ITEM 1. BUSINESS
Introduction
Corrections Services, Inc. (the "Company") was incorporated in the State of Florida in 1984. The Company was organized for the purpose of developing and marketing a house arrest program ("Program") to relieve the need for incarceration in a jail or similar facility. The Program consists of computer-controlled, electronic signaling systems which permit continuous around the clock monitoring of a client/inmate's presence or absence from his or her residence.
Background
The Company undertook to secure equipment which would be responsive to the needs of corrections authorities and began to market its Program with a new hardware system supplied by an independent manufacturer. During 1986, the Company secured registration of its trademark "In-House-Arrest" from the United States Patent and Trademark office (Registration No. 1,394,745).
Beginning in 1988 the Company's system was manufactured by Marconi Electronic Devices, Ltd. ("Marconi") in the United Kingdom. Following a long period of difficulties and shortfall, the Company filed a federal lawsuit against Marconi for breach of contract and breach of warranty, seeking damages and ending its turbulent manufacturing and supply arrangement with Marconi. On July 28, 1993 a settlement agreement was entered into fully and finally terminating the litigation.
Pursuant to the settlement agreement, the Company transferred certain product equipment, intellectual property rights in the systems' equipment design and software and a three year covenant not to compete to Marconi. In exchange, the Company received extinguishment of its approximately $2.1 Million payable to Marconi and the sum of $250,000 in cash. Following closing of the settlement agreement the Company, within the bounds of its non- compete agreement, continued to service its existing customer base.
Subsequent Developments
Subsequent to the litigation settlement, Marconi sold all of its tangible and intangible assets related to the system's equipment production, sales and service to Aeroflex Laboratories, Inc. of Plainview, New York. After settlement of the litigation in mid-1993, neither Marconi nor Aeroflex had engaged in any operations in the monitoring systems marketplace. In late May 1994, the Company approached Aeroflex with a view toward purchase of all of the system assets and release from its non-compete
agreement with Marconi.
On July 1, 1994, the Company both re-acquired from Aeroflex all of the system equipment it had relinquished in the litigation settlement agreement, and acquired all of the other tangible and intangible assets related to production, sales and service of the product line previously acquired by Aeroflex from Marconi, including completed parts and parts for construction of additional units, all of the related software, firmware, tooling, tools and test equipment and all intellectual property including patents and design and manufacturing drawings, schematics, information and records. The Company was also able to secure unconditional release from the non-compete agreement with Marconi.
In exchange, the Company paid Aeroflex Laboratories, Inc. the sum of $100,000 in cash and released Aeroflex Laboratories, Inc. and Marconi from liability for equipment field service obligations, including outstanding, unexpired manufacturer's equipment warranties, which obligations were assumed by the Company.
With completion of the Aeroflex transaction in mid-1994 the Company in effect, negated all of the limiting factors imposed encountered by settlement of the litigation against Marconi in mid- 1993. The Company re-entered the marketplace depending upon its newly acquired, finished equipment inventory, and continues on- going evaluation of manufacturing options for possible future implementation prior to potential exhaustion, if any, of its finished equipment inventory.
Employees
In addition to its officers, Mr. Norman H. Becker and Mr. Frank R. Bauer, who each currently devote approximately ten (10%) percent of their time to its activities, and Ms. Diane Martini, who currently devotes approximately eighty (80%) percent of her time to its activities, the Company currently has five (5) other full-time employees See Part III., Item 10, Directors and Executive Officers of the Registrant.
ITEM 2.
ITEM 2. PROPERTIES
The Company occupies its principal offices and shop facilities space on a month-to-month basis at a combined rental and administrative charge of $2,600 per month ($31,200 per annum).
The Company also occupies warehouse space in the City of Pompano Beach, Florida on an annual lease basis at a rental of $791 per month ($9492 per annum).
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not now a party to any litigation or, to its knowledge, threatened litigation, at March 11, 1996 other than the following:
Estate of Holly Staker, et al vs. Correction Services, Inc., Lake County and Electronic Supervision Services Corp., Case No. 94-L- 141, Circuit Court of the Nineteenth Judicial Circuit In And For Lake County, Illinois.
