-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P4LVJgRq8HHrAz1utwWA0CEqy8+LUgS0+Vvu3mZpA4mcsn5i6GlGm2zWbhK3qK/M h+CjNsQUjvj3xf2UVpJFgg== 0000914670-99-000017.txt : 19991117 0000914670-99-000017.hdr.sgml : 19991117 ACCESSION NUMBER: 0000914670-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORRECTIONAL SERVICES CORP CENTRAL INDEX KEY: 0000914670 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 113182580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23038 FILM NUMBER: 99755461 BUSINESS ADDRESS: STREET 1: 1819 MAIN STREET SUITE 1000 CITY: SARASOTA STATE: FL ZIP: 34236 BUSINESS PHONE: 9419539199 MAIL ADDRESS: STREET 1: 1819 MAIN STREET SUITE 1000 STREET 2: CORRECTIONAL SERVICES CORP CITY: SARASOTA STATE: FL ZIP: 34236 FORMER COMPANY: FORMER CONFORMED NAME: ESMOR CORRECTIONAL SERVICES INC DATE OF NAME CHANGE: 19931110 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended Commission File Number September 30, 1999 0-23038 ---------------- --------- CORRECTIONAL SERVICES CORPORATION ---------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 11-3182580 ----------- -------------- (State of Incorporation) (I.R.S. Employer Identification Number) 1819 Main Street, Suite 1000, Sarasota, Florida 34236 ----------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (941) 953-9199 ------------------ Not Applicable ---------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) Number of shares of common stock outstanding on November 15, 1999: 11,373,064 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 Act of 1934 during the preceding 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 --- --- 1 CORRECTIONAL SERVICES CORPORATION INDEX PAGE NO. ------- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 4-5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 2
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS SEPTEMBER 30, DECEMBER 31, 1999 (unaudited) 1998 ------------ ----------- CURRENT ASSETS CASH AND CASH EQUIVALENTS $ 3,743 $ 7,639 RESTRICTED CASH 295 157 ACCOUNTS RECEIVABLE, NET 42,887 37,924 RECEIVABLE FROM SALE OF EQUIPMENT AND LEASEHOLD IMPROVEMENTS - 994 DEFERRED TAX ASSET 2,716 2,071 PREPAID EXPENSES AND OTHER CURRENT ASSETS 4,097 5,421 ------------ ------------ TOTAL CURRENT ASSETS 53,738 54,206 PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST NET 49,271 53,120 OTHER ASSETS DEFERRED TAX ASSET 11,394 9,162 OTHER 7,396 9,847 ------------ ------------ $121,799 $126,335 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 28,459 $ 27,823 SUBORDINATED PROMISSORY NOTES 100 1,101 7% CONVERTIBLE SUBORDINATED DEBENTURES 14,190 32,200 CURRENT PORTION OF LONG-TERM OBLIGATIONS 5 22 ------------ ------------ TOTAL CURRENT LIABILITIES 42,754 61,146 LONG-TERM SENIOR DEBT 28,080 11,500 LONG-TERM OBLIGATIONS 318 364 LONG-TERM PORTION OF FACILITY LOSS RESERVES 758 1,299 ------------ ------------ TOTAL LIABILITIES 71,910 74,309 STOCKHOLDERS' EQUITY PREFERRED STOCK, $.01 PAR VALUE, 1,000,000 SHARES AUTHORIZED, NONE ISSUED AND OUTSTANDING - - COMMON STOCK, $.01 PAR VALUE, 30,000,000 SHARES AUTHORIZED, 11,373,064 AND 10,906,768 SHARES ISSUED AND OUTSTANDING 114 109 ADDITIONAL PAID-IN CAPITAL 82,825 79,552 ACCUMULATED DEFICIT (33,050) (27,635) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 49,889 52,026 ------------ ------------ $121,799 $126,335 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements. 3
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 -------- -------- REVENUES $180,277 $134,942 -------- -------- FACILITY EXPENSES: OPERATING 159,052 116,140 STARTUP COSTS 980 7,840 ------- ------- 160,032 123,980 ------- ------- CONTRIBUTION FROM OPERATIONS 20,245 10,962 OTHER OPERATING EXPENSES: GENERAL AND ADMINISTRATIVE 9,993 13,623 COLLEGE STATION CLOSURE COSTS - 2,327 MERGER COSTS AND RELATED RESTRUCTURING CHARGES 13,813 778 WRITE-OFF OF DEFERRED FINANCING COSTS 1,622 - ------- ------- OPERATING LOSS (5,183) (5,766) INTEREST AND OTHER EXPENSE, NET (2,218) (1,543) LOSS BEFORE INCOME TAXES, EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (7,401) (7,309) INCOME TAX BENEFIT 1,001 1,790 LOSS BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (6,400) (5,519) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT, NET OF TAX OF $643 985 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX OF $3,180 - (4,863) ------- -------- NET LOSS $(5,415) $(10,382) ------- -------- ------- -------- BASIC AND DILUTED LOSS PER SHARE: LOSS BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $(0.57) $(0.51) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 0.09 - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (0.45) ------- --------- NET LOSS PER SHARE $(0.48) $(0.96) ------- -------- ------- -------- NUMBER OF SHARES USED TO COMPUTE EPS: BASIC & DILUTED 11,167 10,845
The accompanying notes are an integral part of these statements. 4
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1999 1998 ------- ------- REVENUES $60,464 $50,757 ------- ------- FACILITY EXPENSES: OPERATING 52,994 44,554 STARTUP COSTS 222 1,685 ------- ------- 53,216 46,239 ------- ------- CONTRIBUTION FROM OPERATIONS 7,248 4,518 OTHER OPERATING EXPENSES: GENERAL AND ADMINISTRATIVE 3,248 4,720 COLLEGE STATION CLOSURE COSTS - 2,327 MERGER COSTS AND RELATED RESTRUCTURING CHARGES - 472 WRITE OFF OF DEFERRED FINANCING COSTS 1,622 - ------- ------- OPERATING INCOME (LOSS) 2,378 (3,001) INTEREST AND OTHER EXPENSE, NET (736) (560) ------- ------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,642 (3,561) INCOME TAX (EXPENSE) BENEFIT (648) 354 ------- ------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 994 (3,207) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT, NET OF TAX OF $643 985 - ------- ------- NET INCOME (LOSS) $ 1,979 $(3,207) ------- ------- ------- ------- BASIC EARNINGS (LOSS) PER SHARE: INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT $0.09 $(0.29) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 0.09 - ------- ------- NET INCOME (LOSS) PER SHARE $0.18 $(0.29) ------- ------- ------- ------- DILUTED EARNINGS (LOSS) PER SHARE: INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT $0.09 $(0.29) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 0.09 - ------- ------- NET INCOME (LOSS) PER SHARE $0.18 $(0.29) ------- ------- ------- ------- NUMBER OF SHARES USED TO COMPUTE EPS: BASIC 11,302 10,902 DILUTED 11,305 10,902
The accompanying notes are an integral part of these statements. 5
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, ----------------- 1999 1998 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS $(5,415) $(10,382) ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH USED IN OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 4,390 4,146 STOCK GRANTED AS COMPENSATION - 68 MERGER RELATED ASSET WRITE DOWN 5,192 - CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - 4,863 COLLEGE STATION CLOSURE CHARGE - 2,327 DEFERRED INCOME TAX EXPENSE (BENEFIT) (2,878) 252 LOSS ON SALE FIXED ASSETS - 19 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 1,622 - CHANGES IN OPERATING ASSETS AND LIABILITIES: RESTRICTED CASH (138) 168 ACCOUNTS RECEIVABLE (4,889) (13,312) PREPAID EXPENSES AND OTHER CURRENT ASSETS 1,325 (4,027) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (1,162) 7,269 RESERVE FOR FACILITY CARRYING COSTS 1,260 (689) ------- -------- NET CASH USED IN OPERATING ACTIVITIES: (2,321) (8,625) ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (2,822) (9,836) PROCEEDS FROM THE SALE OF PROPERTY, EQUIPMENT AND IMPROVEMENTS - 24 PROCEEDS FROM THE SALE OF BEHAVIORAL HEALTH BUSINESS - 4,500 COLLECTION OF NOTES RECEIVABLE - 38 OTHER ASSETS (19) (682) ------- -------- NET CASH USED IN INVESTING ACTIVITIES: (2,841) (5,956) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS ON SENIOR DEBT, NET 16,580 9,742 PAYMENT ON SHORT-TERM AND LONG-TERM OBLIGATIONS (64) (1,448) PAYMENT OF SUBORDINATED DEBT (17,383) (2,886) PROCEEDS FROM SALE OF FIXED ASSETS 920 920 NET PROCEEDS FROM EXERCISE OF STOCK OPTIONS AND WARRANTS 3,278 1,694 DEBT ISSUANCE COSTS (2,363) (316) LONG-TERM PORTION OF PREPAID LEASE 298 275 DIVIDEND DISTRIBUTION - (59) ------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: 1,266 7,922 ------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (3,896) (6,659) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,639 13,231 ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,743 $ 6,572 ------- -------- ------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST $ 2,627 $ 2,755 ------- -------- ------- -------- INCOME TAXES $ 146 $ 634 ------- -------- ------- --------
The accompanying notes are an integral part of these statements. 6 CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Correctional Services Corporation and its wholly owned subsidiaries. Due to the pooling of interests business combination consummated on March 31, 1999, described in Note 2, the condensed consolidated financial statements also include the accounts of Youth Services International, Inc. and its subsidiaries ("YSI") for all periods presented. In the opinion of management of Correctional Services Corporation and subsidiaries (the "Company"), the accompanying unaudited condensed consolidated financial statements as of September 30, 1999, and for the three and nine months ended September 30, 1999 and 1998, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation. The condensed consolidated balance sheet as of December 31, 1998 has been derived from the audited financial statements of the Company and YSI as of December 31, 1998. The statements herein are presented in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements on Form 10-K for the Company and Form 8-K for YSI have been omitted from these statements, as permitted under the applicable rules and regulations. The statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company's Annual Report on Form 10-K and Form 8-K for YSI for the year ended December 31, 1998 and Form 8-K for CSC filed September 28, 1999. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - POOLING OF INTERESTS BUSINESS COMBINATION On March 31, 1999, the Company exchanged 3,114,614 shares of the Company's common stock for all of the common stock of YSI. YSI operates juvenile justice facilities and also provides aftercare services to adjudicated youth. The above transaction has been accounted for as a pooling of interests and, accordingly the condensed consolidated financial statements for the periods presented have been restated to include the accounts of YSI. Revenue and net income (loss)of the separate companies for the period preceding the YSI merger were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ REVENUE NET INCOME (LOSS) REVENUE NET INCOME (LOSS) ------- ---------------- ------- --------- CSC, as previously reported before the $28,311 $1,237 $ 67,577 $3,296 effect of change in accounting principle (see Note 5) Effect of change in accounting principle - (1,036) - (9,579) YSI 22,446 (3,408) 67,365 (4,099) ------- ------- -------- ------- Combined $50,757 ($3,207) $134,942 ($10,382) ------- ------- -------- -------- ------- ------- -------- --------
