement relating to
stockholder approval of a merger, share exchange or consolidation of
the Company);
the stockholders of CSC approve a merger, share exchange or
consolidation of CSC with or into any other corporation wherein
immediately following such merger, the stockholders of CSC prior to
the transaction own less than 51% of the outstanding voting stock of
CSC (if it is the survivor of the transaction) or the surviving
entity; or
the stockholders of CSC approve a plan of complete liquidation
of CSC or an agreement for the sale or disposition by CSC of all or
substantially all CSC's assets.
Benefits made available to Mr. Slattery under the terms of the change in
control agreement in the event that his employment is terminated under the
above specified circumstances may include:
payment of his full base salary through the date of termination
at the rate in effect at the time notice of termination is given, plus
all other amounts and benefits to which Mr. Slattery is entitled under
his employment agreement or pursuant to any plan of CSC in which he is
participating at the time of termination;
a lump sum severance payment equal to the sum of (A) three times
Mr. Slattery's annual base salary and incentive bonus in effect
immediately prior to the occurrence of the change in control and (B)
$1,000,000 as payment for Mr. Slattery's agreement to extend his
agreement not to compete under his employment agreement to four years
following the date of termination;
any deferred compensation allocated or credited to Mr. Slattery
or his account as of the date of termination;
Certain additional payments to cover any excise tax imposed by
Section 4999 of the Internal Revenue Code;
maintenance of life, disability, accident and health insurance
benefits substantially similar to those that Mr. Slattery was
receiving immediately prior to the notice of termination, for the
period beginning on the date of termination and ending on the earlier
of (A) the end of the 36th month after the date of termination or (B)
the date Mr. Slattery becomes eligible for such benefits under any
plan offered by an employer with which he is employed on a full-time
basis; and
All benefits payable to Mr. Slattery under any applicable
retirement, thrift, and incentive plans as well as any other plan or
agreement sponsored by CSC or any of its subsidiaries relating to
retirement benefits.
30
On December 5, 1998 CSC entered into a new three year employment
agreement with Mr. Garretson, which provides for minimum annual
compensation of $200,000, annual salary increases, automobile allowances,
reimbursement of business expenses, health or disability insurance, and
related benefits. The agreement also entitles Mr. Garretson to an annual bonus
of $100,000 in the first year and $110,000, and $120,000 in the second and
third years respectively, provided that the CSC's total bed count at each year
end exceeds certain amounts.
On May 3, 1999, CSC amended the employment agreement with its Chief
Financial Officer, Ira Cotler, dated July 9, 1997 to provide for a term of
three years with automatic annual renewal provisions. Mr. Cotler's minimum
annual compensation is $200,000 until February 26, 2000, $210,000 until
February 26, 2001 and an amount to be renegotiated by the parties, but in no
event less than $210,000 until February 26, 2002. Mr. Cotler also receives
automobile allowances and a bonus equal to four tenths of 1% of CSC's earnings
before interests, taxes, depreciation, amortization and start-up, such bonus
not to exceed $100,000. Mr. Cotler is entitled to terminate his employment
with CSC and to receive in a lump sum payment three times his annual base
salary plus a bonus at the bonus cap ($100,000 per annum or the pro rata
amount) if he is required to relocate to a location not within 50 miles of his
present office, except for required travel on CSC's business to an extent
substantially consistent with his present travel obligations.
Also, on May 3, 1999, CSC entered into a Change in Control Agreement with
Ira Cotler which provides for payments to Mr. Cotler of specified benefits in
the event that his employment terminates under specified circumstances
following a change in control of CSC. The definition of a change in control
is substantially similar to that set forth in Mr. Slattery's change in control
agreement previously described.
Benefits made available to Mr. Cotler under the terms of the change in
control agreement in the event that his employment is terminated under the
above specified circumstances may include:
Payment of his full base salary through the date of termination
at the rate in effect at the time notice of termination is given, plus
all other amounts and benefits to which Mr. Cotler is entitled under
his employment agreement or pursuant to any plan of CSC in which he is
participating at the time of termination;
A lump sum severance payment equal to the sum of (A) 2.99 times
Mr. Cotler's annual base salary in effect immediately prior to the
occurrence of the change in control and (B) $600,000 as payment for
Mr. Cotler's agreement to extend his agreement not to compete under
his employment agreement to three years following the date of
termination;
Any deferred compensation allocated or credited to Mr. Cotler or
his account as of the date of termination, Certain additional payments
to cover any excise tax imposed by Section 4999 of the Internal
Revenue Code;
Maintenance of life, disability, accident and health insurance
benefits substantially similar to those that Mr. Cotler was receiving
immediately prior to the notice of termination, for the period
beginning on the date of termination and ending on the earlier of (A)
the end of the 36th month after the date of termination or (B) the
date Mr. Cotler becomes eligible for such benefits under any plan
offered by an employer with which he is employed on a full-time basis;
and
All benefits payable to Mr. Cotler under any applicable
retirement, thrift, and incentive plans as well as any other plan
or agreement sponsored by CSC or any of its subsidiaries relating to
retirement benefits.
STOCK OPTIONS
The following table sets forth the value of unexercised stock options
held by the Named Executives. No options were exercised by the Named
Executives in 2000:
OPTION VALUES AT DECEMBER 31, 2000
Number Of Shares Underlying Value Of In-The Money Options
Options At Year End At Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------------------- -----------------------------
James F. Slattery 113,334/76,666 $0/$0
Mike Garetson 90,000/0 $0/$0
Ira Cotler 116,667/8,333 $0/$0
31
Item 12. Security Ownership of Certain Beneficial Ownership and
Management.
------------------------------------------------------
The following table sets forth the beneficial ownership of the Common
Stock on December 31, 2000 by (i) each person known by the Company to own
beneficially more than five percent of such shares, (ii) each director, (iii)
each person named in the Summary Compensation Table under "Executive
Compensation" of this Annual Report on Form 10-K, and (iv) all directors and
executive officers as a group, together with their respective percentage
ownership of the outstanding shares:
Number of Acquirable Percent
Name and Address Of Beneficial Owner Shares within 60 Days** Outstanding
- ------------------------------------ --------- ---------------- -----------
Esther Horn(1) 637,175 - 6.2%
James F. Slattery(1) 772,600 113,334 8.6
Aaron Speisman(1) 427,485 13,334 4.3
Jennifer Anna Speisman 1992 Trust(1) 83,438 - *
Joshua Israel Speisman 1992 Trust(1) 83,438 - *
Ira M. Cotler(1) 18,518(2) 108,334 1.2
Richard P. Staley(1) 9,450 15,001 *
Michael C. Garretson(1) - 90,000 *
Stuart Gerson(1) 1,000 42,500 *
Melvin T. Stith(1) - 27,500 *
Shimmie Horn(1) 14,312 22,500 *
Bobbie L. Huskey(1) 1,206 17,500 *
Dimensional Fund Advisors, Inc.(3) 653,387 - 6.4
All officers and directors as a
group (eight persons) 1,411,447 450,003 18.2
- ---------------
* Less than 1%
** Consists of shares issuable upon exercise of options unless otherwise
noted.
(1) Address is c/o Correctional Services Corporation, 1819 Main Street, Suite
1000, Sarasota, Florida 34236.
(2) Includes 2,612 shares of CSC common stock owned by his wife, as to which
he disclaims beneficial ownership.
(3) Address is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. Based
on a Schedule 13G filed with the SEC by Dimensional Fund Advisors, Inc. on
February 2, 2001, Dimensional Fund Advisors, Inc. has sole voting power to
vote or direct the vote for 653,387 shares.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
During the year 2000, the Company subleased a building located at 12-16
East 31st Street, New York, New York from LeMarquis Operating Corp. ("LMOC"),
a corporation owned 25% by Ester Horn and 8% by James F. Slattery. The Company
used the space in the building for the Manhattan and New York Community
Corrections programs. The Company has ceased its operations of these
programs.
LMOC leases this building from an unaffiliated party at a current base
monthly rental of approximately $16,074 (the "Base Rent"), plus taxes,
currently approximately $14,000, and water and sewer charges, currently
approximately $3,500, for a total monthly rental of approximately $33,000.
The Company was able to use as much of the building as it required for its
business subject to the rights of certain residential subtenants to remain in
the building. These rights include the right to housing at a predetermined
rental for an indefinite period of time pursuant to New York State rent
stabilization laws.
32
As a result of the lease negotiations, under a sublease dated as of
January 1, 1994, since May 1, 1995, the Company has paid rent of $18,000 per
month above the rent paid by LMOC to the building's owner for a total monthly
rent of approximately $51,420. The Company has, to date, invested $739,000 in
leasehold improvements and will not receive any credit, in terms of a
reduction in rent or otherwise, for these improvements. The terms of this
sublease were not negotiated at arm's length due to the relationship of Mrs.
Horn and Mr. Slattery with both the Company and LMOC.