On February 28, 1994, the Company was served with a wrongful death complaint arising from the violent death of Ms. Holly Staker on or about August 17, 1992 at the hands of an individual who was at the time assigned to the In-House Arrest system owned and operated, on the Company's information and belief, by the Lake County Sheriff's or Corrections Department.
The Complaint seeks money damages for Ms. Staker's wrongful death in an unspecified amount and is brought by the Decedent's estate and various individuals under Illinois wrongful death statutes. The Complaint was twice dismissed at the Company's instance. The Plaintiff has appealed the Court's dismissal of the suit. The appeal is currently in the pleading (brief) stage and no decision has been reached. The amended complaint alleged unspecified "malfunction" and sought to impose strict liability to the seller for consequences of the prisoner's subsequent illegal acts.
The Company's appellate counsel is unable to estimate the likely outcome of the appeal.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the fourth quarter of fiscal 1995, through solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of bid and asked prices for the Company's Common Stock on the Over-The-Counter Market for the period indicated, as reported by the National Quotation Bureau, Inc. The Common Stock is traded on the electronic bulletin board under the symbol CRSI. The figures shown represent inter-dealer quotations without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
(b) Holders. As of March 11, 1996, the approximate number of recordholders of Common Stock of the Registrant was 575.
The Company is unable to determine the actual number of beneficial holders of its Common Stock at March 11, 1996 due to Common Stock held for stockholders "in street name" but estimates the current total to be approximately 1,050.
(c) Dividends. Registrant has paid no dividends since inception and does not now anticipate paying cash dividends in the foreseeable future. See Item 7.(a) Financial Condition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
(a) Financial Condition. As of December 31, 1995 the Company had current assets of $1,079,708 compared to $1,093,577 at December 31, 1994, total assets of $1,087,236 compared to $1,101,968 at December 31, 1994 and shareholders equity of $957,003 as compared to $979,720 as of December 31, 1994. The decrease of its current assets and total assets were primarily the result of the Company's decrease in accounts receivable and merchandise inventory. See Part I, Item 1., Business, Recent Developments. The decrease in shareholders equity at December 31, 1995 to $957,003, from $979,720 at December 31, 1994, was primarily the result of earnings of a net loss of $22,717 for the year ended December 31, 1995.
At December 31, 1995, the Company realized a net loss for the year then ended which decreased shareholders equity from $979,720 at year end 1994, to $957,003 at year end 1995.
Liquidity. The Company had a net decrease in cash and cash equivalents for the year ended December 31, 1995 of $2,740, and cash and cash equivalents at the end of the year of $261,385 as compared to an increase in cash and cash equivalents of $90,129, and cash and cash equivalents of $264,125 for the year ended December 31, 1994. See Part II, Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached financial statements and supplementary data.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)(b) Identification of Directors and Executive Officers
Name Age Offices Held
Norman H. Becker 58 President/Director
Frank Bauer 51 Vice President/ Director
Diane Martini 48 Secretary/Treasurer/ Director
Eugene M. Kennedy 58 Director
Robert B. Yeakle 57 Director
(1)(c) Identification of Certain Significant Employees. In addition to its officers and directors, the Company has a continuing consulting arrangement with Vanderbilt Square Corp., a publicly held Florida corporation pursuant to which Vanderbilt Square provides management consultation, financial planning and day-to-day assistance and administrative support services on an as needed basis, primarily in this reporting period, as in previous periods, through the personal efforts and supervision of Ronald A. Martini, its Vice President and director, who devotes approximately 50% of his time to those activities. In the interest of maintaining management attention to the Company's operations, Martini, who is also a principal shareholder of the Company, took on a primary role with respect to the Company's management and administration of pending litigation matters. See Part I, Item 3., Legal Proceedings. See (1)(e) Business Experience. See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management. Ronald A. Martini is the spouse of the Company's Secretary/Treasurer and Director, Diane Martini.
Mr. Becker is also President and a Director of Vanderbilt Square Corp., Mr. Kennedy is legal counsel to the Company and has also provided legal services to Vanderbilt Square. Mr. Yeakle, who resigned the presidency of the Company on May 1, 1992, is also a principal stockholder of Vanderbilt Square Corp.