In connection with the merger, during the first quarter of 1999, the Company recorded a charge to operating expenses of approximately $13,813,000 ($10,279,000, after taxes) for direct costs related to the merger and certain other costs resulting from the restructuring of the newly combined operations. 7 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 and costs associated with the consolidation of administrative functions and the expected closure of certain facilities. Exit costs include charges resulting from the cancellation of lease agreements and other long-term commitments, the write-down of underutilized assets or assets to be disposed of and miscellaneous other costs. Merger costs and related restructuring charges are comprised of the following (in thousands): Direct merger costs $ 6,111 Restructuring charges: Employee severance and change in control payments 2,339 Exit costs 4,410 Other 953 ------- Total $13,813 ------- ------- In addition, in connection with the merger, the Company assumed $32,200,000 of 7% Convertible Subordinated Debentures originally issued by YSI during the year ended June 30, 1996. Under the terms of the indenture pursuant to which YSI issued the Debentures, the acquisition of YSI by the Company constituted a "change of control" thereby enabling the holders of the Debentures to demand redemption by the Company. The applicable portion of the unamortized costs related to the issuance of these debentures have been appropriately written off and are included in the direct merger costs. Agreements were reached with certain holders representing $30,500,000 of the debentures to defer payment until March 31, 2000 leaving a balance of $1,730,000 which was repaid in June 1999. (See Liquidity and Capital Resources Section in Management Discussion and Analysis.) NOTE 3 - DEFERRED FINANCING COSTS On August 21, 1999, the Company finalized a new $95 million financing arrangement with Summit Bank, N.A., a New Jersey based national bank. Simultaneously with the closing of the new credit facility, the Company repaid its previously established credit facility. Consequently, in accordance with FASB No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, as interpreted, unamortized deferred financing costs of $1,622,000 associated with the previously established credit facility were written off. NOTE 4 - EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 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 redemption price was equal to 90% of the original principal amount plus accrued but unpaid interest. In September 1999, the Company used approximately $14,750,000 of its available credit to redeem $16,280,000 face value of Debentures leaving a balance of $14,190,000. This transaction resulted in a gain of $985,000 (net of tax of $643,000) or $.09 per share. NOTE 5 - DEFERRED DEVELOPMENT AND STARTUP COSTS In the fourth quarter of 1998 the Company elected to adopt early the AICPA's Statement of Position 98-5 (SOP 98-5), ACCOUNTING FOR START-UP COSTS. The accounting change required the Company to expense start-up and deferred 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 $4,863,380 (net of tax benefit of $3,180,000) retroactively to January 1, 1998. Due to this implementation methodology, the nine months ended September 30, 1998 was retroactively restated to reflect the cumulative effect of change in accounting. For the three and nine months ended September 30, 1998 operating expenses were restated to reflect the reversal of $642,000 and $1,442,000, respectively of amortization expense. In addition, $2,355,000 and $9,238,000 of startup and development cost previously capitalized were expensed as incurred for the three and nine months ended September 30, 1998. 8 NOTE 6 - 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. This contract obligated the State to maintain the facility at a full population of 686. Conditioned upon the State maintaining the 686 population level for the remaining term of the contract, the Company entered into a verbal understanding with the State indicating it would only invoice the State for the actual monthly population for a period of six- months from the commencement of operations by the Company. At the end of the six-month period, the State was to increase the population to the full capacity or pay for its full utilization. In July 1999, the Company began billing the State at the 686 population level of the original contract. Revenues in the quarter, however, were only recognized 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). In September 1999, the State unexpectedly indicated it could not commit to achieve the population levels required by the contract for its remaining term and subsequently, the Company discontinued operations of the 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. The Company does not anticipate any material losses to be incurred in conjunction with this closure. NOTE 7 - INCOME TAXES Deferred tax assets consisting of a current portion of $2,716,000 and a long-term portion of $11,394,000 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 Company, after considering its pattern of profitability and its anticipated future taxable income, believes it is more likely than not that the deferred tax assets will be realized. NOTE 8 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with SFAS No. 128: Nine Months Ended September 30, 1999 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented Nine Months Ended September 30, 1998 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented. Three Months Ended September 30, 1999 Numerator: Net Income $1,979 ------ ------ Denominator: Basic earnings per share: Weighted average shares outstanding 11,302 Effect of dilutive securities - stock options and warrants 3 ------ Denominator for diluted earnings per share 11,305 ------ ------ Three Months Ended September 30, 1998 9 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This document contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 which are not historical facts and involve risks and uncertainties. These include statements regarding the expectations, beliefs, intentions or strategies regarding 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: the integration of Youth Services International; occupancy levels; the renewal of contracts, the ability to secure new contracts; availability and cost of financing to redeem YSI's debentures and to expand our business; and public resistance to privatization. Additional risk factors include those discussed in the Company's joint proxy statement/prospectus, dated March 4, 1999. The Company does not undertake any obligation to update any forward-looking statements. The Company is one of the largest and most comprehensive providers of juvenile rehabilitative services with 38 facilities and approximately 4,300 juveniles in its care. In addition, the Company is a leading developer and operator of adult correctional facilities operating 19 facilities representing approximately 7,200 beds. On a combined basis, as of September 30, 1999, the Company provided services in 21 states and Puerto Rico, representing approximately 11,500 beds excluding 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 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. RECENT DEVELOPMENTS On March 31, 1999, the Company completed the acquisition of YSI, which was accounted for using the pooling of interests method. The Company issued 3,114,614 shares of the its common stock for all YSI capital 10 stock. Accordingly, the Company's consolidated financial statements have been restated to reflect the combination with YSI. On August 25, 1999, the Company announced that it did not intend to seek renewal of its contract with the Florida Department of Juvenile Justice for the management of the Pahokee Youth Development Center (350 beds). On October 24, 1999, the Company discontinued operations of this facility. Also on August 25, 1999, the Company announced it would be closing the Camp Washington facility in Virginia (45 beds) and the Los Hermanos Ranch in Bryan, Texas (60 beds) in the fourth quarter. In addition, during the third quarter 1999 the Company discontinued operating the Travis County Substance Abuse Treatment Facility in Austin, Texas (74 beds) and the Hays County Juvenile Justice Center in San Marcos, Texas (76 beds). In September 1999, the Company informed the State of Louisiana that it would not be feasible to continue operations of the Tallulah Correctional Center for Youth because the State would not commit to increase the per diem or achieve population levels as stated in the operating contract. On September 24, 1999, the Company discontinued operations of this facility (See Note 6 of the Company's September 30, 1999 financial statements titled "Contract with the State of Louisiana.") RESULTS OF OPERATIONS The following tables set forth-certain operating data as a percentage of total revenues:
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ------ ------ REVENUES 100.0% 100.0% FACILITY EXPENSES: OPERATING 88.2% 86.1% STARTUP COSTS 0.6% 5.8% ----- ----- 88.8% 91.9% ----- ----- CONTRIBUTION FROM OPERATIONS 11.2% 8.1% OTHER OPERATING EXPENSES: GENERAL AND ADMINSTRATIVE 5.5% 10.1% COLLEGE STATION CLOSURE CHARGE - 1.7% MERGER COSTS AND RELATED RESTRUCTURING CHARGES 7.7% 0.6% DEFERRED FINANCING COSTS 0.9% - ----- ----- 14.1% 12.4% ----- ----- OPERATING LOSS -2.9% -4.3% INTEREST AND OTHER EXPENSE, NET -1.2% -1.1% ----- ----- LOSS BEFORE INCOME TAXES, EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT AND CUMULATIVE EFFECT OF CHANGE IN -4.1% -5.4% INCOME TAX BENEFIT 0.6% 1.3% ----- ----- LOSS BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -3.5% -4.1% EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT, NET OF TAX OF $643 0.5% - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX OF $3,180,000 - -3.6% ----- ----- NET LOSS -3.0% -7.7% ----- ----- ----- -----
11
THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 ------ ------ REVENUES 100.0% 100.0% FACILITY EXPENSES: OPERATING 87.6% 87.8% STARTUP COSTS 0.4% 3.3% ----- ----- 88.0% 91.1% ----- ----- CONTRIBUTION FROM OPERATIONS 12.0% 8.9% OTHER OPERATING EXPENSES: GENERAL AND ADMINISTRATIVE 5.4% 9.3% COLLEGE STATION CLOSURE CHARGE 0.0% 4.6% MERGER COSTS AND RELATED STRUCTURING COSTS 0.0% 0.9% DEFERRED FINANCING COSTS 2.7% 0.0% ----- ----- 8.1% 14.8% ----- ----- OPERATING INCOME (LOSS) 3.9% -5.9% INTEREST AND OTHER EXPENSE, NET -1.2% -1.1% ----- ----- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 2.7% -7.0% INCOME TAX (EXPENSE) BENEFIT -1.1% 0.7% ----- ----- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1.6% -6.3% EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT, NET OF TAX OF $643 1.6% 0.0% ----- ----- NET INCOME (LOSS) 3.2% -6.3% ----- ----- ----- -----
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenue increased by $45.3 million or 34% for the nine months ended September 30, 1999 to $180.3 million compared to the same period in 1998. The increase was primarily due to: - An increase of $45.9 million generated from the opening of 11 juvenile facilities (1,500 beds) and 7 adult facilities (4,283 beds). - A net increase of $3.3 million generated from per diem rate and occupancy level increases in existing facilities. - - A decrease of $3.5 million from the discontinuance of 6 programs (606 beds.) Operating expenses increased $42.9 million or 37% for the nine months ended September 30, 1999 to $159.1 million compared to the same period in 1998 due primarily to the opening of the 18 new facilities mentioned above. As a percentage of revenues, operating expenses increased to 88.2% for the nine months ended September 30, 1999 from 86.1% for the nine months ended September 30, 1998. The increase was primarily attributable to a number of facilities that were in their early stages of operations and were experiencing less than optimal utilization rates. Depending on their cost structure, facilities that are experiencing less than 85% utilization rates generally incur 12 significantly higher operating expenses as a percentage of revenue compared to those at or near capacity. A portion of the increase was offset by 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 $980,000 for the nine months ended September 30, 1999 compared to $7,840,000 for the nine months ended September 30, 1998. Startup for the nine months ended September 30, 1999, related to the startup of the South Fulton, Georgia facility (212 beds), 300-bed expansion of the Crowley, Colorado facility and the 45 bed expansion of the Bayamon, Puerto Rico treatment facility. During the nine months ended September 30, 1998, there were nine facilities (4,527 beds) generating start up costs. General and administrative expenses decreased from $13.6 million for the period ended September 30, 1998 to $10.0 million for the nine months ended September 30, 1999. The decrease of $3.6 million in general and administrative expenses was primarily attributable to: - A $2.9 million reduction of deferred development costs. - 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 5.6% for the nine months ended September 30, 1999 from 10.1% for the nine months ended September 30, 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. In late August 1998, the Company decided to close its program in College Station, Texas. The program was a behavioral health program originally intended to be sold with seven other behavioral health programs sold by the YSI on October 31, 1997. This program was excluded from the October 31, 1997 sale and held for sale during 1998. The College Station facility closed entirely on September 15, 1998. The Company recorded a charge of $2,327,000 during the three months ended September 30, 1998 related to the anticipated future losses related to the College Station facility. The major components of the charge were as follows: Future lease payments $1,250,000 Continuing maintenance and occupancy costs 858,000 Write-down of leasehold improvements and other fixed assets 219,000 ---------- $2,327,000 ---------- ---------- In connection with the merger, during the first quarter of 1999, the Company recorded a charge to operating expenses of approximately $13,813,000 ($10,279,000, after taxes) for direct costs related to the merger 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 and costs associated with the consolidation of administrative functions and the expected closure of certain facilities. Exit costs include charges resulting from the cancellation of lease agreements and other long-term commitments, the write-down of underutilized assets or assets to be disposed of and miscellaneous other costs. YSI incurred $778,000 of merger related costs during the nine months ended September 30, 1998. Included in these merger costs were strategic deal costs incurred by YSI during its initial pursuit of strategic alternatives as announced on June 19, 1998 of $472,000 and $306,000 related to the Youth Services International merger with Community Corrections, Inc. in June 1998. Merger costs and related restructuring charges are comprised of the following (in thousands) for the nine months ended September 30: 13
1999 1998 ------- ------ Direct merger and strategic deal costs $ 6,111 $778 Restructuring charges: Employee severance and change in control payments 2,339 - Exit costs 4,410 - Other 953 - ------- ---- Total $13,813 $778 ------- ---- ------- ----
In September 1999, the Company wrote off $1,622,000 or ($0.09) per share after taxes of unamortized deferred financing costs associated with the previously established credit facility which was repaid in full on September 1, 1999. Interest expense, net of interest income, was $2,218,000 for the nine months ended September 30, 1999 compared to interest expense, net of interest income of $1,543,000 for the nine months ended September 30, 1998, a net increase in interest expense of $675,000. This increase resulted from borrowings on the Company's credit facility to finance the growth of the Company. For the nine months ended September 30, 1999 the Company recognized an income tax benefit of $1,001,000 and an income tax expense of $643,000 related to the extraordinary gain on extinguishment of debt associated with the YSI 7% Convertible Debt, representing an effective tax benefit of 6.2%. For the nine months ended September 30, 1998 the Company recognized a benefit for income taxes of $1,790,000 and an income tax benefit of $3,180,000 related to the cumulative effect of change in accounting principle representing an effective tax benefit of 32.4%. The reduction in the effective tax rate was a result of expensing certain merger costs that are non-deductible for tax purposes. As a result of the foregoing factors, for the nine months ended September 30, 1999 the Company had a net loss of ($6,400,000) and a net loss of ($5,415,000) or ($0.57) and ($0.48) per share before and after the extraordinary gain on extinguishment of debt, respectively. For the nine months ended September 30, 1998 the Company had a net loss of ($5,519,000) and a net loss of ($10,382,000) or ($0.51) and ($0.96) per share before and after the cumulative effect of change in accounting principle, respectively. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Revenue increased by $9.7 million or 19% for the three months ended September 30, 1999 to $60.5 million compared to the same period in 1998 due primarily to an increase in the number of residents housed by the Company. The net change was primarily due to: - An increase of $12.3 million generated from the opening of 9 juvenile facilities (1,254 beds) and 3 adult facilities (2,262 beds). - A net increase of $1.5 million generated from per diem rate and occupancy level increases in existing facilities. - A decrease of $4.1 million from the discontinuance of the 6 programs (606 beds.) Operating expenses increased $8.4 million or 19% for the three months ended September 30, 1999 to $53.0 million compared to the same period in 1998 due primarily to the opening of the 12 new facilities mentioned above. As a percentage of revenues, operating expenses decreased to 87.6% for the three months ended September 30, 1999 from 87.8% for the three months ended September 30, 1998. The decrease was primarily 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. 