The negotiation of the sublease, including the renewal terms, was requested by
the Representative of the Underwriters of the Company's February 2, 1994
initial public offering to substantially track the renewal terms of the
Company's management contract. The negotiations were not subject to the board
resolution, adopted subsequent to the negotiations, relating to affiliated
transactions, although the terms were approved by all of the directors. The
initial term of the Company's sublease expired April 30, 1995, and its first
renewal term expired April 30, 2000. The sublease contained two additional
successive five-year renewal options beginning May 1, 2000. The Company chose
not to exercise the options and instead occupied the building as a holdover
tenant until its complete cessation of operations on December 31, 2000.
The Company had previously paid $40,000 to LMOC for the renewal options.
These renewal options were separately negotiated between the Board of
Directors of the Company and LMOC. Mr. Slattery participated in such
negotiations. Mrs. Horn and Mr. Slattery will receive their proportionate
shares of rents received by LMOC under the terms of this sublease.
Previously, residential and commercial tenants of this building paid rent
to LeMarquis Enterprise Corp. ("Enterprises"), a company owned 30% by Mrs.
Horn, 28% by Mr. Slattery and 25% by Mr. Speisman, and Enterprises paid all
expenses of operating the residential and commercial portions of the building
as well as a portion of the overall expenses of the building. As of February
1994 and until December, 2000, however, all of the building's revenues,
including rent from the residential and commercial tenants are now received
and expenses paid by the Company.
The Company leases the entire building located at 988 Myrtle Avenue,
Brooklyn, New York from Myrtle Avenue Family Center, Inc. ("MAFC") pursuant to
a lease which commenced January 1, 1994 and expired on December 31, 1998. The
lease established a monthly rental of $40,000 and contained three five-year
renewal options. The Company is currently in its first option period, which
runs from January 1, 1999 through December 31, 2003. The monthly rental
payment during the first option period is $40,000. The monthly rental for the
second option period, which runs from January 1, 2004 through December 31,
2008, is $45,000, and the monthly rental for the third option period, which
runs from January 1, 2009 through December 31, 2013, is $50,000. In addition,
the Company pays taxes, insurance, repairs and maintenance on this building.
MAFC is a corporation owned by Mrs. Horn (27.5%) and Messrs. Slattery (8%) and
Speisman (27.5%). The terms of the lease were not negotiated at arm's length
due to their relationship with MAFC and the Company. Messrs. Slattery and
Speisman participated in such negotiations.
The Company leases a building located at 2534 Creston Avenue, Bronx, New
York from Creston Realty Associates, L.P. ("CRA"), the corporation owned 10%
by Ester Horn. The lease term is two years commencing October 1, 1996 and has
three additional one year option periods. The Company also pays a base rent
of $180,000 per year which will escalate five percent per year for each of the
three year options if they are exercised. The Company pays taxes, insurance,
repairs and maintenance on this building which will be used to house a
community correctional center. The terms of this lease were not negotiated at
arms length due to the relationship between the Company, Ms. Horn and CRA.
Stuart M. Gerson, a director of CSC, is a member of Epstein Becker &
Green, CSC's legal counsel, which has received fees for legal services
rendered to CSC during the last fiscal year.
On November 29, 2000, Youth Services International Real Property
Partnership, L.L.C., a wholly-owned subsidiary of the Company, entered into an
agreement to sell real property located at 12012 Boyette Road, Riverview,
Florida to a two-person Florida based partnership. Aaron Speisman, a director
of CSC, is a member of that partnership. This contract was reviewed by the
independent directors of the Company and deemed to be at arm's length.
The sale closed on December 29, 2000, and the partnership agreed to pay
the Company $3,940,000. A portion of the purchase price was paid by a
promissory note guaranteed by the members of the partnership in the amount of
$480,000. The promissory note is to be paid in full no later than September
1, 2001.
33
Pursuant to the terms of a Board of Directors resolution adopted in
connection with the Company's initial public offering, all transactions
between the Company and any of its officers, directors or affiliates (except
for wholly-owned subsidiaries) must be approved by a majority of the
unaffiliated members of the Board of Directors and be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties and be in connection with bona fide business purposes of the Company.
In the event the Company makes a loan to an individual affiliate (other
than a short-term advance for travel, business expense, relocation or similar
ordinary operating expenditure), such loan must be approved by a majority of
the unaffiliated directors.
In October 1989, a subsidiary of the Company, entered into an employment
agreement with William Banks. Under this agreement, Mr. Banks was responsible
for developing and implementing community relations projects on behalf of the
Company and for acting as a liaison between the Company and local community
and civic groups who may have concerns about Company's facilities being
established in their communities, and with government officials throughout the
State of New York. As compensation, Mr. Banks received 3% of the gross
revenue from all Federal Bureau of Prisons, state and local correctional
agency contracts within the State of New York with a guaranteed minimum
monthly income of $4,500. In December 1993, Mr. Banks agreed to become a
consultant to the Company upon the same terms and conditions in order to
accurately reflect the level and nature of the services he provided. In 1999
and 2000, Mr. Banks earned approximately $272,000 and $281,000 respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
----------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The consolidated statements of the Company are included on
pages F-1 through F-27 of this Form 10-K.
(2) The financial statement schedules prescribed by this Item 14
are not required.
(3) Exhibits (All referenced herein to "SEC" shall mean the U.S.
Securities and Exchange Commission.)
(b) The Company filed a Form 8-K Report on November 10, 2000, relating
to the First Amendment of its August 31, 1999, Credit Agreement with
Summit Bank, N.A.
(c) Exhibits:
2.1 Agreement and Plan of Merger, dated as of September 23, 1998, among
YSI, CSC and Palm Merger Corp.(28)
2.2 First Amendment, dated as of January 12, 1999, to the Agreement and
Plan of Merger, dated as of September 23, 1998, among YSI, CSC and
Palm Merger Corp.(29)
2.3 Second Amendment, dated as of March 2, 1999, to the Agreement and
Plan of Merger, dated as of September 23, 1998, among YSI, CSC and
Palm Merger Corp.(35)
3.1 Certificate of Incorporation of CSC dated October 28, 1993.(1){
3.1.1 Copy of Certificate of Amendment of Certificate of Incorporation of
CSC dated July 29, 1996.(4)
3.1.2 Copy of Certificate of Correction to CSC's Certificate of
Incorporation.(1)
3.1.3 Copy of Certification of Correction to CSC's Certificate of
Amendment to CSC's Certificate of
Incorporation. (1)
3.2 CSC's By-Laws.(33)
4.1 Form of YSI's 7% Convertible Subordinated Debentures Due February 1,
2006.(14)
4.2.1 Amendment to Fiscal and Paying Agency Agreement, dated March 31,
1999, by and among YSI, The Chase Manhattan Bank, N.A., New York,
The Chase Manhattan Bank, N.A., London and Chase Manhattan Bank
Luxembourg S.A.(15)
34
4.3 a. Form of CSC Series A Warrant.(2)
4.3 Indenture, dated October 15, 1996, by and between YSI and The Chase
Manhattan Bank, N.A., as Trustee.
