SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
33-02035-A
(Commission File Number)
CORRECTIONS SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-2508470
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3040 East Commercial Boulevard
Fort Lauderdale, Florida 33308
(Address of Principal Executive Offices)
(954) 772-2297
(Registrant's Telephone Number)
None
(Former Name, Former Address and former Fiscal Year, if
changed since last report)
Securities registered pursuant to Section 12(b) of the Act
None None
(Title of Each Class) (Name of Each Exchange
on which Registered)
Securities registered pursuant to Section 12(g) of the Act
None None
(Title of Each Class) (Name of Each Exchange
on which Registered)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of March 25, 1998, was
approximately $1,300,000.00.
The number of shares of Common Stock, $.0001 par value, of the
Registrant issued as of March 25, 1998 was 7,276,900 shares.
Of that total 7,216,900 shares are outstanding. The Company
has 60,000 shares in treasury.
<PAGE>
PART I
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 individual incarceration in a jail or similar
full time confinement 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 to ensure compliance with an order of house
arrest of the client/inmate.
Background
The Company undertook to secure equipment to assemble a system
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 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 mid-1993, neither Marconi nor Aeroflex had
engaged in any operations in the electronic monitoring systems
marketplace and/in late May 1994, the Company approached Aeroflex with
<PAGE>
a view toward purchase of all of the monitoring system assets and
release from its earlier 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
monitoring system 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 simultaneously
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 by
settlement of the litigation against Marconi in mid-1993. The Company
re-entered the marketplace depending upon its then newly acquired,
finished equipment inventory. The Company continues to consider
alternative manufacturing options for possible future implementation
prior to potential exhaustion, if any, of its finished equipment
inventory. There can be no assurances that the Company will be able
to implement one or more manufacturing options in the event of a need
to do so. The Company does not now perceive a near term need to
secure and implement a manufacturing option. If unable to do so,
however, when and if needed, the Company will be adversely affected.
Employees
In addition to its officers, Norman H. Becker and Frank R. Bauer,
who each currently devote approximately ten (10%) percent of their
time to its activities, and Diane Martini, who currently devotes
approximately eighty (80%) percent of her time to its activities, the
Company currently has four (4) other full-time employees See Part
III., Item 10, Directors and Executive Officers of the Registrant.
ITEM 2. PROPERTIES
The Company occupies its principal offices and shop facilities
space on a month-to-month basis at a combined rental and
<PAGE>
administrative charge of $2,600 per month ($31,200 per annum).
The Company also occupies warehouse space in the adjacent City
of Pompano Beach, Florida on an annual lease basis at a rental of $828
per month ($9,936 per annum).
ITEM 3. LEGAL PROCEEDINGS
The Company is not now a party to any litigation or, to its
knowledge, threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted, through solicitation of proxies or
otherwise, to a vote of the Company's security holders during the
fourth quarter of fiscal 1997.
<PAGE>
PART II
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 CRSE. The figures shown represent inter-dealer quotations
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
Period Bid Price Asked Price
High Low High Low
<S> <C> <C> <C> <C>
First Quarter, 1996 $0.125 $0.10 $0.025 $0.20
Second Quarter, 1996 $0.18 $0.125 $0.25 $0.18
Third Quarter, 1996 $0.18 $0.125 $0.25 $0.18
Fourth Quarter, 1996 $0.18 $0.125 $0.25 $0.18
First Quarter, 1997 $0.21 $0.18 $0.25 $0.22
Second Quarter, 1997 $0.20 $0.17 $0.25 $0.22
Third Quarter, 1997 $0.21 $0.18 $0.29 $0.25
Fourth Quarter, 1997 $0.21 $0.18 $0.375 $0.25
January 1, through
March 25, 1998 $0.29 $0.21 $0.375 $0.25
</TABLE>
(b) Holders. As of March 25, 1998, the approximate number of
recordholders of Common Stock of the Registrant was 636.
The Company is however generally unable to determine the actual
number of beneficial holders of its Common Stock due to Common Stock
held for stockholders "in street name" but estimates the current total
to be approximately 985.