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. The majority of this decrease was offset by certain facilities, which experienced less than optimal utilization rates. Depending on their cost structure, facilities that are 14 experiencing less than 85% utilization rates generally incur significantly higher operating expenses as a percentage of revenue compared to those at or near capacity. Startup costs were $222,000 for the three months ended September 30, 1999 compared to $1,685,000 for the three months ended September 30, 1998. During the three months ended September 30, 1998, there were four facilities in the startup phase of operations. During the three months ended September 30, 1999, the Bayamon, Puerto Rico facility incurred start up costs relating to the 45-bed expansion. General and administrative expenses decreased to $3.2 million for the three months ended September 30, 1999 from $4.7 million for the three months ended September 30, 1998. The decrease in general and administrative expenses was primarily attributable to a decrease in deferred development costs of $934,000 and the reduction of the administrative staff and corporate overhead of the YSI subsidiary and synergies achieved from the merger. As a percentage of revenues, general and administrative expenses decreased to 5.4% for the three months ended September 30, 1999 from 9.3% for the three months ended September 30, 1998. The decrease in general and administrative expenses as a percentage of revenue is a result of leveraging these reduced costs over a larger revenue base. Other operating expenses for the three months ended September 30, 1999 consist of the write off of unamortized deferred financing costs of $1,622,000 associated with the previously established credit facility which was paid in full on September 1, 1999. For the three months ended September 30, 1998 other operating expenses consisted of College Station closure costs of $2,327,000 as detailed out in the nine-month comparison above and merger related costs of $472,000. The merger related costs for the three months ended September 30, 1998 were strategic deal costs incurred by YSI during its original pursuit of strategic alternatives consisting primarily of professional fees. Interest expense, net of interest income, was $736,000 for the three months ended September 30, 1999 compared to interest expense, net of interest income of $560,000 for the three months ended September 30, 1998, a net increase in interest expense of $176,000. This increase resulted from prior borrowings on the Company's credit facility to finance the substantial growth of the Company during late 1998 and early 1999. For the three months ended September 30, 1999 the Company recognized an income tax provision of $648,000 and $643,000 related to the extraordinary gain on extinguishment of debt associated with the YSI 7% Convertible Debt, representing an effective tax rate of 39.5%. For the three months ended September 30, 1998 the Company recognized a benefit for income taxes of $354,000 representing an effective tax benefit of 9.9%. As a result of the foregoing factors, for the three months ended September 30, 1999 the Company had net income of $994,000 and net income of $1,979,000 or $0.09 and $0.18 per share before and after the extraordinary gain on extinguishment of debt, respectively. For the three months ended September 30, 1998 the Company had a net loss of ($3,207,000) or ($0.29) per share. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had $3,743,000 in cash and working capital of $10,984,000, as compared to December 31, 1998 when the Company had $7,639,000 in cash and a working capital deficit of ($6,940,000). The increase in the Company's working capital during the nine months ended September 30, 1999 was attributable primarily to the redemption of approximately $18,010,000 of the YSI's subordinated debenture obligations, which were classified as current liabilities at December 31, 1998. These subordinated debentures were repaid with proceeds from long term senior debt and cash. The decrease in cash is further explained below. Net cash used in operating activities was $2,321,000 for the nine months ended September 30, 1999 compared to net cash used in operating activities of $8,625,000 for the nine months ended September 30, 1998. The change is attributable primarily to: - An increase in net income - The payment of cash expenses related to the merger in 1999. 15 - An increase in accounts receivable related to the opening of new facilities. Net cash of $2,841,000 was used in investing activities during the nine months ended September 30, 1999 as compared to $5,956,000 used in investing activities in the nine months ended September 30, 1998. In the 1999 period such cash was used principally for: - Capital expenditures related to the opening of new facilities. - Leasehold improvements on existing facilities. - Merger related computer technology and upgrades. - Land improvement for future development. In the comparable period for 1998, the principal investing activities of the Company were: - Capital expenditures related to the opening of new facilities; - Offset by the receipt of $4,500,000 from the sale of the Behavioral Health business owned by YSI. Net cash of $1,266,000 was provided by financing activities for the nine months ended September 30, 1999 as compared to $7,922,000 provided by financing activities for the nine months ended September 30, 1998. During the 1999 period the Company's primary sources and uses of funds were: - Net proceeds of $16,580,000 from the Company's revolving credit facilities primarily used to redeem a portion of the subordinated debt as noted below. - Receipt of $3,278,000 from the exercise of stock options and warrants. - Redemption of subordinated debt totaling $17,383,000. - Payment of debt issuance costs of $2,363,000. In the comparable period for 1998, the primary sources and uses of cash provided by financing activities were: - Proceeds from the Company's revolving credit agreement of $9,742,000. - Proceeds of $1,694,000 received from the exercise of stock options and warrants. - Repayments of short-term borrowings and long-term debt of $1,448,000. - Redemption of subordinated debt totaling $2,886,000. On August 31, 1999, the Company finalized a new $95 million financing arrangement with Summit Bank, N.A., a New Jersey based national bank. The new financing consists of the following components: - $30 million 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. - $20 million credit facility which provides the Company with additional financing to be used by the Company to fund the redemption of the outstanding 7% Convertible Subordinated Debentures Due March 31, 2000 that were issued by the Youth Services International, Inc., a subsidiary of the Company (the "Debentures"). 16 - $45 million in financing which may be used by the Company to purchase land and property and to finance the construction of new facilities through an operating lease arrangement. Simultaneously with the closing of the new credit facilities, the Company used approximately $13,080,000 of the available credit under the revolving line of credit facility to discharge all of its outstanding line of credit banking indebtedness to NationsBank, N.A., fees related to the financing and repayment of other indebtedness. At September 30, 1999 the Company has $16,920,000 available under the new revolving line of credit. Additionally, in connection with the closing of the new credit facilities, the Company used approximately $18,984,000 of its available credit under the lease credit facility to discharge its obligations to NationsBank under a similar financing vehicle previously provided by NationsBank to the Company. As a result, the Company currently has $26,016,000 available for additional property acquisition and construction under this operating lease financing facility. In anticipation of entering into the new 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 new credit facilities at a redemption price equal to 90% of the original principal amount thereof, plus accrued but unpaid interest. The Company used approximately $14,750,000 of its available credit under the delayed draw down facility to redeem $16,280,000 face value of these Debentures. As a result of the above note redemptions, approximately $14,190,000 in principal amount of these Debentures remain outstanding at September 30, 1999. Absent a different agreement, the Company will be required to redeem these remaining Debentures on March 31, 2000 at 100% of the original principal amount thereof, plus accrued but unpaid interest. The Company expects to utilize its credit facility to repay the balance of the Debentures. The Company continues to make cash investments in the acquisition and construction of new facilities and the expansion of existing facilities. In addition, the Company expects to continue to have cash needs as it relates to financing start-up costs in connection with new contracts. In addition the Company is continuing to evaluate opportunities, which could require significant outlays of cash. If such opportunities are pursued the Company would require additional financing resources. Management believes these additional resources may be available through alternative financing methods. YEAR 2000 The Year 2000 problem is the result of two potential malfunctions that could have an impact on the Company's operations. First, many computer systems and software currently in use have been programmed to use two digits rather than four to identify the year. Consequently, the year 2000 could be incorrectly interpreted as the year 1900. The second potential problem that embedded chips used in various equipment may also have been designed using the two digits rather than four to define the applicable year. These chips are sometimes used in the security and communication equipment used at certain of the Company's facilities. The Company has established a Year 2000 Program Management Plan (PMP), chartered to prepare and assess the Company's readiness for the year 2000. The Company's corporate MIS department has conducted an in-depth assessment and remediation of its key information technology systems including its client server operating systems and critical financial and non-financial applications. Based on this assessment, the Company believes that these key information technology systems are Year 2000 compliant. However,no assurance that coding errors or other defects will not be discovered in the future that will result in the replacement of the affected hardware, software or equipment. The Company's Corporate MIS staff continues to evaluate the remaining non- critical information technology systems for Year 2000 compliance and to inventory, assess and correct or replace equipment that contains embedded chips that will have a direct impact on inmate security or employee safety. Under the guidelines of the PMP, the Company has drawn upon the expertise, both internally and externally, of technical experts who specialize in Year 2000 issues. The Company has contacted and is relying on information provided by vendors and manufacturers regarding the Y2K compliance status of their products. There can be no assurances that in all instances