4.3.1 Amendment to Indenture, dated March 31, 1999, by and between YSI and
The Chase Manhattan Bank, as Trustee.(15)
4.4 a. Form of CSC 10% Subordinated Promissory Note.(37)
4.4 Form of Letter Agreement executed by certain Debenture holders
agreeing to receive proceeds from redemption of their Debentures one
year following the effective date of the Merger together with Form
of Guaranty from CSC.(14)
4.4.2 Fiscal and Paying Agency Agreement, dated January 29, 1996, by and
among YSI, The Chase Manhattan Bank, N.A., New York, The Chase
Manhattan Bank, N.A., London and Chase Manhattan Bank Luxembourg
S.A.(14)
4.5 Form of Placement Agent's Warrant between CSC and Janney Montgomery
Scott Inc.(1)
* 10.1 CSC's 1993 Stock Option Plan, as amended.(33)
* 10.5.1 Employment Agreement between CSC and James F. Slattery dated
February 17, 1998.(9)
* 10.6 Employment Agreement between CSC and Aaron Speisman.(1)
* 10.6.1 Modification to the Employment Agreement between CSC and Aaron
Speisman, dated June 13, 1996.(4)
10.15 Agreement between CSC and William Banks, dated October 31, 1989.(1)
10.15.1 Letter dated December 9, 1993 from William Banks to CSC.(1)
10.16 Form of Sub-Lease between CSC and LeMarquis Operating
Corporation.(1)
10.17 Form of Lease between CSC and Myrtle Avenue Family Center, Inc.(1)
10.24.1 Renewal of the Revolving Line of Credit Note dated January 15,
1998.(7)
* 10.25 1994 Non-Employee Director Stock Option Plan.(3)
10.26 Loan and Security Agreement with NationsBank, N.A. (South) dated as
of December 31, 1995.(3)
10.26.2 Deed of Trust Modification Agreement dated January 14, 1998.(7)
10.26.3 Third Amendment to Loan Agreement dated January 5, 1998.(7)
10.26.4 Fourth Amendment to Loan Agreement dated January 14, 1998.(7)
10.44 Lease Agreement between CSC and Creston Realty Associates, L.P.,
dated October 1, 1996.(4)
10.45 Lease between CSC and Elberon Development Company.(1)
10.45.1 Assignment of Lease between CSC and Elberon Development Company.(4)
* 10.47.1 Amended Employment Agreement between CSC and Ira M. Cotler dated
July 9, 1997.(5)
* 10.47.2 Amendment No. 1 dated May 3, 1999 to Employment Agreement between
CSC and Ira M. Cotler of July 9, 1997.(11)
* 10.47.3 Change in Control Agreement between CSC and Ira M. Cotler, dated May
3, 1999.(11)
* 10.48 Employment Agreement between CSC and Michael C. Garretson, dated
January 21, 1996.(4)
* 10.48.1 Employment Agreement between CSC and Michael C. Garretson, dated
December 5, 1998.(17)
10.51.1 First Amendment to Asset Purchase Agreement between CSC and Dove
Development Corporation, Consolidated Financial Resources/Crystal
City, Inc., dated August 27, 1997.(6)
10.60 Credit facility with NationsBank and a syndicate of banks for up to
$30 million dated April, 1998.(8)
10.60.1 Amendment No. 1 to credit facility with NationsBank and a syndicate
of banks, dated October 16, 1998.(10)
10.60.2 Amendment No. 2 to credit facility with NationsBank and a syndicate
of banks, dated March 31, 1999.(11)
10.61 Sublease for Sarasota, Florida office space dated April 9, 1998
between Lucent Technologies, Inc. and CSC and Landlord Consent to
Sublease.(8)
10.67 Asset Purchase Agreement between CSC and the County of Dickens,
Texas dated July 14, 1998 for the purchase of the Dickens County
Correctional Facility.(9)
10.70.1 Subcontract, Facility Use Agreement, and Asset Purchase by and among
CSC, Trans-American Development Associates, Inc. and FBA, L.L.C.
dated December 14, 1998.(36)
10.72 Credit Agreement, dated August 31, 1999, between CSC and Summit
Bank, N.A.(16)
10.73 Master Agreement, dated August 31, 1999, between CSC and Atlantic
Financial Group, Ltd., Summit Bank, N.A. and SunTrust Bank.(16)
* 10.74 Employment Agreement dated September 29, 1999 between CSC and James
F. Slattery.(13)
35
* 10.75 Change in Control Agreement dated September 29, 1999 between CSC and
James F. Slattery.(13)
10.114 Construction/Installment Purchase and Management Services Contract
by and among CSC, the State of Nevada, Department of Human
Resources, Nevada Real Property Corporation and Clark & Sullivan
Constructors-Rite of Passage, Inc. dated February 2, 1999.(36)
21 List of Subsidiaries
23.1 Consent of Grant Thornton L.L.P., CSC's independent public
accountants.
27. Financial Data Schedule
- ------------------
(1) Incorporated by reference to exhibit of same number filed with CSC's
Registration Statement on Form SB-2 (Registration No. 33-71314-NY).
(2) Incorporated by reference to exhibit 4.3 filed with CSC's Registration
Statement on Form SB-2 (Registration No. 33-71314-NY).
(3) Incorporated by reference to exhibit of same number filed with the
initial filing of CSC's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
(4) Incorporated by reference to exhibit of same number filed with CSC's
Annual Report on Form-10-KSB for the year ended December 31, 1996.
(5) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the six months ended June 30, 1997.
(6) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the nine months ended September 30, 1997.
(7) Incorporated by reference to exhibit of same number filed with CSC's
Annual Report on Form-10-K for the year ended December 31, 1997.
(8) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the three months ended March 31, 1998.
(9) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the six months ended June 30, 1998.
(10) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the nine months ended September 30, 1998.
(11) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the three months ended March 31, 1999.
(13) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the nine months ended September 30, 1999.
(14) Incorporated by reference to exhibit of same number filed with CSC's
Current Report on Form 8-K filed with the SEC on April 15, 1999.
(15) Incorporated by reference to exhibit of same number filed with CSC's
Current Report on Form 8-K filed with the SEC on April 22, 1999.
(16) Incorporated by reference to exhibit of same number filed with CSC's
Current Report on Form 8-K filed with the SEC on September 29, 1999.
(17) Incorporated by reference to exhibit of same number filed with CSC's Form
10-K filed with the SEC on March 31, 1999.
(28) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
the SEC on September 25, 1998.
(29) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
the SEC on January 21, 1999
(33) Incorporated by reference to exhibit of same number filed with CSC's
Registration Statement on Form S-1 (Registration Number 333-6457).
(35) Incorporated by reference to exhibit of same number filed with CSC's,
Current Report on Form 8-K, filed with the SEC on March 3, 1999.
(36) Incorporated by reference to exhibit of same number filed with CSC's
Registration Statement on Form S-4 (Registration Number 333-72003).
(37) Incorporated by reference to Exhibit 4.4 filed with CSC's Registration
Statement on Form SB-2 (Registration No. 33-71314-NY).
* Management Contract or Compensatory Plan or arrangement.
37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORRECTIONAL SERVICES CORPORATION
Registrant
By: /s/ James F. Slattery
James F. Slattery, President
Dated: April 2, 2001
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ James F. Slattery President, Chief Executive Officer
James F. Slattery and Chairman of the Board April 2, 2001
/s/ Ira M. Cotler Executive Vice President,
Ira M. Cotler and Chief Financial Officer April 2, 2001
/s/ Aaron Speisman Executive Vice President
Aaron Speisman and Director April 2, 2001
/s/ Richard Staley Senior Vice President
Richard Staley and Director April 2, 2001
/s/ Stuart Gerson Director April 2, 2001
Stuart Gerson
/s/ Shimmie Horn Director April 2, 2001
Shimmie Horn
/s/ Bobbie L. Huskey Director April 2, 2001
Bobbie L. Huskey
/s/ Melvin T. Stith Director April 2, 2001
Melvin T. Stith
37
C O N T E N T S
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 F-3
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6-F-27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Correctional Services Corporation
We have audited the accompanying consolidated balance sheets of Correctional
Services Corporation and Subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Correctional Services Corporation and Subsidiaries as of December 31, 2000
and 1999, and the consolidated results of their operations and consolidated
cash flows for the years ended December 31, 2000 and 1999, in conformity with
accounting principles generally accepted in the United States of America.
We previously audited and reported on the consolidated statements of
operations, stockholders' equity and cash flows of Correctional Services
Corporation and Subsidiaries for the year ended December 31, 1998 prior to
their restatement for the 1999 pooling of interests. The contribution of
Correctional Services Corporation and Subsidiaries to revenues for the year
ended December 31, 1998 represented 52.0 percent of the respective restated
totals. Separate financial statements of the other company included in the
1998 restated statements of operations, stockholders' equity and cash flows
were audited and reported on separately by another auditor. We also audited
the combination of the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1998,
after restatement for the 1999 pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note A of the notes to the consolidated financial statements.
/s/ GRANT THORNTON LLP
Tampa, Florida
March 2, 2001
F-1
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS December 31,
----------------
2000 1999
------- -------
CURRENT ASSETS
Cash and cash equivalents $ 133 $ 7,070
Restricted cash 92 192
Accounts receivable, net of allowance for doubtful
accounts of $1,718 and $1,380 for December 31,
2000 and 1999, respectively 36,976 35,768
Notes receivable 3,730 -
Deferred tax asset 1,926 3,227
Prepaid expenses and other current assets 2,673 2,987
------- -------
Total current assets 45,530 49,244
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 39,543 47,972
OTHER ASSETS
Deferred tax asset 5,431 7,060
Goodwill, net 1,049 1,428
Other 5,222 5,494
------- -------
$96,775 $111,198
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,338 $ 3,124
Accrued liabilities 14,682 18,836
Current portion of subordinated debt 10 3,797
Current portion of senior debt 6,669 1,206
------- --------
Total current liabilities 26,699 26,963
LONG-TERM SENIOR DEBT 16,338 22,551
SUBORDINATED DEBENTURES - 10,393
LONG-TERM PORTION OF FACILITY LOSS RESERVES - 553
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000 shares
aurhorized, none issued and outstanding - -
Common Stock, $.01 par value, 30,000 shares authorized,
11,373 and 10,249 shares issued and outstanding,
respectively,in 2000 and 11,373 shares issued and
outstanding in 1999 114 114
Additional paid-in capital 82,797 82,807
Accumulated deficit (26,395) (32,183)
Treasury stock, at cost (2,778) -
-------- --------
53,738 50,738
-------- --------
$96,775 $111,198
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
----------------------
2000 1999 1998
-------- -------- --------
Revenues $210,812 $233,918 $188,454
-------- -------- --------
Facility expenses:
Operating 185,447 205,662 166,443
Startup costs 155 1,177 8,171
-------- -------- --------
185,602 206,839 174,614
-------- -------- --------
Contribution from operations 25,210 27,079 13,840
Other operating expenses:
General and administrative 13,670 13,899 21,119
(Gain) loss on sale of assets (1,115) - -
College Station closure costs - - 2,327
Merger costs and related restructuring
charges - 12,052 1,109
Write-off of deferred financing costs - 1,874 -
-------- -------- --------
Operating income (loss) 12,655 (746) (10,715)
Interest expense, net (3,157) (3,069) (2,611)
-------- -------- --------
Income (loss) before income taxes,
extraordinary gain on extinguishment
of debt and cumulative effect of
change in accounting principle 9,498 (3,815) (13,326)
Income tax (provision) benefit (3,710) (429) 1,593
-------- -------- --------
Income (loss) before extraordinary gain on
extinguishment of debt and cumulative
effect of change in accounting
principle 5,788 (4,244) (11,733)
Extraordinary gain on extinguishment of debt,
net of tax of $46 - 716 -
Cumulative effect of change in accounting
principle, net of tax of $3,180 - - (4,863)
-------- -------- --------
Net income (loss) $5,788 $(3,528) $(16,596)
======== ======== ========
Basic and diluted income (loss) per share:
Income (loss) before extraordinary gain on
extinguishment of debt and cumulative
effect of change in accounting
principle $0.51 $(0.38) $(1.08)
Extraordinary gain on extinguishment of
debt - 0.07 -
Cumulative effect of change in accounting
principle - - (0.45)
-------- -------- --------
Net income (loss) per share $0.51 $(0.31) $(1.53)
======== ======== ========
Number of shares used to compute EPS:
Basic 11,366 11,219 10,860
Diluted 11,367 11,219 10,860
The accompanying notes are an integral part of these financial statements.