(c) Dividends. The 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.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Summary of Statement of Operations:
<TABLE>
<CAPTION>
As of As of As of As of As of
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
Revenue $ 342,592 $ 552,441 $ 533,269 $ 890,094 $ 612,178
Oper. Exp. $ 525,199 $ 532,331 $ 542,884 $ 708,578 $1,058,497
Net Income(Loss) ($ 137,759) $ 113,003 ($ 22,717) $ 61,412 $1,200,364
Weighted No. of
shs. outstanding 5,936,893 5,126,900 5,126,900 5,179,709 5,181,545
Net Income(Loss)
per sh. Common
Stk. Outstanding ($ .02) $ .02 ($ .004) $ .01 $ .23
(See Note A-Notes
to Fin. Stmts.)
</TABLE>
Summary Balance Sheet Information
<TABLE>
<CAPTION>
As of As of As of As of As of
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
Total Assets $1,758,638 $1,205,096 $1,087,236 $1,101,968 $1,032,050
Total Current $ 92,298 $ 135,090 $ 120,382 $ 98,104 $ 85,314
Liabilities
Tot. Current
Assets $1,684,941 $1,199,917 $1,079,708 $1,093,577 $1,015,736
Stkholders'
Equity $1,666,340 $1,070,006 $ 957,003 $ 979,720 $ 937,058
Cash Dividends $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(a) Financial Condition. As of December 31, 1997 the Company
had current assets of $1,684.941 compared to $1,199.917 at December
31, 1996, total assets of $1,758,638 compared to $1,205,096 at
December 31, 1996 and shareholders equity of $1,666,340 as compared
<PAGE>
to $1,070,006 as of December 31, 1996. The increases in current
assets and total assets were primarily the result of the Company's
increase in cash and marketable trading securities resulting from
the acquisition of Hi-Tech Leasing, Inc. Shareholders Equity at
December 31, 1997 increased $596,334. to $1,666,340, from
$1,070,006 at December 31, 1996. The increase was primarily the
result of the Company's acquisitions of Hi-Tech Leasing, Inc. and
Professional Programmers Inc. See Item 8., Financial Statements and
Supplementary Data.
Liquidity. The Company had a net increase in cash and cash
equivalents for the year ended December 31, 1997 of $127,899, and
cash and cash equivalents at the end of the year of $464,577, as
compared to an increase in cash and cash equivalents of $75,293,
and cash and cash equivalents of $336,678, for the year ended
December 31, 1996. See Item 8., Financial Statements and
Supplementary Data.
The Company continues to have no fixed executory obligations.
Capital Resources. The Company has no present material
commitments for additional capital expenditures. The Company has
no outstanding credit lines or commitments in place and no
immediate need for additional financial credit. There can be no
assurance however that it will be able to secure additional credit
borrowing, if needed.
Results of Operations. The Company's revenues for the fiscal
period ended December 31, 1997, were derived from sales, lease
income and repairs and maintenance income.
The Company's revenues decreased $209,849, or 40%), to
$342,592 for the fiscal year ended December 31, 1997, as compared
to $552,441 for the same period of 1996. The principal reason for
decreased revenue was a decline in the sale of new monitoring
units.
Operating expenses decreased $7,132, or 1.3%, to $525,199 as
compared to $532,331 for the same period last year principally due
to a minor decrease in cost of sales. The Company realized a net
loss of ($137,759) for the fiscal year ended December 31, 1997, as
compared to net income of $113,003 for the same period last year.
The decrease in net income was primarily due to a decline in the
sale of new units and a decrease in realized and unrealized gain
(loss) on marketable securities.
The operating expenses decrease in the period ended December
31, 1997 of $7,132 in comparison to 1996 operating expenses was
primarily attributable to a decrease in cost of sales.
The Company knows of no unusual or infrequent events or
transactions, nor significant economic changes that have materially
affected the amount of its reported income from continuing
<PAGE>
operations for the year ended December 31, 1997.
On August 27, 1997 the Company's ownership interest in its
former affiliate, Vanderbilt Square Corp., was sold to an unrelated
third party. With completion of that transaction, the Company
essentially ended its affiliate relationship with Vanderbilt Square
Corp.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached financial statements and supplementary data.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)(b) Identification of Directors and Executive Officers
Name Age Offices Held
Norman H. Becker 60 President/Director
Frank Bauer 53 Vice President/Director
Diane Martini 50 Secretary/Treasurer/Director
Eugene M. Kennedy 60 Director
Robert B. Yeakle 59 Director
(1)(c) Identification of Certain Significant Employees. Mr.