The Company's officers receive varying assistance and support in their respective areas from Vanderbilt Square Corp.. The formal arrangement between the Company and Vanderbilt Square Corp. expired by its terms during February, 1994 but has continued thereafter on an as-needed albeit reduced basis.
(1)(e) Business Experience.
Norman H. Becker has been a director of the Company since July 1, 1987. On January 15, 1993, Mr. Becker was appointed the Company's President. In addition he has, since its inception, been an officer and a director of Vanderbilt Square Corp., a publicly held Florida corporation. Since January, 1985, Mr. Becker has also been self-employed in the practice of public accounting in Hollywood, Florida. Mr. Becker is a graduate of City College of New York (Bernard Baruch School of Business) and is a member of a number of professional accounting associations including the American Institute of Certified Public Accountants, the Florida Institute of Certified Public Accountants and the Dade Chapter of Florida Institute of Certified Public Accountants.
Frank R. Bauer has been an Officer and a director of the Company since February 15, 1988 and its Vice President since January 4, 1993. Mr. Bauer is also President and Chief Executive Officer of Specialty Device Installers, Inc., a Florida corporation engaged in outside plant utility and construction contracting. Mr. Bauer holds the Bachelor of Business Administration Degree from Stetson University.
Diane Martini has been Secretary/Treasurer and a director of the Company since January 12, 1993. Ms. Martini is also Secretary/Treasurer of Vanderbilt Square Corp., an affiliate of the Company. Ms. Martini is also President and Chief Executive Officer of Financial Communications, Inc., a privately held Florida public relations and business consulting firm. Ms. Martini is married to the Company's principal shareholder, Ronald A. Martini. See Part IV., Item 12.
Eugene M. Kennedy has been a director of the Company since March 15, 1989. Mr. Kennedy has also been the Company's legal counsel since September, 1985. Mr. Kennedy operates his own private law practice in Fort Lauderdale, Florida. He holds the Bachelor of Science Degree in Physics from the City University of New York, has attended the Masters in Business Administration Program at Adelphi University, in Garden City, New York, and holds the Juris Doctor Degree from the University of Miami School of Law in Coral Gables, Florida.
Robert B. Yeakle resigned as an officer of the Company on May 1, 1992. Until that point, he was the Company's President and a Director and had been since June 22, 1989 and continues as a member of the Board. In January, 1988 Mr. Yeakle retired from Alexander Proudfoot & Company in West Palm Beach, Florida, having spent the prior 21 years in various executive management positions within the Proudfoot organization, to manage his personal investments. Alexander Proudfoot & Co. is a $200 million, publicly held management consulting company which is traded on the London Stock Exchange. During April, 1991, Mr. Yeakle returned to Alexander
Proudfoot & Company in an executive capacity and currently devotes only a minimum of his time to the Company's affairs. Mr. Yeakle attended the School of Engineering at Rutgers University in New Brunswick, New Jersey.
Ronald A. Martini is Vice-President and a director of the Company's affiliate, Vanderbilt Square Corp., a publicly held Florida corporation. See (1)(c) Identification of Certain Significant Employees. He is also Vice-President and a director of Financial Communications, Inc., a privately held public relations and business consulting firm in Fort Lauderdale, Florida. Mr. Martini is married to the Company's Secretary/Treasurer and director, Diane Martini. On April 24, 1990, Martini entered a guilty plea in the United States District Court for the District of New Jersey to violations of federal conspiracy, mail fraud and securities laws in connection with transactions in securities of public companies unrelated to the Company during a fifteen (15) month period of 1988 through 1989.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation
Messrs. Norman H. Becker and Frank Bauer, devote approximately 10% of their time, respectively, to the Company's affairs. Ms. Diane Martini currently devotes approximately 80% of her time to the Company's affairs. There are no employment agreements in effect or presently contemplated. The total compensation received by all Executive Officers of the Company during the year ended December 31, 1995 was received entirely by Diane Martini and amounted to $36,042.
(1) Mr. Becker received a total of $11,157 in accounting fees from the Company during 1995.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(1) Based upon 5,126,900 shares outstanding at March 11, 1996.