accurate informa- 17 tion is being provided by these vendors and manufacturers and the Company can not guarantee the repair, replacement or upgrade of all equipment on a timely basis. Contingency planning continues to be established and implemented in an effort to minimize any impact from Y2K related failures of such equipment that might arise on and around January 1, 2000. The planning also addresses financial and operational problems which in the event of systems disruptions and the identification of alternative vendors and back-up processes that do not rely on computers, whenever possible. As part of the Company's general operational policy, CSC's facilities have existing continge outcome of their efforts. The Company has incurred and expects to continue to incur expenses allocable to internal staff, as well as costs for outside consultants, computer and non-information technology systems remediation and replacement, in order to achieve Year 2000 compliance. In addition, the Company is working with its financing entities to finalize its contingency plan relating to the availa- bility of liquidity in the event of systems disruptrational policy, CSC's facilities have existing continge tcome of their efforts. The Company has incurred and expects to continue to incur expenses allocable to internal staff, as well as costs for outside consultants, computer and non-information technology systems remediation and replacement, in order to achieve Year 2000 compliance. In addition, the Company is working with its financing entities to finalize its contingency plan relating to the availability of liquidity in the event of systems disruptions of third parties. The Company estimates it has invested approximately $500,000 in connection with its PMP, which was funded through cash flows from operations. These estimated final costs of the Company's Year 2000 compliance program of $650,000 are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third-party remediation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from the Company's plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in specific areas, the ability to locate and correct relevant non-compliant software and embedded technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. This entire section "Year 2000 Issue" is hereby designated a "Year 2000 Readiness Disclosure" under and subject to the United States Year 2000 Information and Readiness Disclosure Act (1998). RISK FACTORS DECREASES IN OCCUPANCY LEVELS AT OUR FACILITIES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. While the 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/juvenile 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 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 1998, YSI 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 Company's facilities in the future and new and existing facilities might not reach occupancy levels required to produce profitability. 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. 18 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 in favor of the contracting governmental agency. Many of the Company's 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. A contracting governmental agency often has a right to terminate a facility contract with or without cause by giving us adequate notice. 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. A contracting government agency could 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. We also 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. WE FACE FINANCIAL RISKS RELATING TO SPECULATIVE PROJECTS, INCLUDING THE LOSS OF INITIAL OUTLAYS ON CONTRACTS NOT AWARDED TO US. In some cases, we may decide to construct and own a facility without a contract award when we believe there is a need for the facility and a strong likelihood we will be awarded a contract. However, we take the risk that a contract may not be awarded. If contracts do not materialize, the initial outlays may be lost. 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 have recently required successful bidders to make a significant capital investment in connection with the financing of a particular project, a trend which will require the Company to have sufficient capital resources to compete effectively. If such capital resources are required, we may or may not be able to obtain them. 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 similar risks of international operations faced by US Enterprises operating abroad. 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. WE MAY NOT BE ABLE TO ACHIEVE THE GROWTH WE ANTICIPATE, OR IF ACHIEVED, WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE IT. CSC has experienced significant growth and expects that the Company will also continue to grow. Successful growth depends on our ability to obtain and train qualified personnel to handle the increasing number of juveniles and adults in our care, to develop and operate the information technology systems and financial controls necessary to manage expanded operations, to manage our resources over a larger base of programs and activities, and to integrate efficiently and effectively the business and financial any newly developed programs. We may not be able to achieve the growth anticipated or, if achieved, we may not be able to effectively manage it. 19 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. 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. 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. 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 businesses owned by members of minority groups. We may not always successfully comply with these regulations. 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. INSURANCE COVERAGE MAY BE INADEQUATE OR UNAVAILABLE TO COVER POTENTIAL LIABILITY RELATED TO MANAGEMENT OF CORRECTIONAL AND DETENTION FACILITIES. 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 20 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. ITEM 3. 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 ----------------------- 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE ---- ---- ---- ---- ---- ---------- ----- ---------- Fixed rate debt 15,442,181 5,002,404 5,002,651 3,752,923 3,222 305,950 29,509,331 29,509,331 ---------- --------- --------- --------- ----- ------- ---------- ---------- ---------- --------- --------- --------- ----- ------- ---------- ---------- Weighted average interest Rate at September 30, 1999 7.18% ---- ---- Variable rate LIBOR debt - - 13,079,504 - - - 13,079,504 13,079,504 ---------- -------- ---------- --------- ----- ------ ---------- ---------- ---------- -------- ---------- --------- ----- ------ ---------- ---------- Weighted average interest Rate at September 30, 1999 7.91% ---- ----
PART II - - OTHER INFORMATION Item 1. Legal Proceedings The Company is not party to any legal proceedings, other than ordinary and routine litigation incidental to its business, which in the opinion of the Company are material to the Company, either individually or in the aggregate. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. 21 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) EXHIBITS 10.74 Employment Agreement dated September 29, 1999 between CSC and James F. Slattery. 10.75 Change in Control Agreement dated September 29, 1999 between CSC and James F. Slattery. 11. Computation of Per Share Earnings. 27. Financial Data Schedule (b) REPORTS ON FORM 8-K Form 8-K filed on September 28, 1999 relating to the Credit Agreements dated August 31, 1999 entered into by CSC and Summit Bank, N.A. and by CSC, and Summit Bank, N.A., SunTrust Bank, Nashville, N.A. and Atlantic Financial Group Limited. 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORRECTIONAL SERVICES CORPORATION Registrant By: /S/ IRA M. COTLER Ira M. Cotler, Chief Financial Officer Dated: November 15, 1999 23 EX-10.74 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 29{th} day of September 1999 by and between Correctional Services Corporation ("CSC" or "Employer") and James F. Slattery ("Employee"). WHEREAS, Employee has been employed under an employment agreement dated February 17, 1998 (the "Existing Agreement") and Employee and Employer desire to continue the employment of Employee as the President and Chief Executive Officer of CSC on the terms and conditions set forth in this Agreement; and WHEREAS, parties are entering into contemporaneously herewith a Change in Control Agreement (the "Change in Control Agreement"). NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other valuable consideration the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. POSITION AND DUTIES. CSC hereby continues to employ Employee and Employee hereby accepts continued employment and agrees to continue to serve as the President and Chief Executive Officer of CSC. Employee will perform all duties and responsibilities and will have all authority inherent in the position of President and Chief Executive Officer, subject to the power of the Board of Directors to modify, expand and limit such duties, responsibilities and authorities. 2. TERM. The period of Employee's employment under this Agreement will be for an initial term of three years. Following the first anniversary of this Agreement, the period of employment under this Agreement will be automatically extended by successive one-year terms, unless terminated prior to any anniversary of this Agreement by written notice by either party to the other no less than ninety (90) days prior to the end of any anniversary. In such event, the Agreement will terminate three years from the anniversary of this Agreement immediately prior to which a notice of termination was given. 