Becker was also President and a Director of the Company's previous
affiliate, Vanderbilt Square Corp., Mr. Kennedy is legal counsel
to the Company and also provides legal services to the Company's
previous affiliate, Vanderbilt Square Corp.
(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. Mr. Becker was also, since its inception,
an officer and a director of Vanderbilt Square Corp., a publicly
held Florida corporation previously affiliated with the Company.
Mr. Becker resigned his position as an officer and director of
Vanderbilt Square Corp. on August 27, 1998 as an aspect of change
of control of that company. 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.
<PAGE>
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 was also
Secretary/Treasurer of Vanderbilt Square Corp., a former affiliate
of the Company. Ms. Martini resigned her position as an officer and
director of Vanderbilt Square Corp. on August 27, 1997 as an aspect
of change of control of that Company at that time. 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.
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.
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
<PAGE>
effect or contemplated. The total compensation received by all
Executive Officers of the Company during the year ended December
31, 1997 was received entirely by Diane Martini and amounted to
$39,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Other Restricted All
Principal Annual Stock Options/ LTIP Other
Position Year Salary Bonus(2) Compensation Awards SARS Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Norman H. Becker
President (1) 1996 $ -0- -- -- -- -- -- --
(since 1/15/93) 1997 $ -0- -- -- -- -- -- --
Frank Bauer (1)
Vice-President 1996 $ -0- -- -- -- -- -- --
President 1997 $ -0- -- -- -- -- -- --
Diane Martini
Secretary/ 1996 $37,333 -- -- -- -- -- --
Treasurer 1997 $39,000 -- -- -- -- -- --
(since 01/12/93)
All Executive
Officers & Former 1996 $37,333 -- -- -- -- -- --
Executive Officers 1997 $39,000 -- -- -- -- -- --
as a Group (3)
Persons (1)
</TABLE>
(1) Mr. Becker received a total of $16,608 in
accounting fees from the Company during 1997.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(b) Security of Ownership of Management
<TABLE>
<CAPTION>
Name of Amount and Nature Percent
Title of Beneficial of Beneficial of
Class Owner Ownership Class(1)
<S> <C> <C> <C>
Common Stock Diane Martini 85,000 Shares 1.2%
Common Stock Norman H. Becker 291,724 Shares 0.6%
Common Stock Frank R. Bauer 31,500 Shares 0.4%
Common Stock Eugene M. Kennedy 50,000 Shares 0.7%
Common Stock Ronald A. Martini 1,125,806 Shares 15.6%
Common Stock Robert B. Yeakle (2) 550,000 Shares 7.6%
Common Stock Corp. Invest. Assoc. 767,700 Shares 10.6%
Common Stock All Officers and
Directors as a Group
(5 persons) 1,008,224 Shares 14.0%
</TABLE>
(1) Based upon 7,216,900 shares outstanding at March
25,1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
The Company paid a total of $116,199 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".
<PAGE>
Certain Business Relationships
During the year ended December 31, 1997, the Company
paid its director, Eugene M. Kennedy, $4,569 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 $16,608.
<PAGE>
PART IV
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, 1997
and December 31, 1996.
Consolidated Statement of Operations - Three
Years Ended December 31, 1997.
Consolidated Statement of Shareholders' Equity
- Three Years Ended December 31, 1997.
Consolidated Statement of Cash Flows - Three
Years Ended December 31, 1997.
Notes to Consolidated Financial Statements.
2. 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
<PAGE>
Statements and Statement of Operations Three
Years Ended December 31, 1997.
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 Systems International, Inc.
Hi-Tech Leasing, Inc.
Professional Programmers Inc.
Published report regarding matters submitted
to vote of Security Holders:
Not applicable.
<PAGE>
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 1997.
<PAGE>
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 30th day
of March, 1998.