(2) Vanderbilt Square Corp. owns 950,000 shares of the Company's Common Stock at March 11, 1996. Ronald A. Martini, Diane Martini and Norman H. Becker are also officers, directors and principal shareholders of Vanderbilt Square Corp. Diane Martini and Ronald A. Martini are married to each other. Robert B. Yeakle is also a principal shareholder of Vanderbilt Square Corp. See Part III, Item 10. "Business Experience". All four individuals disclaim any beneficial ownership interest in the Company's Common Stock owned by Vanderbilt Square Corp. See Item 8., Financial Statements - Notes to Consolidated Financial Statement, Note F.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
On February 23, 1989, the Company and Vanderbilt Square Corp. entered into a continuing consulting arrangement pursuant to which Vanderbilt assisted the Company in its operations, provided access to potential financing sources if needed and provided consultation and services related to administrative, bookkeeping and accounting matters. The formal consulting agreement expired by its terms on February 23, 1994 and the arrangement has continued thereafter on an as-needed albeit reduced, basis. During 1995, the Company paid Vanderbilt Square Corp. a total of $18,000 for such services.
In addition, the Company paid a total of $79,800 to various affiliates of the Company's principal shareholder, Ronald A. Martini, in the nature of consulting fees, rentals and office and administrative services. See "Financial Statements - Notes to Consolidated Financial Statements, Note G".
Certain Business Relationships
During the year ended December 31, 1995, the Company paid its director, Eugene M. Kennedy, $4,471 in legal fees and costs reimbursement in connection with legal services rendered to the Company by his law firm.
In addition, the Company paid its President and director, Norman H. Becker accounting fees of $11,157.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements:
Report of Independent Certified Public Accountant.
Consolidated Balance Sheet - December 31, 1995 and December 31, 1994.
Consolidated Statement of Operations - Three Years Ended December 31, 1995.
Consolidated Statement of Shareholders' Equity - Three Years Ended December 31, 1995.
Consolidated Statement of Cash Flows - Three Years Ended December 31, 1995.
Notes to Consolidated Financial Statements.
2. Schedules:
Schedule I Marketable Securities - Other Investments
Schedule II Amounts Receivable from Related Parties, Underwriters, Promoters and Employees other than Related Parties
Schedule VIII Valuation and Qualifying Accounts
Schedule X Supplementary Income Statement Information
All other financial statements not listed have been omitted since the required information is included in the financial statements or the notes thereto, or is not applicable or required.
Exhibits:
Articles of Incorporation and By-Laws:
Articles of Incorporation and By-Laws incorporated by reference to the filing of the original registration statement on Form S-18.
Instruments defining the rights of security holders, including indentures:
Not applicable.
Voting Trust Agreement:
Not applicable.
Material Contracts:
Not applicable.
Statement Re: Computation of per share income (loss):
See Note "A"., Notes to Consolidated Financial Statements and Statement of Operations Three Years Ended December 31, 1995.
Statements RE: Computation of Ratios:
Not applicable.
Annual Report to Security Holders, Form 10-Q or quarterly report to security holders:
Not applicable.
Letter re: Change in accounting principles:
Not applicable.
Previously unfiled documents:
Not applicable.
Other Documents or Statements to Security Holders:
Not applicable.
Subsidiaries of the Registrant:
Corrections Services International, Inc.
Published report regarding matters submitted to vote of Security Holders:
Not applicable.
Consents of experts and counsel:
Not applicable.
Power of Attorney:
Not applicable.
Additional Exhibits:
The Registrant filed no current reports on Form 8-K during the fourth quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Lauderdale, State of Florida, on the 27th day of March, 1996.
CORRECTIONS SERVICES, INC.