3. COMPENSATION. (a) BASE SALARY. For all of the services rendered by Employee during the period of employment, CSC will pay Employee a base salary at the rate of not less than $270,000 per year. For each year of the Term after the first year, the Company shall pay to Employee a cost of living increase. The amount shall be determined by multiplying the annual base salary then in effect by a percentage equal to the excess, if any, of the United States Department of Labor Consumer Price Index -- New York Metropolitan area - all items (the "CPI") on the last day of the year preceding the year for which the calculation is being made above the CPI on the date hereof. However, under no circumstances shall the cost of living increase be less than 3.5% per annum. The annual base salary shall be payable at such regular times and intervals as the Company customarily pays its employees from time to time. 1 (b) INCENTIVE BONUS. For each fiscal year of CSC during which the Employee is employed by the Company, Employee shall be entitled to receive a bonus equal to five (5%) percent of the Company's earnings before income tax provision ("pre-tax profits") in excess of $1,000,000, which bonus shall not exceed $200,000. Payment of the bonus, if any, shall be made within thirty (30) days from receipt of the audited financial statement for each fiscal year of the Company. Each bonus payment shall be accompanied by the Company's financial statement for the requisite period and a schedule calculating such bonus. Pre-tax profits determined by the Company and audited by the Company's independent auditors shall be final and binding. For purposes hereof, pre-tax profits shall not include extraordinary gains and losses and shall be determined in accordance with generally accepted accounting principles consistently applied. In the event the Employee works for less than a full fiscal year (other than in the first fiscal year of the term), his bonus for that fiscal year shall be pro-rated. 4. BENEFITS. (a) CSC will provide Employee with the full-time use of a Company automobile. The Company shall purchase all relevant insurance and pay for all fuel and repairs. (b) Employee will be entitled to four weeks of vacation per fiscal year. Employee will be eligible for and will participate in, without action by the Board of Directors of CSC or any committee thereof, any additional benefits and perquisites available to executive officers of CSC, including any group health, life insurance, disability, or other form of employee benefit plan or program of CSC now existing or that may be later adopted by CSC. This includes the health, dental and life insurance programs CSC provides currently to its executives. 5. TERMINATION. (a) BY EMPLOYER WITH CAUSE. This Agreement may be terminated by CSC for Cause by written notice to Employee specifying the event relied upon for such termination within 30 days of such event. The term "Cause" will mean after written notice and a reasonable opportunity to cure: (i) the material failure by Employee to perform such duties as are reasonably incidental to the position of President and Chief Executive Officer; (ii) any instance of gross negligence or willful misconduct by Employee in the performance of Employee's duties; (iii) the conviction of a felony; (iv) chronic absenteeism; (v) substance abuse; or (vi) Employee's breach of the representations and warranties contained in Section 8 of this Agreement. (b) UPON DEATH OR DISABILITY. Employee's employment will terminate immediately upon Employee's death and in that event Employee's base salary and incentive compensation will be paid to Employee's estate or legally appointed representative through the end of the third month following the month in which Employee's death occurs. If Employee become physically or mentally disabled so as to become unable for a period of more than five consecutive months or for shorter periods aggregating at least five months during any twelve-month period to perform Employee's duties hereunder on a substantially full-time basis, Employee's employment will terminate as of the end of such five-month or twelve-month period and in that event Employee's base salary and incentive compensation will be paid to the Employee or his legally appointed representative through the end of the third month following the month in which the employment terminated. Such termination will not affect Employee's benefits under CSC's disability insurance program, if any, then in effect. 3 6. CHANGE IN CONTROL AGREEMENT. Nothing in this Agreement shall adversely affect the rights of the Employee under the Change in Control Agreement. In the event of a termination of employment pursuant to which Employee is entitled to compensation under the Change in Control Agreement, he shall be entitled to no additional compensation or benefits hereunder. 7. NON-COMPETITION; CONFIDENTIALITY. (a) NON-COMPETITION. During the period of Employee's employment with CSC, Employee will not, directly or indirectly, on Employee's own behalf or as a partner, officer, director, trustee, employee, agent, consultant or member of any person, firm or corporation, or otherwise, enter into the employ of, render any service to, or engage in any business or activity which is the same as or competitive with any business or activity conducted by CSC or any of its majority owned subsidiaries; provided, however, that the foregoing shall not be deemed to prevent the Employee from investing in securities of any company having a class of securities which is publicly traded, so long as through such investment holdings in the aggregate, the Employee is not deemed to be the beneficial owner of more than 5% of the class of securities that are so publicly traded. During the period of Employee's employment and until two years after the termination of Employee's employment, Employee will not, directly or indirectly, on Employee's own behalf or as a partner, shareholder, officer, employee, director, trustee, agent, consultant or member of any person, firm or corporation or otherwise, seek to employ or otherwise seek the services of any employee of CSC or any of its majority owned subsidiaries. (b) CONFIDENTIALITY. During and following the period of Employee's employment with CSC, Employee will not use for Employee's own benefit or for the benefit of others, or divulge to others, any information, trade secrets, knowledge or data of secret or confidential nature and otherwise not available to members of the general public that concerns the business or affairs of CSC or its affiliates and which was acquired by Employee at any time prior to or during the term of Employee's employment with CSC, except with the specific prior written consent of CSC. (c) WORK PRODUCT. Employee agree that all programs, inventions, innovations, improvements, developments, methods, designs, analyses, reports and all similar or related information which relate to the business of CSC and its affiliates, actual or anticipated, or to any actual or anticipated research and development conducted in connection with the business of CSC and its affiliates, and all existing or future products or services, which are conceived, developed or made by Employee (alone or with others) during the term of this Agreement ("Work Product") belong to CSC. Employee will cooperate fully in the establishment and maintenance of all rights of CSC and its affiliates in such Work Product. The provisions of this Section 7(c) will survive termination of this Agreement indefinitely to the extent necessary to require actions to be taken by Employee after the termination of the Agreement with respect to Work Product created during the Agreement. 3 (d) ENFORCEMENT. If any covenant or agreement contained in this Section 7 is found by a court having jurisdiction to be unreasonable in duration, geographical scope or character of restriction, the covenant or agreement will not be rendered unenforceable thereby but rather the duration, geographical scope or character of restriction of such covenant or agreement will be reduced or modified with retroactive effect to make such covenant or agreement reasonable, and such covenant or agreement will be enforced as so modified. 8. REPRESENTATIONS. Employee hereby represent and warrant to CSC that (i) the execution, delivery and full performance of this Agreement by Employee does not and will not conflict with, breach, violate or cause a default under any agreement, contract or instrument to which Employee are a party or any judgment, order or decree to which Employee are subject; (ii) Employee are not a party or bound by any employment agreement, consulting agreement, agreement not to compete, confidentiality agreement or similar agreement with any other person or entity; and (iii) upon the execution and delivery of this Agreement by CSC, this Agreement will be Employee's valid and binding obligation, enforceable in accordance with its terms. 9. ARBITRATION. In the event of any dispute between CSC and Employee with respect to this Agreement, either party may, in its sole discretion by notice to the other, require such dispute to be submitted to arbitration. The arbitrator will be selected by agreement of the parties or, if they cannot agree on arbitrator or arbitrators within 30 days after the giving of such notice, the arbitrator will be selected by the American Arbitration Association. The determination reached in such arbitration will be final and binding on both parties without any right of appeal. Execution of the determination by such arbitrator may be sought in any court having jurisdiction. Unless otherwise agreed by the parties, any such arbitration will take place in Sarasota, Florida and will be conducted in accordance with the rules of the American Arbitration Association. If the Employee is the prevailing party in any such arbitration, he will be entitled to reimbursement by CSC for all reasonable costs and expenses (including attorneys' fees incurred in such arbitration). 