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 30, 1998
/s/Norman H. Becker
Norman H. Becker
(ii) Principal Financial and Secretary March 30, 1998
Accounting Officer
/s/Diane Martini
Diane Martini
(iii) A Majority of the Board Director March 30, 1998
of Directors
/s/Diane Martini Director March 30, 1998
Diane Martini
Director March __, 1998
Frank Bauer
/s/Norman H. Becker Director March 30, 1998
Norman H. Becker
/s/Eugene M. Kennedy Director March 30, 1998
Eugene M. Kennedy
Director March __, 1998
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 - 14
<PAGE>
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, 1996
and 1997, and the related consolidated statements of operations and
shareholders' equity and cash flows for each of the three years
ended December 31, 1997. 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, 1997 and 1996, and the results of its consolidated
operations and its consolidated cash flows for the three years
ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Thomas W. Klash
Thomas W. Klash
Certified Public Accountant
Hollywood, Florida
February 3, 1998
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 464,577 $ 336,678
Investment in marketable trading
securities - at market 974,660 660,769
Accounts receivable - trade - net of
allowance for uncollectible accounts
of $2,500 in 1997 and 1996 43,102 62,710
Accounts receivable - other 14,989 7,701
Note receivable - Current
Affiliate 4,818 --
Other 37,657 --
Net investment in direct financing
Leases - current 3,765 --
Accrued interest receivable 4,560 --
Inventory 131,911 127,255
Other 4,902 4,804
Total Current Assets 1,684,941 1,199,917
PROPERTY AND EQUIPMENT - net of
accumulated depreciation of $141,201
in 1997 and $135,442 in 1996 1,102 2,941
NOTES RECEIVABLE - Non-Current:
Affiliate 10,379 --
Other 55,259 --
NET INVESTMENT IN DIRECT FINANCING
LEASES - Non-Current 4,788 --
OTHER 2,169 2,238
$1,758,638 $1,205,096
</TABLE>
See accompanying notes to consolidated financial statements.
-2(a)-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and
accrued expenses - principally
trade $ 49,283 $ 60,860
Deferred revenue - current 43,015 74,230
Total Current Liabilities 92,298 135,090
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock $.0001 par value;
10,000,000 shares authorized;
7,276,900 shares issued in 1997 and
5,276,900 shares at December 31, 1996.
7,216,900 shares outstanding at
December 31, 1997 and 5,126,900 shares
outstanding at December 31, 1996 728 528
Additional paid-in capital 2,821,667 2,095,391
Accumulated deficit (1,137,022) ( 999,263)
1,685,373 1,096,656
Less treasury stock, 60,000 shares
at December 31, 1997 and 150,000
shares at December 31, 1996 at cost (19,033) (26,650)
Total shareholders' equity 1,666,340 1,070,006
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,758,638 $ 1,205,096
</TABLE>
-2(b)-
<PAGE>
CORRECTIONS SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 160,541 $ 300,440 $ 378,638
Lease income 7,065 69,392 1,000
Repair and maintenance
fee income 174,986 182,609 153,631
342,592 552,441 533,269
COST AND EXPENSES:
Cost of sales (excluding
depreciation and
amortization) 200,033 229,464 235,166
Depreciation and amortization 1,962 2,727 5,067
Selling, general and
administrative expenses 323,204 300,140 302,651
TOTAL OPERATING EXPENSES 525,199 532,331 542,884
INCOME (LOSS)
FROM OPERATIONS (182,607) 20,110 (9,615)
OTHER INCOME (EXPENSE):
Dividend and Interest Income 72,934 41,179 37,740
Realized and unrealized
gain (loss) on
marketable securities (71,974) 52,225 (46,072)
Elimination of Debt 45,000 -- --
Other ( 1,112) ( 511) ( 4,770)
44,848 92,893 (13,102)
</TABLE>
-3(a)-
<PAGE>
CORRECTIONS SERVICES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET INCOME (LOSS) $ (137,759) $ 113,003 $ (22,717)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,936,893 5,126,900 5,126,900
NET INCOME (LOSS)PER COMMON
SHARE $ (.02) $ .02 $ (.004)
</TABLE>
See accompanying notes to consolidated financial statements.