BY:/S/ Norman H. Becker Norman H. Becker, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signatures Title Date
(i) Principal Executive Officer President March 27, 1996
/S/ Norman H. Becker Norman H. Becker
(ii) Principal Financial and Secretary March 27, 1996 Accounting Officer
/S/ Diane Martini Diane Martini
(iii) A Majority of the Board Director March 27, 1996 of Directors
/S/ Frank Bauer Director March 27, 1996 Frank Bauer
/S/ Norman H. Becker Director March 27, 1996 Norman H. Becker
/S/ Eugene M. Kennedy Director March 27, 1996 Eugene M. Kennedy
Director March 27, 1996 Robert B. Yeakle
CONTENTS
PAGE
AUDITOR'S REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CONSOLIDATED BALANCE SHEET. . . . . . . . . . . . . . . . . . . . . . . . . 2
CONSOLIDATED STATEMENT OF OPERATIONS. . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) . . . . . . . . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENT OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . .6-12
Board of Directors and Shareholders Corrections Services, Inc. and Subsidiary Fort Lauderdale, Florida
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying consolidated balance sheets of Corrections Services, Inc. and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations and shareholders' equity and cash flows for each of the three years ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corrections Services, Inc. and Subsidiary as of December 31, 1995 and 1994, and the results of its consolidated operations and its consolidated cash flows for the three years ended December 31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Corrections Services, Inc. and Subsidiary will continue as a going concern. As more fully described in Note B, the Company has incurred substantial operating losses in previous years. In addition, a substantial portion of the Company's sales were made to one customer. These conditions raise questions about the Company's ability to continue as a going concern. The Company's continued existence is dependent upon its ability to preserve its existing
Board of Directors and Shareholders Corrections Services, Inc. and Subsidiary Page Two
working capital, continue to successfully sell its products and continue to achieve profitable operations. The financial statements do not include any adjustments to reflect the possible future effects on the recovery and classification of assets or the amounts and classification of liabilities that may result from the possible inability of Corrections Services, Inc. and Subsidiary to continue as a going concern.
Thomas W. Klash Certified Public Accountant Hollywood, Florida February 7, 1996
CORRECTIONS SERVICES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 AND 1994
See accompanying notes to consolidated financial statements.
-2(a)-
CORRECTIONS SERVICES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 AND 1994
-2(b)-
CORRECTIONS SERVICES, INC. CONSOLIDATED STATEMENT OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 1995
-3(a)-
CORRECTIONS SERVICES, INC. CONSOLIDATED STATEMENT OF OPERATIONS THREE YEARS ENDED DECEMBER 31, 1994
See accompanying notes to consolidated financial statements.
-3(b)-
CORRECTIONS SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Deficiency) THREE YEARS ENDED DECEMBER 31, 1995
See accompanying notes to consolidated financial statements.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1995
Continued on next page
-5(a)-
CORRECTIONS SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1995
See accompanying notes to consolidated financial statements.
-5(b)-
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Corrections Services, Inc. (the "Company") was incorporated under the laws of the State of Florida on September 14, 1984. The Company's articles of incorporation originally provided for the issuance of 100 shares of common stock, with a par value of $5 per share. On November 13, 1985, the authorized number of shares was increased to 10,000,000 shares, with a par value of $.0001 per share. In that connection, the 100 shares of common stock outstanding prior to that date were exchanged for 2,115,000 shares.
General
The Company commenced its operational activities for accounting purposes on February 5, 1985. Through December 31, 1986, the Company was principally engaged in organization, initial marketing, program design and implementation, as well as system hardware and software design activities and raising capital. Revenues earned through December 31, 1986, were primarily the result of test marketing sales to a limited number of customers. During 1987, the Company successfully installed its equipment in a number of sites throughout the country.
Business Activity
As a result of agreements reached with its former manufacturing supplier, the Company sells in-house arrest systems and now provides maintenance, repair and replacement of in-house arrest systems previously sold to customers. The in-house arrest system consists of a computer controlled electronic signalling system to permit continuous monitoring of the user's presence or absence from his residence during the period of the individual's home restriction and confinement sentence.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Corrections Systems International, Inc. All significant intercompany accounts and transactions have been eliminated.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents - For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Inventory - Inventory which is comprised principally of computers, monitors, TX's and parts, is valued at the lower of cost or market using the first-in, first-out method.
Investment in Marketable Equity Securities - The Company's investment in marketable equity securities consists of trading securities as defined in FASB Statement No. 115. Trading securities are carried at market value in the accompanying balance sheets. Unrealized gains and losses resulting from fluctuations in the market price of the related securities are currently reflected in the statement of operations.
Property and Equipment - Property and equipment is recorded at cost. Expenditures for major betterments and additions are charged to the asset accounts, while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are charged to expense currently.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:
Computer and monitor equipment 3 years Molds, dies and tooling costs 5 years Office furniture and equipment 5 years Software 3 years Leasehold improvements 3 years
Product Warranty - The Company warranties its products for a specified time after a sale. The Company's supplier warranties its product for a similar time period. Due to the nature of these warranties, all expenses relating to repair of units sold is expensed as incurred and, accordingly, no provision for warranty liability has been made.