F-3
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Common Paid-in Accumulated Treasury
Stock Capital (Deficit) Stock Total
------ ------- ----------- -------- --------
Balance at December 31, 1997 $107 $77,396 $ (12,000) $ - $ 65,503
Stock issuance cost - (4) - - (4)
Exercise of stock options 1 1,069 - - 1,070
Exercise of warrants 1 630 - - 631
Tax benefit realized due to
exercise of non-qualified
stock options - 352 - - 352
Issuance of common stock as
compensation - 109 - - 109
Dividend distribution - - (59) - (59)
Net loss - - (16,596) - (16,596)
---- ------- -------- ------- -------
Balance at December 31, 1998 109 79,552 (28,655) - 51,006
Exercise of stock options 1 515 - - 516
Exercise of warrants 4 2,740 - - 2,744
Net loss - - (3,528) - (3,528)
---- ------- -------- ------- -------
Balance at December 31, 1999 114 82,807 (32,183) - 50,738
Adjustment for overpaid warrants - (10) - - (10)
Stock repurchase - - - (2,778) (2,778)
Net income - - 5,788 - 5,788
---- ------- -------- ------- -------
Balance at December 31, 2000 $114 $82,797 $(26,395) $(2,778) $53,738
==== ======= ======== ======= =======
The accompanying notes are an integral part of this financial statement.
F-4
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
-----------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 5,788 $ (3,528) $(16,596)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,874 6,707 5,667
Stock granted as compensation - - 109
Merger related asset writedown - 4,831 -
Cumulative effect of a change in
accounting principle, net of tax - - 4,863
Deferred income tax expense (benefit) 2,930 945 (897)
Gain (loss) on disposal of fixed
assets, net (1,115) 316 17
Write off of other assets - - 321
Tax benefit realized due to exercise of
nonqualified stock options - - 352
Gain on extinguishment of debt - (1,628) -
Deferred financing costs - 1,874 -
Changes in operating assets and
liabilities:
Restricted cash 100 (35) 167
Accounts receivable (1,208) 2,230 (10,088)
Prepaid expenses and other current
assets 397 1,410 (1,727)
Accounts payable and accrued liabilities (1,709) (6,609) 11,414
------- ------- --------
Net cash provided by (used in)
operating activities: 10,057 6,513 (6,398)
------- ------- --------
Cash flows from investing activities:
Capital expenditures (3,656) (4,137) (12,942)
Proceeds from the sale of property, equipment
and improvements 4,355 1,232 1,292
Proceeds from the sale of behavioral health
business - - 4,500
Collection of notes receivable - - 38
Other assets (373) 136 (802)
------- ------- --------
Net cash provided by (used in)
investing activities: 326 (2,769) (7,914)
------- ------- --------
Cash flows from financing activities:
(Payment) proceeds on short-term, long-term
borrowings and capital lease obligations (751) 11,874 11,021
Payment of subordinated debt (14,180) (17,483) (3,886)
Proceeds from exercise of stock options
and warrants - 3,260 1,700
Debt issuance costs - (2,363) (431)
Stock repurchase (2,778) - -
Long-term portion of prepaid lease 399 399 375
Adjustment for overpaid warrants (10) - -
Dividend distribution - - (1,324)
------- ------- --------
Net cash provided by (used in)
financing activities: (17,320) (4,313) 9,985
------- ------- --------
Net decrease in cash and cash equivalents (6,937) (569) (5,592)
Cash and cash equivalents at beginning of period 7,070 7,639 13,231
------- ------- --------
Cash and cash equivalents at end of period $ 133 $ 7,070 $ 7,639
======= ======= ========
Non-cash investing activities
Property exchanged for a note receivable $ 3,812 - -
======= ======= ========
Supplemental disclosures of cash flows
information:
Cash paid (refunded) during the period for:
Interest $ 3,846 $ 3,712 $ 2,631
======= ======= ========
Income taxes $ 872 $ 8 $ 703
======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Correctional Services Corporation and its subsidiaries are organized to
privately operate and manage detention, and correctional facilities as well as
educational, developmental and rehabilitative programs for federal, state and
local government agencies.
1. Principles of Consolidation
The consolidated financial statements as of December 31, 2000 include the
accounts of Correctional Services Corporation and its wholly owned
subsidiaries:
Esmor, Inc.
Esmor New Jersey, Inc.
CSC Management de Puerto Rico, Inc.
CSC UK, Ltd.
YSI Holdings, Inc.
YSI Real Property Partnership, LLP
YSI Investment LLC
YSI International Management LLC
Community Corrections, Inc.
FF & E, Inc.
Youth Services International, Inc.
Youth Services International of Iowa, Inc.
Youth Services International of Tennessee, Inc.
Youth Services International of Northern Iowa, Inc.
Youth Services International of South Dakota, Inc.
Youth Services International of Missouri, Inc.
Youth Services International of Central Iowa, Inc.
Youth Services International of Texas, Inc.
Youth Services International of Virginia, Inc.
Youth Services International of Delaware, Inc.
Youth Services International of Minnesota, Inc.
Youth Services International of Illinois, Inc.
Youth Services International of Michigan, Inc.
All significant intercompany balances and transactions have been
eliminated.
2. Pooling-Of-Interests Business Combinations
Youth Services International, Inc.
On March 31, 1999, the Company exchanged 3,114,614 shares of the
Company's common stock for all of the common stock of Youth Services
International, Inc. (YSI). The merger was accounted for as a
F-6
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
pooling-of-interests, and accordingly, the accompanying financial
statements have been retroactively adjusted to include the financial
position and results of operations of YSI for all periods presented.
The following balances of the separate companies for the period preceding
the YSI merger were as follows (in thousands):
For the twelve months
ended December 31, 1998
-----------------------
Revenues
CSC $ 97,928
YSI 90,526
-----------------------
Combined $188,454
=======================
Net (Loss)
CSC $ (6,022)
YSI (10,574)
------------------------
Combined $(16,596)
As of December 31, 1998
------------------------
Stockholders' equity
CSC $ 37,923
YSI 14,103
------------------------
Combined 52,026
Adjustments to stockholders' equity
for adoption of accounting policy (1,020)
-------------------------
Adjusted stockholders' equity $ 51,006
=========================
In connection with the merger, a conforming accounting adjustment was
recorded to conform the accounting policy relating to YSI's accounting
for supplies inventory. Previously YSI capitalized supplies inventory
while CSC expensed them as incurred. The above adjustment to equity was
made to effect the accounting adjustment as of January 1, 1997.
During the first quarter of 1999, the Company recorded a charge to
operating expenses of approximately $12.1 million for direct costs
related to the merger and certain other costs resulting from the
restructuring of the newly combined operations. In connection with the
combination, the Company planned to close the YSI corporate offices in
Maryland, withdraw from a facility in Iowa, and close facilities in Texas
and Virginia, which were expected to result in the elimination of 350
positions. Direct merger costs consisted primarily of fees to investment
bankers, attorneys, accountants, financial advisors and printing and
other direct costs. Restructuring charges included severance and change
in control payments made to certain former officers and employees of YSI;
losses associated with the write-off of the carrying value of the
software used by YSI, which will not be used by the Company and computer
equipment that is incompatible with that used by the Company; and
miscellaneous other costs which included the cancellation of lease
agreements and other long-term commitments.