-3(b)-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Deficiency)
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock
$.0001 Par Value Additional Retained
Authorized 10,000,000 Shares Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1994 5,126,900 $ 528 $ 2,095,391 $( 1,089,549) $ ( 26,650) $ 979,720
Net Loss for the period - - - ( 22,717) - ( 22,717)
Balance - December 31, 1995 5,126,900 528 2,095,391 ( 1,112,266) ( 26,650) 957,003
Net Income for the period - - 113,003 - 113,003
Balance - December 31, 1996 5,126,900 528 2,095,391 ( 999,263) ( 26,650) 1,070,006
Purchase of Treasury Shares ( 522,500) - - - ( 94,985) ( 94,985)
Sale of Treasury Shares 462,500 - - - 75,952 75,952
Acquisition of Hi-Tech Leasing 2,000,000 200 736,788 - - 736,988
Acquisition of Professional
Programmers, Inc. 150,000 - ( 10,512) - 26,650 16,138
Net loss for the period - - - ( 137,759) - ( 137,759)
Balance - December 31, 1997 7,216,900* $ 728 $ 2,821,667 ($1,137,022) ($ 19,033) $1,666,340
</TABLE>
Shown on the accompanying
Balance Sheet as follows:
Issued: 7,276,900
Treasury shares 60,000
7,216,900
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ($ 137,759) $ 113,003 ($ 22,717)
Adjustments to reconcile
net income (loss) to net cash
(used in) provided by
operating activities:
Depreciation and amortization 1,962 2,692 5,067
(Gain) on disposition assets - - ( 925)
(Gain) loss on sale of marketable
securities ( 60,781) ( 140,450) 15,271
Allowance for market decline
of securities 132,755 88,225 30,801
Write off uncollectable notes - 10,500 -
Change in operating assets
and liabilities:
(Increase) decrease in
trade accounts receivable 19,608 ( 2,420) 64,171
Decrease (increase) in inventory ( 4,656) 21,426 52,498
(Increase) Decrease in accounts
receivable - other 15,811 ( 1,705) 3,924
(Increase) Decrease in accrued
interest receivable ( 4,560) - -
(Increase) Decrease in other assets ( 152) ( 253) 242
(Decrease) increase in accounts
payable and accrued expenses ( 11,577) ( 11,942) ( 14,114)
Increase (decrease) in
deferred revenue ( 31,215) 16,799 22,099
Purchase of marketable trading
securities ( 360,240) ( 745,411) ( 603,515)
Proceeds from sale of
marketable trading securities 402,017 725,697 436,842
Total adjustments 98,972 ( 36,842) 12,361
Net cash provided (used in)
operating activities ( 38,787) 76,161 ( 10,356)
</TABLE>
Continued on next page
-5(a)-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Continued)
1997 1996 1995
<C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Advances paid on notes
receivable - affiliate $ - $ - ($ 50,000)
Advances paid on notes
receivable - other ( 78,958) - -
Principal collection of
notes receivable - affiliate 1,897 - 50,000
Principal collection of
notes receivable - other 28,482 - 11,500
Principal collection of direct
financing leases 1,482 - -
Sale of property & equipment - - 925
Purchase of property and equipment - ( 868) ( 4,809)
Net cash provided by (used in)
financing activities ( 47,097) ( 868) ( 7,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Treasury Stock 16,138 - -
Issuance of Common Stock 197,645 - -
Net cash provided by (used in)
financing activities 213,783 - -
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 127,899 75,293 ( 2,740)
CASH AND CASH EQUIVALENTS -
Beginning of year 336,678 261,385 264,125
CASH AND CASH EQUIVALENTS -
End of year $ 464,577 $ 336,678 $ 261,385
</TABLE>
See accompanying notes to consolidated financial statements.
-5(b)-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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 signaling 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.
-6-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, and its wholly-owned subsidiaries, Corrections
Systems International, Inc. Professional Programmers, Inc.
and Hi-Tech Leasing, Inc. from the date of their acquisition.
All significant intercompany accounts and transactions have
been eliminated.
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 Trading Securities - The Company's
investment in marketable trading 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
-7-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Income Taxes.
Deferred taxes are provided on the "liability" method whereby
deferred tax assets are recognized for operating loss
carryforwards. Deferred tax assets are reduced by a valuation
allowance, when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax
asset will not be realized.
-8-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Leasehold improvements $ 3,170 $ 3,170
Office furniture and equipment 59,704 55,784
Computer and monitoring
equipment 79,429 79,429
142,303 138,383
Less accumulated depreciation
andamortization 141,201 135,442
$ 1,102 $ 2,941
</TABLE>
NOTE C - NOT RECEIVABLE - AFFILIATE
8% Note Receivable. Due from an individual who is an officer
and director of the Company - Collateralized by transportation
equipment - Payable in monthly installments of $488, including
interest, thru November 15, 2000.
$ 15,197
Deduct - Not Current 10,379
$ 4,818
NOTE D - NOTES RECEIVABLE - OTHER
Notes receivable - other - consist of the following:
1997
10% Notes Receivable - Collateralized
by transportation and other equipment.
Payments are due in various monthly
installments through November 1, 2000 $ 71,599
-9-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE D - NOTES RECEIVABLE - OTHER (Contd.)