Deferred Revenue - Deferred revenue represents the unearned portion of customers' payments relating to equipment maintenance and leasing contracts.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income (Loss) Per Common Share - Net income (loss) per common share was computed by dividing the net income (loss) for each period by the weighted average number of common shares outstanding during each period.
Research and Development - The Company has expensed all costs incurred in establishing technological feasibility of computer software intended for sale to customers. Certain research and development costs incurred for computer software are capitalized, such as costs incurred for producing product masters, including costs for coding and testing. Such capitalized software costs are amortized over a three year period.
Revenue Recognition - The Company recognizes revenue at the time merchandise is shipped to the customers. Installation and training costs associated with the sale are generally recorded in the same period.
NOTE B - BASIS OF PRESENTATION
The Company's continued existence is dependent upon its ability to preserve working capital, obtain an alternative source of revenues sufficient to absorb operating expenses, and achieve profitable operations. The Company intends to reduce its operating expenses and hopes to realize increased revenues from its repair and maintenance operations.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1995 1994
Leasehold improvements $ 3,170 $ 1,679 Office furniture and equipment 56,427 56,143 Computer and monitoring equipment 113,834 113,167
173,431 170,989
Less accumulated depreciation and amortization 168,181 165,699
$ 5,250 $ 5,290
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE D - INCOME TAXES
The components of the provisions for income taxes are as follows for the three years ended December 31, 1995:
1995 1994 1993
Federal $ - $61,110 $ - State - 11,328 - - 72,438 -
Significant components of deferred tax benefits are as follows:
Current Tax Benefit Assets
Allowance for market decline of equity securities $ 71,141 Allowance for doubtful accounts 850 Total Current Tax Benefit 71,991
Non-Current Tax Benefit Assets
Tax loss carry forward at December 31, 1995 268,540 Capital loss carry forward at December 31, 1995 31,666 Total Non-current Benefit 300,206
Total Current and Noncurrent Tax Benefit 372,197 Valuation Allowance (372,197)
Net Deferred Tax Assets $ -
At December 31, 1995, management is unable to predict profitable operations for the Company in the future.
At December 31, 1995, the Company had available net operating loss carryforwards for financial and tax reporting purposes of approximately $789,823 and capital loss carry- forward amounting to approximately $93,000 expiring at various times through 2006.
The Company adopted Statement of Financial Accounting Standards No. 109 in 1993. There was no effect on the 1993 financial statements as a result of adopting this statement. The Company has fully reserved for the benefit of the net operating loss carry-forwards.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE E - MAJOR CUSTOMERS
Sales to customers individually representing more than 10% of combined revenues amount to $244,622 in 1995, $432,796 in 1994, and $382,672 in 1993. In 1995, two customers accounted for 35% and 12% respectively. In 1994, two customers accounted for 49% and 10% respectively. In 1993, two customers accounted for 52% and 11% respectively.
NOTE F - CONSULTING AGREEMENT
On February 23, 1989, the Company entered into a 5-year agreement with Vanderbilt Square Corp. The agreement provided that Vanderbilt Square Corp. assist the Company in its sales and marketing operation, provide access to potential lenders, provide assistance in administrative, bookkeeping, and accounting matters, provide in its sole discretion, up to $200,000 in lease financing, and guarantee in its sole discretion, payment for product equipment purchased by the Company. In consideration of the aforementioned services, the Company paid $233,333 represented by the issuance of 1,000,000 shares of the Company's restricted common stock during 1990 and 1989. The agreement expired by its terms on February 23, 1994.
Consulting fees expense relating to this agreement amounted to a final payment of $3,940 in 1994, and to $46,656 in 1993. The Company paid Vanderbilt Square Corp. a total of $18,000 during 1995 for services on an as-needed basis.
NOTE G - RELATED PARTY TRANSACTIONS
Professional and Consulting Fees - the Company paid officers, directors, shareholders and affiliates professional and consulting fees amounting to $82,228 in 1995, $123,136 in 1994 and $155,161 in 1993.