F-7
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Merger costs and related restructuring charges are comprised of the
following (in thousands):
Direct merger costs $ 4,350
Restructuring charges:
Employee severance and change in control payments 2,339
Write-off of buildings and leasehold improvements 2,661
Write-off of software and computer equipment 1,749
Other 953
-------
Total $12,052
=======
The Company closed the corporate facility and withdrew from the Iowa
facility, which resulted in the elimination of 273 positions. The Texas
and Virginia facilities were closed in 2000 and resulted in the
elimination of 72 positions. At December 31, 2000, all merger and
restructuring charges have been paid as noted above, except for a
$300,000 surplus from exit costs which was recognized as a reduction in
2000 operating expenses.
Community Corrections, Inc.
On June 30, 1998, the Company exchanged 238,362 shares of the
Company's common stock for all of the common stock of Community
Corrections, Inc. (CCI). The merger was accounted for as a pooling-of-
interests and, accordingly, the accompanying consolidated financial
statements for the periods presented have been retroactively adjusted to
include the financial position and results of operations for all periods
presented. CCI operates residential boot camp and detention facilities
with a total capacity of 204 beds in Texas and provides aftercare
services to adjudicated youth in Georgia. CCI was a Subchapter S
corporation for federal income tax purposes whereby the earnings of the
corporation pass through to the respective owners. It was the policy of
CCI to distribute necessary amounts to the owners on a periodic basis in
order to allow them to fund their personal tax liabilities attributable
to the earnings of CCI. During the year ended December 31, 1998, income
tax dividends were distributed to the owners totaling approximately
$59,000.
3. Use of Estimates in Consolidated Financial Statements
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
4. New Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial
statements. This SAB was effective during the fourth quarter of 2000 for
the Company. The Company's adoption of SAB No. 101 did not have a
material impact on revenue or earnings.
F-8
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
5. Revenue Recognition and Contract Provisions
Revenues are principally derived pursuant to contracts with federal,
state and local government agencies and not-for-profit entities that
contract directly with governmental entities. These contracts generally
provide for fixed per diem payments based upon program occupancy.
Revenues on fixed per diem and management contracts are recognized as the
services are performed.
One of the Company's significant programs operates under a contract
whereby revenues are recognized as reimbursable costs are incurred
through a gross maximum price cost reimbursement arrangement. This
contract has costs, including indirect costs, subject to audit and
adjustment by negotiations with government representatives. Contract
revenues subject to audit relating to this contract of approximately
$15.0 million, $13.8 million, and $13.5 million have been recorded for
the years ended December 31, 2000, 1999 and 1998, respectively, at
amounts which are considered to be earned. Subsequent adjustments if
any, resulting from the audit process are recorded when known.
Contract terms with government and not-for-profit entities generally
range from one to five years in duration and expire at various dates.
Most of these contracts are subject to termination for convenience by the
governmental entity.
6. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities
of three months or less when purchased to be cash equivalents.
Included in the restricted cash of $92,000 and $192,000 at December 31,
2000 and 1999 is a major maintenance and repair reserve fund established
by the Company as required by certain contracts.
7. Building, Equipment and Leasehold Improvements
Building, equipment and leasehold improvements are carried at cost.
Depreciation of buildings is computed using the straight-line method over
twenty and thirty year periods. Depreciation of equipment is computed
using the straight-line method over a five-year period. Leasehold
improvements are being amortized over the shorter of the life of the
asset or the applicable lease term (ranging from five to twenty years).
For tax purposes accelerated methods of depreciation are utilized.
8. Development and Start-Up Costs
In the fourth quarter of 1998 the Company elected to early adopt the
AICPA's Statement of Position 98-5 (SOP 98-5), ACCOUNTING FOR START-UP
COSTS. The Company incurs costs prior to obtaining certain contracts
that are recorded as development costs. Costs incurred subsequent to a
signed contract and up to the first three months of operations are
recorded as start-up costs. The new accounting change required the
Company to expense start-up and development costs as incurred, rather
than capitalizing and subsequently amortizing such costs. SOP 98-5
required the Company to record a cumulative effect of change in
accounting of $4.9 million (net of tax benefit of $3.2 million)
retroactively to January 1, 1998 and a current year effect of expensing
startup and development costs as incurred throughout the remainder of the
year totaling $11.6 million. These costs are included in startup costs
and general and administrative expenses amounting to $7.7 million and
$3.9 million, respectively in 1998.
F-9
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The Company incurred start up costs of $155,000 and $1.2 million in the
years ended December 31, 2000 and 1999, respectively. Development costs
of $642,000 and $689,000 were expensed in the years ended December 31,
2000 and 1999, respectively.
9. Goodwill
Goodwill representing the excess of the cost over the net assets of
acquired businesses is stated at cost and is amortized over 10 years
using the straight-line method. Amortization expense for the years ended
December 31, 2000, 1999 and 1998 was $370,000, $362,000, and $375,000,
respectively. Accumulated amortization at December 31, 2000 and 1999 was
$2.7 million and $2.3 million, respectively.
10. Accounting for the Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets and certain identifiable
intangibles including goodwill to be held and used or disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company uses an
estimate of the undiscounted cash flows over the remaining life of its
long-lived assets and goodwill in measuring whether the assets to be held
and used will be realizable.
11. Income Taxes
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The primary objectives of
accounting for income taxes are to (a) recognize the amount of tax
payable for the current year and (b) recognize the amount of deferred tax
liability or asset based on management's assessment of the tax
consequences of events that have been reflected in the Company's
consolidated financial statements.
12. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding. In the computation
of diluted earnings per share, the weighted-average number of common
shares outstanding is adjusted, when the effect is not anti-dilutive, for
the effect of all common stock equivalents and the average share price
for the period is used in all cases when applying the treasury stock
method to potentially dilutive outstanding options.
13. Stock Based Compensation
With respect to stock options granted to employees the Company applies
the accounting method promulgated by the Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to measure and
recognize compensation. Management has adopted the disclosure provision
of the Financial Accounting Standards Board No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, for accounting related to stock options granted
to employees.
14. Comprehensive Income
The Company's comprehensive income (loss) is equivalent to net income
(loss) for the years ended December 31, 2000, 1999 and 1998.
F-10
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
15. Reclassifications
Unamortized costs related to debt issuance of certain YSI debt, which
were included in the 1999 consolidated financial statement of operations
with "merger costs and related restructuring charges" have been
reclassified as an increase in "general and administrative" ($1,064,000),
an increase in "write-off of deferred financing costs" ($252,000), and a
decrease of the "extraordinary gain" ($445,000). Income tax expense was
reclassified to reflect the income tax change in the extraordinary gain.
This reclassification reduced the loss before extraordinary gain on
extinguishment of debt by $269,000 or $0.02 per share and has no effect
on previously reported net loss or net loss per share.
16. Treasury Stock
On October 20, 2000, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $10 million. The Company
had 1.1 million shares of common stock held in treasury at December 31,
2000, at a cost of $2.8 million.
F-11
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES
The Company currently operates forty-five secure and non-secure corrections or
detention programs as well as educational, developmental and rehabilitative
programs in the states of Arizona, Delaware, Florida, Georgia, Iowa, Illinois,
Maryland, Michigan, Minnesota, Mississippi, Missouri, Nevada, New York, South
Dakota, Tennessee, Texas, Virginia, Washington and Puerto Rico for federal,
state and local government agencies. The Company's secure facilities include
a detention and processing center for illegal aliens, intermediate sanction
facilities for parole violators and a shock incarceration facility, which is a
military style "boot camp" for youthful offenders. Non-secure facilities
include residential programs such as community correction facilities for
federal and state offenders serving the last six months of their sentences and
non-residential programs such as home confinement supervision. The
educational, developmental and rehabilitative programs include an academy
style residential treatment program for high impact juvenile offenders and
non-residential highly structured supportive aftercare programs for juveniles.
The Company is generally compensated on the basis of the number of residents
held in each of its facilities. The Company's contracts may provide for fixed
per diem rates or monthly fixed rates. Some contracts also provide for
minimum guarantees. One of the Company's programs operates under a contract
whereby revenues which are recognized as reimbursable costs are incurred
through a gross maximum price cost reimbursement arrangement.
The terms of each contract vary and can be from one to five years. Contracts
for more than one year have renewal options which either are exercisable on
mutual agreement between the Company and the government agency or are
exercisable by the government agency alone.
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
1. Cash and Cash Equivalents
The carrying amount reasonably approximates fair value because of the
short maturity of those instruments.
2. Accounts and Notes Receivable, Accounts Payable and Accrued Expenses
The carrying amount reasonably approximates fair value because of the
short-term maturities of these items.