10. ASSIGNMENT. Employee may not assign, transfer, convey, mortgage, hypothecate, pledge or in any way encumber the compensation or other benefits payable to Employee or any rights which Employee may have under this Agreement. Neither Employee nor Employee's beneficiary or beneficiaries will have any right to receive any compensation or other benefits under this Agreement, except at the time, in the amounts and in the manner provided in this Agreement. This Agreement will inure to the benefit of and will be binding upon any successor to CSC. As used in this Agreement, the term "successor" means any person, firm, corporation or other business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the capital stock or assets of CSC. This Agreement may not be otherwise assigned by CSC. 11. GOVERNING LAW. This Agreement shall be governed by the laws of Florida without regard to the application of conflicts of laws. 12. ENTIRE AGREEMENT. This Agreement constitutes the only agreement between CSC and Employee regarding Employee's employment by CSC. This Agreement supersedes any and all other agreements and understandings, written or oral, between CSC and Employee. A waiver by either party of any 4 provision of this Agreement of any breach of such provision in any instance will not be deemed or construed to be a waiver of such provision for the future, or of any subsequent breach of such provision. This Agreement may be amended, modified or changed only by further written agreement between CSC and Employee, duly executed by both parties. 13. NOTICES. Any and all notices required or permitted to be given hereunder will be in writing and will be deemed to have been given when deposited in United States mail, certified or registered mail, postage prepaid. Any notice to be given by Employee hereunder will be addressed to CSC to the attention of its Chief Financial Officer at its main offices, 1819 Main Street, Suite 1000, Sarasota, Florida 34236. Any notice to be given to Employee will be addressed to Employee at Employee's residence address last provided by Employee to CSC. Either party may change the address to which notices are to be addressed by notice in writing to the other party given in accordance with the terms of this Section. 14. HEADINGS. Section headings are for convenience of reference only and shall not limit or otherwise affect the meaning or interpretation of this Agreement or any of its terms and conditions. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement under seal as of the date first above written. CORRECTIONAL SERVICES CORPORATION By: /s/ James F. Slattery _______________________________ Name: James F. Slattery Title: President & CEO /s/ James F. Slattery _______________________________ James F. Slattery Approved by a majority of the members of the Compensation Committee at a duly convened meeting of that committee held on September 29, 1999. /s/ Melvin T. Stith ________________________ Melvin T. Stith /s/ Stuart M.Gerson ________________________ Stuart M. Gerson 5 EX-10.75 3 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT (this "Agreement") is made this 29th day of September 1999, by and between CORRECTIONAL SERVICES CORPORATION., a Delaware corporation ("CSC"), and JAMES F. SLATTERY (hereinafter the "Employee"). WHEREAS, CSC is engaged in the business of developing and operating adult and juvenile correctional facilities; WHEREAS, the Employee has certain expertise and acumen and is entering into an Employment Agreement of even date herewith providing for the continued employment of the Employee by CSC (the "Employment Agreement"); and WHEREAS, CSC and the Employee desire to enter into this Agreement to establish certain rights and obligations of the parties in the event the employment relationship ends under the circumstances described herein. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and in the Employment Agreement, the parties hereto agree as follows: I.DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth opposite such terms. All other capitalized terms used in this Agreement shall have the meanings given them in this Agreement, or if no definition is provided herein, the meanings given such terms in the Employment Agreement. (a) CAUSE. "Cause" shall have the meaning given such term in the Employee's Employment Agreement. (b) CHANGE IN CONTROL. A "Change in Control" (i) shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is in fact required to comply therewith at the time of such change in control, and (ii) without limitation by the foregoing, shall be deemed to have occurred if: (A)for any period of two consecutive years beginning on any date from and after the date hereof, 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 (1) individuals who constitute the Board of Directors at the beginning of such period or (2) 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 (1) or (2), a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (B) or (C) of this Subsection 1(a); 2 (B) the stockholders of the Company approve a merger, recapitalization, reorganization, share exchange, consolidation or similar transaction; in each case, with respect to which all or substantially all of the persons who were respective beneficial owners of the outstanding shares of capital stock of the Company immediately prior to such merger, recapitalization, reorganization, share exchange, consolidation or similar transaction, beneficially own, directly or indirectly, less than 50% of the combined voting power of the then outstanding shares of capital stock of the Company resulting from such merger, recapitalization, reorganization, share exchange, consolidation or similar transaction; (C) the stockholders of the Company approve any transaction (or if no such approval is required, upon the occurrence of any transaction), the result of which is that the Common Stock of the Company shall no longer be required to be registered under Section 12 of the Securities Exchange Act of 1934, as amended, and that the holders of shares of Common Stock of the Company do not receive common stock of the person surviving such transaction that is required to be registered under Section 12 of the Securities Exchange Act of 1934, as amended; or (D) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) COMPANY. "Company" shall mean Correctional Services Corporation and any successor, whether direct or indirect, by purchase, merger, share exchange, consolidation or otherwise, whether by operation of law or otherwise, to all or substantially all of the business and/or assets of the Company. (d) DATE OF TERMINATION. The "Date of Termination" shall be the date specified in the written Notice of Termination which in no event shall be later than 60 days after the date the written Notice of Termination is given. (e) NOTICE OF TERMINATION. "Notice of Termination" shall mean a written notice from the party terminating the Employee's employment. The Employee shall have the right in his sole discretion to give such Notice of Termination at any time upon the occurrence of a Change in Control or following a Change in Control. Notwithstanding any provision in the Employment Agreement to the contrary, a Notice of Termination given by the Employee hereunder shall not be deemed a breach by the Employee of the Employment Agreement or any provision thereof. 2. SEVERANCE RESULTING FROM CHANGE IN CONTROL OF THE COMPANY. In the event the Employee's employment is terminated in contemplation of, upon the occurrence of or following a Change in Control for any reason or in the event the Employee terminates his employment upon the occurrence of or following a Change in Control, the Employee shall be provided with the following benefits: (a)The Company shall pay the Employee 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 to which the Employee is entitled under any compensation plan of the Company in which the Employee is participating at the time of termination, payable at the time such payments are due, except as otherwise provided below. 2 (b) In lieu of any further salary payments to the Employee for periods subsequent to the Date of Termination, the Company shall pay as severance pay to the Employee a lump sum severance payment (together with the payments provided in clause (c) of this Subsection, the "Severance Payments") equal to three times the sum of (i) the Employee's annual base salary and incentive bonus earned by the Employee, whether paid to the Employee by the Company or due to the Employee from the Company, for the calendar year immediately preceding the Notice of Termination and (ii) any and all additional monetary compensation earned by the Employee, whether paid to the Employee by the Company or due to the Employee from the Company, during such calendar year. In addition, the Company shall pay to the Employee a lump sum payment equal to One Million Dollars ($1,000,000) as payment for the Employee's agreement to extend his non-competition and non-solicitation covenants in Section 7(a) of his Employment Agreement to four (4) years following the date of termination. (c) The Company shall pay to the Employee any deferred compensation allocated or credited to the Employee or his account as of the date of termination. (d) The Company shall also pay to the Employee all legal fees and expenses incurred by the Employee as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). (e) If the payments provided under Subsections (b) and/or (c) above (the "Contract Payments") or any other portion of the Total Payments (as defined below) will be subject to the tax imposed by Section 4999 of the Code (the "Excise Tax"), the Company shall pay to the Employee at the time specified in subsection (f) below, an additional amount (the "Gross-Up Payment") such that the net amount retained by the Employee, after deduction of any Excise Tax on the Contract Payments and such other Total Payments and any federal and state and local income tax and Excise Tax upon the payment provided for by this clause, shall be equal to the Contract Payments and such other Total Payments. For purposes of determining whether any of the payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Employee in connection with a Change in Control of the Company or the Employee's termination of employment (whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, its successors, any person whose actions result in a Change in Control of the Company or any corporation affiliated (or which, as a result of the completion of a transaction causing a Change in Control of the Company, will become affiliated) with the Company within the meaning of Section 1504 of the Code) (together with the Contract Payments, the "Total Payments") shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to the Employee the Total 3 Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code either to the extent such reasonable compensation is in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments that shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Employee's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Employee's employment, the Employee shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(d) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (f) The payments provided for in Subsections (b), (c), and (e) above, shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Employee on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at a rate equal to 120% of the rate provided in Section 1274(d) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Employee payable on the fifth day after demand by the Company (together with interest at a rate equal to 120% of the rate provided in Section 1274(d) of the Code). (g) Any options held by the Employee to purchase any securities of the Company which are not exercisable as of the Date of Termination, notwithstanding any other provision of the option or any plan under which it was granted or issued regarding vesting or exercisability or otherwise, shall become fully vested and exercisable as of the Date of Termination and all options held by the Employee (including those already exercisable and those that become exercisable pursuant to this Subsection (g)), shall remain exercisable for the balance of their respective terms and all other terms of the options shall remain in full force and effect. 