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