3. Subordinated Promissory Notes and Long-Term Debt
The fair value of the Company's subordinated promissory notes and long-
term debt is estimated based upon the quoted market prices for the same
or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. As of December 31, 2000 and 1999 the
estimated fair values of the subordinated promissory notes and long-term
debt approximated their carrying values.
F-12
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
December 31,
2000 1999
------ ------
Prepaid insurance $ 235 $ 269
Prepaid real estate taxes 168 217
Prepaid and refundable income taxes 281 225
Prepaid rent - current portion 488 473
Prepaid expenses 1,149 1,233
Other current assets 352 570
------ ------
$2,673 $2,987
====== ======
NOTE E - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, at cost, consist of the
following (in thousands):
December 31,
2000 1999
------- -------
Buildings and land $32,055 $37,008
Equipment 11,572 13,531
Leasehold improvements 11,449 11,536
------- -------
55,076 62,075
Less accumulated depreciation (15,533) (14,103)
------- -------
$39,543 $47,972
======= =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $4.1 million, $4.9 million, and $5.1 million, respectively.
NOTE F - OTHER ASSETS
Other assets consist of the following (in thousands):
December 31,
2000 1999
------ ------
Deferred refinancing costs, net $1,038 $1,229
Deposits 731 482
Prepaid rent - net of current portion 3,162 3,561
Other 291 222
------ ------
$5,222 $5,494
====== ======
F-13
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
December 31,
2000 1999
------- -------
Accrued expenses $ 6,194 $ 6,727
Accrued interest 16 533
Accrued medical claims and premiums 1,522 1,886
Accrued worker's compensation claims and premiums 1,486 978
Payroll and related taxes 4,495 3,965
Construction costs (including retainage) - 728
Unearned revenue 70 1,509
Facility loss reserves - 808
Other 899 1,702
------- -------
$14,682 $18,836
======= =======
NOTE H - DEBT
SENIOR DEBT:
Senior debt consists of the following (in thousands):
December 31,
2000 1999
------- -------
Revolving line of credit expiring August 2002. Interest
payable monthly at LIBOR plus 2.75% or prime plus 1.25%.
Interest rate at December 31, 2000 was 10.75%. $10,000 $ 9,000
Delayed drawdown term note, principal payments of $1.67
million due quarterly beginning June 30, 2000. Interest
payable monthly at prime plus 1%. Interest rate at
December 31, 2000 was 10.5%. 12,694 14,438
Mortgage payable due in semi-annual installments of $17,083
which includes principal plus interest at 10% per annum, due
in full October 2006 collateralized by land with a book value
of $434,000. 313 319
------- -------
23,007 23,757
Less current portion 6,669 1,206
------- -------
$16,338 $22,551
======= =======
F-14
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - DEBT - (CONTINUED)
SENIOR DEBT:
On August 31, 1999, the Company finalized a financing arrangement with
Summit Bank, N.A, which was amended in November 2000. The amendment to the
Credit Agreement will allow the Company the option of utilizing a percentage
of both: (i) excess cash flow (as defined by the agreement) and (ii) the
proceeds of the sale of certain assets, to repurchase Company stock in
furtherance of the Company's stock repurchase plan (Note A). Borrowings under
the line are subject to compliance with various financial covenants and
borrowing base criteria (which were also amended). The Company is in
compliance with the amended loan covenants as of December 31, 2000. This
financing arrangement is secured by all of the assets of the Company and
consists of the following components:
$25 million (as amended) revolving line of credit to be used by
the Company and its subsidiaries for working capital and general
corporate purposes and to finance the acquisition of facilities,
properties and other businesses. At December 31, 2000 the Company
had $10.0 million outstanding under the revolving line of credit.
$20 million delayed drawdown credit facility which provided the
Company with additional financing to be used to fund the redemption of
the outstanding 7% Convertible Subordinated Debentures due March 31,
2000 that were issued by Youth Services International, Inc., a
subsidiary of the Company (the "Debentures"). At December 31, 2000,
the Company had $12.7 million outstanding on the delayed drawdown
credit facility. The Company expects to make prepayments on this debt
in 2001 based on excess cash flow as defined in the Company's amended
credit agreement. Accordingly, the Company expects to make a $1.6
million prepayment on March 31, 2001, funded by its other long-term
financing arrangement.
$35 million (as amended) in financing which may be used to
purchase land and property and to finance the construction of new
facilities through an operating lease arrangement. The Company
currently has approximately $24.9 million outstanding under this
operating lease financing facility.
SUBORDINATED DEBENTURES:
Subordinated debentures consists of the following (in thousands):
December 31,
2000 1999
-------- -------
7% Convertible Subordinated Debentures due
March 31, 2000 which includes interest
payable semi-annually in arrears. $ 10 $14,190
Less current portion 10 3,797
-------- -------
$ - $10,393
======== =======
F-15
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - DEBT - (CONTINUED)
During the year ended June 30, 1996, YSI issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $38.0 million.
The debentures are convertible into common stock at the rate of one share of
YSI common stock for each $12.47 of principal.
In connection with the merger, the Company assumed the outstanding balance of
$32.2 million of Debentures. Due to certain provisions in the indenture, the
change of control as a result of the merger enabled the holder to demand
immediate redemption by the Company.
In anticipation of entering into the credit facilities with Summit Bank, the
Company agreed with certain holders of the Debentures (who had previously
agreed to postpone the redemption of their Debentures until March 31, 2000) to
redeem their Debentures upon the closing of the credit facilities at a
redemption price equal to 90% of the original principal amount thereof, plus
accrued but unpaid interest. The Company used approximately $14.8 million of
its available credit under the delayed drawdown facility to redeem
$16.3 million face value of these Debentures. The balance of $1.7 million was
repaid during the second quarter of 1999. An extraordinary gain of $716,000
(net of tax of $467,000 or $0.07 per share) was recognized by the Company in
connection with this early extinguishment.
As a result of the above note redemptions, $14.2 million in principal amount
of these Debentures remained outstanding at December 31, 1999. As of December
31, 2000, $10,000 remains outstanding pending receipt of the original
Debentures from the Debenture holders.
At December 31, 2000 aggregate maturities of senior debt and subordinated
debentures were as follows (in thousands):
Year Ending December 31,
-----------------------
2001 6,679
2002 16,029
2003 3
2004 3
2005 4
Thereafter 299
TOTAL $23,017
=======
F-16
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - RENTAL AGREEMENTS
The Company has operating leases for certain of its facilities and certain
machinery and equipment which expire at various dates. Substantially all the
facility leases provide for payment by the Company of all property taxes and
insurance.
Future minimum rental commitments under both cancelable and non-cancelable
leases as of December 31, 2000 are as follows (in thousands):
Related
Year Ending December 31, Total Companies
----------------------- ------- ---------
2001 $ 5,347 $ 627
2002 4,030 480
2003 2,860 480
2004 1,896 -
2005 1,112 -
Thereafter 4,546 -
------- ------
$19,791 $1,587
======= ======
The Company leased one facility from a related party under a sublease
arrangement, which expired April 30, 2000. The Company has two five-year
options to renew this sublease arrangement. The Company did not renew the
lease in 2000 and is investigating alternative locations.
The Company leases a second facility from a related party. The lease
commenced January 1, 1999 and expires December 31, 2003. Thereafter, the
Company has two successive five-year options to renew. In addition to the
base rent, the Company pays taxes, insurance, repairs and maintenance on this
facility.
The Company leases a third facility from a related party. The lease commenced
October 1, 1996 and expires September 30, 2001. In addition to the base rent,
the Company pays taxes, insurance, repairs and maintenance on this facility.
Rental expense of operating leases and machinery and equipment for the years
ended December 31, 2000, 1999, and 1998 aggregated $7.2 million, $6.8 million,
and $6.2 million, respectively. Rent to related companies aggregated $1.3
million for each of the years ended December 31, 2000, 1999, and 1998.
F-17
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - INCOME TAXES
The income tax expense (benefit) consists of the following (in thousands):
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ --------
Current:
Federal $ 114 $ (335) $(1,159)
State and local 666 286 (107)
Deferred:
Federal, state and local 2,930 945 (3,507)
------ ------ --------
$3,710 $ 896 $(4,773)
====== ====== ========
The following is a reconciliation of the federal income tax rate and the
effective tax rate as a percentage of pre-tax income (loss):
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ --------
Statutory federal rate 34.0% (34.0)% (34.0)%
State taxes, net of federal tax
benefit 6.5 (5.1) (5.0)
Non-deductible items (0.4) 37.3 2.1
Valuation allowance and reconciliation (3.4) 35.0 15.6
Other 2.4 .8 (1.0)
---- ---- ----
39.1% 34.0% (22.3)%
==== ==== ====
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $8.9 million, $26.3 million and $4.1 million for federal, state,
and foreign income tax purposes, respectively, that expire in periods
beginning in 2006 through 2020. At December 31, 2000, the Company also had an
Alternative Minimum Tax (AMT) credit of approximately $562,000, which does not
expire.