Product Repair - Amounts paid for repair of monitoring units, to a company owned by the Company's then secretary- treasurer amounted to -0- in 1994 and 1993.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE G - RELATED PARTY TRANSACTIONS (Contd..)
Office Expense - Office expenses were paid to shareholders and/or entities affiliated through common officers, directors and shareholders amounting to $10,200 in 1995, $20,474 in 1994 and $21,824 in 1993.
Rent Expense - Rentals paid to entities having officers, directors and shareholders in common with the Company amounted to $21,000 in 1995, 1994 and 1993.
NOTE H - LITIGATION
The Company was named as a party defendant in an Illinois action arising for the death of an individual at the hands of a house arrest detainee. The complaint alleged that the decedent's demise was a consequence of unspecified "malfunction" of equipment previously marketed by the Company. The lawsuit sought money damages in an unspecified amount. The complaint was twice dismissed at the Company's motion. The dismissal has been appealed. The Company's litigation counsel is unable to estimate the outcome of this suit. Management intends to continue to contest the suit vigorously.
NOTE I - RENTAL COMMITMENTS
Rent expense incurred for the occupancy of general office and storage facilities amounted to $31,162 in 1995, $30,125 in 1994 and $27,363 in 1993. At December 31, 1995, there were no fixed annual rental commitments.
NOTE J - INVESTMENTS IN MARKETABLE EQUITY SECURITIES
At December 31, 1995, the Company's investment in marketable equity securities consisted entirely of trading securities as follows:
Market Cost Value
Investments in corporate equity securities of related parties $ 56,884 $ 71,974 Investment in corporate equity securities - other 741,186 516,856 $798,070 $588,830
CORRECTIONS SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994
NOTE J - INVESTMENTS IN MARKETABLE EQUITY SECURITIES (Contd..)
The Company adopted FASB No. 115 on January 1, 1994. Prior to that date the Company's investment in marketable equity securities were carried at the lower of cost or market. At December 31, 1993, the Company's portfolio of equity securities was carried at market value, which was less than cost.
Unrealized losses on changes in market values of marketable equity securities amounted to $30,801 in 1995, $138,115 in 1994 and $21,218 in 1993.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT ON FINANCIAL STATEMENTS SCHEDULES
Board of Directors and Shareholders Corrections Services, Inc. and Subsidiary Ft. Lauderdale, Florida
I have examined the financial statements of Corrections Services, Inc. and Subsidiary as of December 31, 995 and 1994, and for each of the three years ended December 31, 1995 and have issued my report thereon dated February 7, 1995. In connection with my examination, I also examined the financial statement schedules listed in Item 14(a)(2). In my opinion, these schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information set forth therein.
Thomas W. Klash Certified Public Accountant Hollywood, Florida February 7, 1996
Note: Balance Sheet valuation based upon aggregated lower of cost or market
* Companies affiliated through common management and principal shareholders
CORRECTIONS SERVICES, INC. AND SUBSIDIARY MARKETABLE SECURITIES - OTHER INVESTMENTS DECEMBER 31, 1994 SCHEDULE I
Note: Balance Sheet valuation based upon aggregated lower of cost or market
*Companies affiliated through common management and principal shareholders
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1994
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1993
Notes
(a) Written off to gain extinguishment of debt.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION
DECEMBER 31, 1995
Charged to Costs Item and Expenses
1. Maintenance and repairs $ 12,387
2. Depreciation and amortization (1)
3. Taxes, other than payroll and income taxes 6,639
4. Royalties -
5. Advertising -
(1) Less than 1% of revenues.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION
DECEMBER 31, 1994
Charged to Costs Item and Expenses
1. Maintenance and repairs (1)
2. Depreciation and amortization $ 10,282
3. Taxes, other than payroll and income taxes (1)
4. Royalties -
5. Advertising -
(1) Less than 1% of revenues.
CORRECTIONS SERVICES, INC. AND SUBSIDIARY SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION
DECEMBER 31, 1993
Charged to Costs Item and Expenses
1. Maintenance and repairs (1)
2. Depreciation and amortization $ 41,979
3. Taxes, other than payroll and income taxes 12,224
4. Royalties -
5. Advertising -
(1) Less than 1% of revenues.