4 (h) The Company shall arrange to provide the Employee, for a period of 36 months from and after the Date of Termination, with life, disability, accident and health insurance benefits substantially similar to those that the Employee was receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by the Employee pursuant to this Subsection shall be reduced to the extent comparable benefits are actually received by the Employee during the 36-month period following the Employee's termination, and any such benefits actually received by the Employee shall be reported to the Company. (i) In addition to all other amounts payable to the Employee, the Employee shall be entitled to receive all benefits payable to the Employee under any applicable retirement, thrift, and incentive plans as well as any other plan or agreement sponsored by the Company or any of its subsidiaries relating to retirement benefits. 3. NOTICE OF TERMINATION. Any purported termination of the Employee's employment by the Company or by the Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8 of this Agreement. 4. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Employee as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Employee to the Company, or otherwise except as specifically provided in Subsection 2(h). 5. TERMINATION IN CONTEMPLATION OF CHANGE IN CONTROL. In connection with a termination of Employee's employment in contemplation of a Change in Control, any reference in this Agreement with regard to any measurement date or time or the parameters of any time period that references the time or date of the Change in Control shall be deemed to mean either (a) the date or time of the occurrence constituting the Date of Termination by the Company, or (b) the date or time of the Change in Control, as the context would require to effectuate the intent of the provisions of this Agreement. 6. DEATH. If the Employee should die while any amount would still be payable to the Employee hereunder if the Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid to the Employee's legatee or other designee or, if there is no such designee, to the Employee's estate. 5 7. SUCCESSORS; BINDING AGREEMENT. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, share exchange, consolidation or otherwise and whether by operation of law or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and to agree to perform the obligations of the Company under this Agreement. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled to hereunder as if the Employee terminated the Employee's employment following a Change in Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, heirs, distributees and legatees. (c) In the event that the Employee is employed by a subsidiary of the Company wherever in this Agreement reference is made to the "Company," unless the context otherwise requires, such reference shall also include such subsidiary. The Company shall cause such subsidiary to carry out the terms of this Agreement insofar as they relate to the employment relationship between the Employee and such subsidiary, and the Company shall indemnify the Employee and save the Employee harmless from and against all liability and damage the Employee may suffer as a consequence of such subsidiary's failure to perform and carry out such terms. Wherever reference is made to any benefit program of the Company, such reference shall include, where appropriate, the corresponding benefit program of such subsidiary if the Employee was a participant in such benefit program on the date a Change in Control of the Company has occurred. 8. NOTICES. Any notice required or permitted to be given under this Agreement shall be given in writing, and shall be delivered by hand or by certified mail, postage prepaid and return receipt requested, addressed as set forth below: If to the Company: Correctional Services Corporation 1819 Main Street, Suite 1000 Sarasota, Florida 34236 Attention: If to the Employee: James F. Slattery 8150 Perry Maxwell Circle Sarasota, Florida 34240 6 All notices delivered by certified mail shall be deemed delivered on the second day (not including Sundays or holidays observed by the U.S. postal service) after mailing. Notices delivered by hand to the Employee must be delivered in person to the Employee. Notices delivered by hand to the Company must be delivered to a person at the offices of the Company or in person to the Chief Executive Officer. Any change of address by either the Company or the Employee must be promptly communicated in writing and delivered in accordance with this Section 8. 9. WAIVER. The waiver by any party hereto of a breach of any provision of this Agreement by any other party hereto shall not operate or be construed as a waiver of any subsequent breach by the breaching party. 10. BINDING EFFECT. Except as otherwise expressly provided herein, the rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon its successors and assigns. The Company has agreed to enter into this Agreement with Employee in connection with his employment by the Company. Accordingly, the Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement except as otherwise provided herein. 11. ENTIRE AGREEMENT. This Agreement and the Employment Agreement constitutes the entire understanding of the Employee and the Company in respect of the subject matter hereof and supersedes any and all prior understandings and agreements, written or oral, relating to such subject matter of this Agreement. This Agreement and the provisions hereof may not be changed, waived or canceled orally, but may be changed, waived, or canceled only by an instrument in writing signed by the parties hereto. 12. SECTION HEADINGS. The section headings of this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the provisions of this Agreement. 13. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. SURVIVAL. The parties understand and agree that this Agreement in its entirety survives the termination or expiration of the Employee's employment. 15. LAW AND INTERPRETATION. This Agreement shall be governed by the laws of the State of Florida, and the invalidity or unenforceability of any provisions hereof shall in no way affect the validity of enforceability of any other provisions. 16. ARBITRATION. Any dispute or controversy arising under this Agreement or relating in any way to the Employee's employment with the Company shall be settled exclusively by arbitration in the State of Florida in accordance with the rules of the American Arbitration Association then in effect. The parties hereto agree that except as otherwise provided herein, each of them shall bear their own costs, including attorney's fees, incurred in any such arbitration and further agree that the cost of the arbitrator shall be shared equally between them. The parties further agree that judgment may be entered on the arbitrator's award in any court having jurisdiction. 7 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement under seal as of the date first above written. ATTEST: CORRECTIONAL SERVICES CORPORATION /s/ Seth Truwit By: /s/ James F. Slattery (SEAL) ________________________ ____________________________ Name: Seth Truwit Name: James F. Slattery Title: President & CEO WITNESS: /s/ Seth Truwit /s/ James F. Slattery ________________________ ____________________________ Name: Seth Truwit Name: James F. Slattery Approved by a majority of the members of the Compensation Committee at a duly convened meeting of that committee held on September 29, 1999. /s/ Melvin T. Stith ________________________ Melvin T. Stith /s/ Stuart M.Gerson ________________________ Stuart M. Gerson 8 EX-11 4 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS NOTE 8 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with SFAS No. 128: Nine Months Ended September 30, 1999 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented Nine Months Ended September 30, 1998 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented. Three Months Ended September 30, 1999 Numerator: Net Income $1,979 ------ ------ Denominator: Basic earnings per share: Weighted average shares outstanding 11,302 Effect of dilutive securities - stock options and warrants 3 ------ Denominator for diluted earnings per share 11,305 ------ ------ Three Months Ended September 30, 1998 The effect of dilutive securities is anti-dilutive therefore, the reconciliation has not been presented. EX-27 5
5 0000914670 Correctional Services Corporation 9-MOS DEC-31-1999 SEP-30-1999 3,743 0 42,887 0 0 53,738 63,443 14,172 121,799 42,754 0 0 0 114 82,825 121,799 180,277 180,277 160,032 160,032 25,428 0 2,218 (7,401) 1,001 (6,400) 0 985 0 (5,415) ($0.48) ($0.48)
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