The net operating loss carryforwards are subject to IRS Section 382
limitations and other limitations, which limit the utilization of the federal
and state net operating loss carryforwards in any given year. Realization of
the portion of the deferred tax asset resulting from the Company's net
operating loss carryforward in certain states and Puerto Rico is not
considered more likely than not. Accordingly, a valuation allowance has been
established for the full amount of those deferred tax assets. The Company,
after considering its pattern of profitability and its anticipated future
taxable income, believes it is more likely than not that the remaining
deferred tax assets will be realized.
F-18
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J - INCOME TAXES - (CONTINUED)
Deferred income taxes reflect the tax effected impact of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. The components of
the Company's deferred tax assets (liabilities) are summarized as follows (in
thousands):
December 31,
2000 1999
------- -------
Facility closure costs $ - $ 648
Vacation accrual 284 289
Startup and development costs 1,112 2,148
Accrued expenses 1,517 1,874
Depreciation 498 249
Net operating loss carryforwards 5,594 4,880
Alternative minimum tax credit 562 374
Other 888 1,310
------- ------
10,455 11,772
Valuation allowance (3,098) (1,485)
------ ------
7,357 10,287
Less: current portion 1,926 3,227
------ ------
$ 5,431 $ 7,060
======= =======
NOTE K - COMMON STOCK WARRANTS
The Company issued to individuals and sold to certain underwriters' warrants
associated with the 1994 public offering and the 1995 Private Placement. The
following represents all warrant activity for the years presented:
Public Underwriter Total
------- ----------- -----
Balance at December 31, 1998 650,510 33,549 684,059
------- ---------- -------
Warrants exercised 350,589 5,906 356,495
Warrants expired 299,921 - 299,921
------- ---------- -------
Balance at December 31, 1999 - 27,643 27,643
Warrants expired - 27,643 27,643
------- ---------- -------
Balance at December 31, 2000 - - -
======= ========== =======
F-19
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - COMMITMENTS AND CONTINGENCIES
1. NEW JERSEY FACILITY CLOSURE
Due to a disturbance at the Company's Elizabeth, New Jersey facility on
June 18, 1995, the facility was closed and the INS moved all detainees
located therein to other facilities. On December 15, 1995, the Company
and a publicly-traded company (the "Buyer"), which also operates and
manages detention and correctional facilities, entered into an asset
purchase agreement pursuant to which the Buyer purchased the equipment,
inventory and supplies, contract rights and records, leasehold and land
improvements of the Company's New Jersey facility for $6.2 million. The
purchase price is payable in non-interest bearing monthly installments of
$123,000 effective January 1997, the month the Buyer commenced operations
of the facility. The Company has no continuing obligation with respect
to the Elizabeth, New Jersey facility. According to the terms of the
asset purchase agreement, the monthly payments beginning September 1999
are contingent upon the renewal of the contract by the INS and the Buyer.
The INS did re-award the contract to the Buyer in 1999. Therefore, the
Company will continue to receive monthly non-interest bearing payments of
$123,000, beginning September 1999 through March 2001, and will recognize
income ratably over this period.
2. LEGAL MATTERS
In March 1996, former inmates at one of the Company's facilities filed
suit in the Supreme Court of the State of New York, County of Bronx on
behalf of themselves and others similarly situated, alleging personal
injuries and property damage purportedly caused by negligence and
intentional acts of the Company and claiming $500.0 million each for
compensatory and punitive damages, which suit was transferred to the
United States District Court, Southern District of New York, in April
1996. In June 1996, seven detainees at one of the Company's facilities
(and certain of their spouses) filed suit in the Superior Court of New
Jersey, County of Union, seeking $10.0 million each in damages arising
from alleged mistreatment of the detainees, which suit was transferred to
the United States District Court, District of New Jersey, in August 1996.
In June 1997, former detainees of the Company's Elizabeth, New Jersey
facility filed suit in the United States District Court for the District
of New Jersey. The suit claims violation of civil rights, personal
injury and property damage allegedly caused by the negligent and
intentional acts of the Company. No monetary damages have been stated.
Through stipulation, all these actions will now be heard in the United
States District Court for the District of New Jersey. This will
streamline the discovery process, minimize costs and avoid inconsistent
rulings.
The Company believes the claims made in each of the foregoing actions to
be without merit and will vigorously defend such actions. The Company
further believes the outcome of these actions and all other current legal
proceedings to which it is a party will not have a material adverse
effect upon its results of operations, financial condition or liquidity.
However, there is an inherent risk in any litigation and a decision
adverse to the Company could be rendered.
3. CONTRACTS
Renewal of government contracts is subject to, among other things,
appropriations of funds by the various levels of government involved
(Federal, state or local). Also, several contracts contain provisions
whereby the Company may be subject to audit by the government agencies
involved. These contracts also generally contain "termination for the
convenience of the government" and "stop work order" clauses which
generally allow the government to terminate a contract without cause. In
the event one of the Company's larger contracts is terminated, it may
have a material adverse effect on the Company's operations.
F-20
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
4. DISPUTED RECEIVABLE
In April 1999, immediately following the merger with YSI, a non-profit
entity for whom YSI provided management services elected to discontinue
all contracted services pursuant to a change in control clause of its
management agreement with YSI. Upon this determination, YSI presented a
final bill for management services rendered, which the non-profit entity
disputed, claiming, among other things, that it had been billed
incorrectly over the course of the management contract. The Company has
investigated these claims and is currently attempting to negotiate a
settlement with the non-profit in order to avoid litigation. Based on
currently available information, the Company has reserved approximately
$1.4 million against the receivable due from this non-profit at
December 31, 2000.
5. OFFICERS' COMPENSATION
The Company has an employment agreement with its President which expires
February 17, 2002 and is subject to automatic annual renewals. The
contract provides for minimum annual compensation of $270,000, cost of
living increases, use of an automobile, reimbursement of business
expenses, health insurance, related benefits and a bonus equal to 5% of
pre-tax profits in excess of $1.0 million, such bonus not to exceed
$200,000.
The Company has an employment agreement with its Chief Operating Officer
(COO) which expires on January 20, 2002 and provided for minimum annual
compensation of $200,000 with pre-determined annual increases. The
contract also includes automobile allowances, reimbursement of business
expenses, health or disability insurance, related benefits, and a
$110,000 bonus based upon the attainment of a certain level of beds under
contract.
In January 1999, as part of the renegotiations of compensation with its
Chief Financial Officer (CFO) for the period commencing February 26,
1999, the Company increased the CFO's base compensation to $200,000 with
an annual bonus not to exceed $100,000, equal to 0.4% of earnings before
interest, taxes, depreciation, amortization and start up costs. In
addition the CFO was granted five-year options to purchase 25,000 shares
of the Company's common stock at $11.125 per share. The options become
exercisable at the annual rate of 8,333 shares, commencing on the date of
grant. The contract is subject to automatic annual renewals.
6. CONCENTRATIONS OF CREDIT RISK
The Company's contracts in 2000, 1999 and 1998 with government agencies
where revenues exceeded 10% of the Company's total consolidated revenues
were as follows:
Years Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Florida Department of Juvenile Justice 10% 13% 15%
Texas Department of Criminal Justice 13% 10% -
Various Agencies in the State of Texas 13% 11% 10%
State of Maryland Department of Juvenile Justice 11% 10% 13%
7. FIDUCIARY FUNDS
The Company has acted as a fiduciary disbursing agent on behalf of a
governmental entity. Funds received from the governmental entity have
been paid to the general contractor, which constructed the government
owned facilities. The Company is responsible for managing the
construction process. The Company has no legal rights to the funds nor
the constructed facility, and accordingly, such funds do not appear in
the accompanying financial statements.
F-21
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - COMMITMENTS AND CONTINGENCIES - (CONTINUED)
8. CONSTRUCTION COMMITMENTS
The Company has various construction contracts related to ongoing
projects totaling approximately $1.3 million as of December 31, 2000.
9. LETTER OF CREDIT
In connection with the Company's workmen's compensation insurance
coverage requirements, the Company obtained a $269,000 Letter of Credit
from its bank in favor of the insurance carrier. This letter of credit
was released in the first quarter of 2001. In February 2001 the Company
engaged a new insurance carrier. The new carrier requires a step-up
letter of credit with the initial commitment of $450,000 to be secured on
May 1, 2001. This letter of credit will be increased by $450,000 on
August 1, 2001, and again on November 1, 2001 for a total of $1,350,000
by November 1, 2001
NOTE M - CONTRACT WITH THE STATE OF LOUISIANA
In December 1998, the Company entered into a contract with the State of
Louisiana (`the State") to operate the Tallulah Correctional Center for Youth.
The express terms of this contract obligated the State to maintain the
facility at a full population of 686; however, in light of the conditions at
the facility inherited by the Company and the State's desire to maintain the
population of the facility at less than 686 juveniles on an interim basis, the
Company reached an agreement with the State under which the Company would
invoice the State only for the actual monthly population for a period of six-
months from the commencement of operations by the Company. The Company's
agreement was made in consideration of the State's commitment to honor the
terms of the contract and increase the population to the full capacity or pay
for its full utilization, regardless of the actual population level, at the
end of the six month period. As contemplated by the foregoing agreement,
commencing in July 1999, the Company began billing the State at the 686
population level of the original contract. These invoices were disputed by
the State and the Company received payment only for the actual number of
juveniles housed in the facility. During this period, in order to be
conservative, the Company recognized revenues for a population level of 620
(the population level the facility was approved to house by the local judicial
authority prior to commencement of operations by the Company) despite its
belief that it was entitled to payment assuming full utilization of the
facility regardless of the court order. In September 1999, the State
unexpectedly indicated it could not commit to achieve the population levels
required by the contract or to pay for the full utilization of the facility as
provided for in the contract during the remaining term of the contract, and
subsequently, the Company discontinued operations of the facility on September
24, 1999. The Company is currently pursuing payment of all funds that would
be owed under the original contract from the commencement of operation as well
as damages for breach of the contract by the State. The Company did not incur
any material losses in conjunction with this closure.
F-22
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with SFAS No. 128:
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ ---------
Numerator:
Net income (loss) $5,788 $(3,528) $(16,596)
====== ======= =========
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,366 11,219 10,860
Effect of dilutive securities - stock options
and warrants
1 - -
Denominator for diluted earnings per share 11,367 11,219 10,860
====== ====== ========
Net income (loss) per common share - basic $ 0.51 $(0.31) $ (1.53)
====== ======= ========
Net income (loss) per common share - diluted $ 0.51 $(0.31) $ (1.53)
====== ======= ========
The effect of dilutive securities was not included in the calculation of
diluted net loss per common share as the effect would have been anti-dilutive
in all years.
F-23
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - STOCK OPTIONS
In October 1993, the Company adopted a stock option plan (the "Stock Option
Plan"). This plan as amended, provides for the granting of both: (i)
incentive stock options to employees and/or officers of the Company and (ii)
non-qualified options to consultants, directors, employees or officers of the
Company. The total number of shares that may be sold pursuant to options
granted under the stock option plan is 1.5 million. The Company, in June
1994, adopted a Non-employee Directors Stock Option Plan, which provides for
the grant of non-qualified options to purchase up to 150,000 shares of the
Company's Common Stock. In May 1999, the Company adopted the 1999 Non-
Employee Director Stock Option Plan, which provides for the grant of non-
qualified options to purchase up to 300,000 shares of the Company's Common
Stock.
Options granted under all plans may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Options granted under all plans will expire not more than ten
years from the date of grant.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB No. 25 and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock based compensation plans
other than for restricted stock. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS No. 123,
the Company's net loss per share would be adjusted to the pro forma amounts
indicated below:
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ ---------
Net income (loss)
As reported $5,788 $(3,528) $(16,596)
Pro forma (unaudited) 4,845 (4,454) (22,102)
Income (loss) per common share - basic
As reported $ 0.51 $ (0.31) $ (1.53)
Pro forma (unaudited) 0.43 (0.40) (2.04)
Income (loss) per common share - diluted
As reported $ 0.51 $ (0.31) $ (1.53)
Pro forma (unaudited) 0.43 (0.40) (2.04)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2000, 1999, and
1998.
Years Ended December 31,
-----------------------
2000 1999 1998
------ ------ ---------
Volatility 75% 62% 77%
Risk free rate 5.50% 5.00% 5.75%
Expected life 3 years 3 years 3 years
The weighted average fair value of options granted during 2000, 1999, and 1998
for which the exercise price equals the market price on the grant date was
$2.16, $3.51, and $18.19, respectively.
F-24
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially effect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Stock option activity during 2000, 1999 and 1998 is summarized below:
Weighted-Average
Options Exercise Price
------- ----------------
Balance, December 31, 1997 896,707 $15.49
Granted 351,544 26.12
Exercised (44,061) 20.67
Canceled (113,012) 31.96
---------
Balance, December 31, 1998 1,091,178 16.58
Granted 319,001 7.72
Exercised (108,501) 4.67
Canceled (369,553) 28.24
---------
Balance, December 31, 1999 932,125 10.34
Granted 59,000 4.11
Exercised - -
Canceled (83,875) 13.67
---------
Balance, December 31, 2000 907,250 $ 9.66
=========
F-25
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O - STOCK OPTIONS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 2000:
Weighted-Average
Remaining
Range of Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
--------------- ----------- ---------------- ----------------
$ 2.06 - 4.12 21,000 9.2 $ 3.88
4.12 - 6.18 37,000 9.1 4.26
6.18 - 8.25 275,000 8.3 7.50
8.25 - 10.31 241,000 4.5 8.96
10.31 - 12.37 111,500 2.1 11.57
12.37 - 14.44 184,250 2.2 12.98
14.44 - 16.50 17,500 0.5 15.25
16.50 - 18.56 20,000 0.4 17.82
-------
907,250 5.8 $ 9.66
=======
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- ---------------
$ 4.12 - 6.18 1,334 $ 4.45
6.18 - 8.25 110,003 7.50
8.25 - 10.31 241,000 8.96
10.31 - 12.37 85,001 11.66
12.37 - 14.44 126,171 12.97
14.44 - 16.50 17,500 15.25
16.50 - 18.56 20,000 17.82
-------
601,009 $10.38
=======
NOTE P - EMPLOYEE BENEFIT PLANS
On July 1, 1996, the Company adopted a contributory retirement plan under
Section 401(k) of the Internal Revenue Code, for the benefit of all employees
meeting certain minimum service requirements. Eligible employees can
contribute up to 15% of their salary but not in excess of $10,500 in 2000 and
$10,000 in 1999 and 1998. The Company's contribution under the plan amounts to
20% of the employees' contribution. The Company contributed $154,000,
$322,000 and $127,000 in 2000, 1999, and 1998 respectively, to the plan.
NOTE Q - SELF INSURANCE
The Company is self-insured for workers' compensation. The Company has
obtained an aggregate excess policy, which limits the Company's exposure to a
maximum of $2.5 million and $1.2 million as of December 31, 2000 and 1999,
respectively. The estimated insurance liability totaling $1.4 million and
$909,000 on December 31, 2000 and 1999, respectively is based upon review by
the Company of claims filed and claims incurred but not reported.
The Company maintains a group health plan subject to a self-insured retention
and subject to a loss limit of $100,000 per individual. At December 31, 2000
the plan had approximately 3,000 participants and a medical insurance
liability of $1.6 million was recognized. This liability represents the
maximum claim exposure under the plan less actual payments made during 2000.
In addition, the Company is subject to a maximum terminal liability of
$917,000. Since termination is not anticipated, no terminal accruals were
made at December 31, 2000.
F-26
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE R - RELATED PARTY TRANSACTIONS
In addition to related party transactions disclosed elsewhere, the Company has
a note receivable from a limited partnership in the amount of $480,000 related
to the sale of the Tampa Bay Academy. The note is guaranteed by a member of
the Board of Directors. Interest is payable quarterly beginning April 1, 2001
at 9.5% and the note is due in full on September 1, 2001. Cash of
approximately $3.3 million was received and a loss of approximately $1.0
million was recorded upon the sale of the Tampa Bay Academy.
NOTE S - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1999 and 2000 (in thousands).
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
1999(A) 2000 1999(B) 2000 1999 2000 1999 2000
------- ------- ------- ------- ------- ------- ------- -------
Revenues $58,934 $53,709 $60,878 $52,357 $60,464 $52,209 $53,642 $52,537
Operating expenses 70,468 49,889 56,684 49,338 57,975 48,833 49,538 50,100
------- ------- ------- ------- ------- ------- ------- -------
Income from operations (11,534) 3,820 4,194 3,019 2,489 3,376 4,104 2,437
Other income (expense) 2,176 (2,020) (2,095) (1,682) (1,427) (1,802) (2,151) (1,360)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary gain (9,358) 1,800 2,099 1,337 1,062 1,574 1,953 1,077
Extraordinary gain - - - - 716 - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $(9,358) $ 1,800 $ 2,099 $ 1,337 $ 1,778 $ 1,574 $ 1,953 $ 1,077
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted
earnings (loss) per
share:
Income (loss) before
extraordinary gain $(0.84) $0.16 $0.19 $0.12 $0.10 $0.14 $0.17 $0.10
Extraordinary gain - - - - 0.06 - - -
------ ----- ----- ----- ----- ----- ----- -----
Net income (loss) $(0.84) $0.16 $0.19 $0.12 $0.16 $0.14 $0.17 $0.10
====== ===== ===== ===== ===== ===== ===== =====
(A) - Results of first quarter reflect $12.1 million in merger costs and
related restructuring charges
(B) - Results of third quarter reflect the write-off of $1.9 million in
deferred financing costs and the extraordinary gain on the early
extinguishment of debt of $716,000, net of tax of $467,000.
F-27