10% Notes Receivable - Due from
various individual - on demand and
unsecured 21,317
$ 92,916
Deduct noncurrent portion 37,657
$ 55,259
Interest earned on notes amounted to $4,430 in 1997.
NOTE E - INCOME TAXES
Significant components of deferred tax benefits are as
follows:
Current Tax Benefit Assets
Allowance for market decline
of equity securities $ 65,494
Allowance for doubtful accounts 513
Total Current Tax Benefit $ 66,007
Non-Current Tax Benefit Assets
Tax loss carry forward at
December 31, 1997 $ 207,435
Total Non-current Benefit $ 207,435
Total Current and
Noncurrent Tax Benefit $ 273,442
Valuation Allowance ($ 273,442)
Net Deferred Tax Assets $ -
At December 31, 1997, management is unable to predict
profitable operations for the Company in the future.
-10-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE E - INCOME TAXES (Contd).
At December 31, 1997, the Company had available net operating
loss carryforwards for financial and tax reporting purposes of
approximately $689,456 expiring at various times through 2007.
NOTE F - MAJOR CUSTOMERS
Sales to customers individually representing more than 10%
of combined revenues amount to $88,922 in 1997, $174,188
in 1996 and $244,622 in 1995. In 1997, two customers
accounted for 14% and 12% respectively. In 1996, two
customers accounted for 22% and 10% respectively.
NOTE G - RELATED PARTY TRANSACTIONS
Professional and Consulting Fees - the Company paid
officers, directors, shareholders and affiliates
professional and consulting fees amounting to $96,277 IN
1997, $75,023 in 1996 and $82,228 in 1995.
Office Expense - Office expenses were paid to shareholders
and/or entities affiliated through common officers,
directors and shareholders amounting to $10,200 in 1997,
$5,817 in 1996 and $10,200 in 1995.
Rent Expense - Rentals paid to entities having officers,
directors and shareholders in common with the Company
amounted to $21,000 in 1997, 1996 and 1995.
NOTE H - RENTAL COMMITMENTS
Rent expense incurred for the occupancy of general office
and storage facilities amounted to $35,423 in 1997,
$30,759 in 1996 and $31,162 in 1995. At December 31,
1997, there were no fixed annual rental commitments.
-11-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE I - INVESTMENTS IN MARKETABLE EQUITY SECURITIES
At December 31, 1997, the Company's investment in
marketable equity securities consisted entirely of trading
securities as follows:
Market
Cost Value
Investment in corporate
trading securities - $1,294,142 $ 974,660
Unrealized losses on changes in market values of marketable
trading securities amounted to $132,755 in 1977, $88,225 in
1996 and $30,801 in 1995.
NOTE J - CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary
cash investments, investments in marketable securities and
accounts receivable. The Company places its cash investments
and investments in marketable securities with high quality
institutions and limits the amount of credit exposure to any
one institution or investee. Concentrations of credit risk
with respect to accounts receivable are limited, due to the
relatively small average balance per customer and their
dispersion across several geographical areas. The Company
generally does not require collateral or other security to
support customer receivables.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following Notes summarize the major methods and
assumptions used in estimating the fair values of financial
instruments:
Cash and Cash Equivalent
The carrying amount approximates fair value due to the
liquidity of these financial instruments.
-12-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS (Contd.)
Investments
The fair value of investments are based upon quoted market
prices for those investments.
Accounts Receivable
The fair value of customer receivables is based upon net
realizable value.
NOTE L - INVESTMENT IN WHOLLY-OWNED SUBSIDIARIES
On July 28, 1997 the Company issued 2,000,000 shares of
authorized but previously unissued restricted common stock to
a former affiliate, Vanderbilt Square Corp. ("Vanderbilt") in
exchange for all of the issued and outstanding shares of Hi-
Tech Leasing, Inc., a 100% owned subsidiary of Vanderbilt.
Fair value of the common shares issued amounted to $731,000.
Net assets acquired amounted to $736,988. The excess of net
assets acquired over fair value of common stock issued was
credited to additional paid-in capital.
The Company's earnings and cash flows reflect the operations
of Hi-Tech Leasing, Inc. from July 28, 1997 through December
31, 1997.
On September 30, 1997, the Company acquired 100% ownership of
Professional Programmers, Inc. an inactive, wholly-owned
subsidiary of Vanderbilt in settlement of a receivable of
$16,152, which was fair value of the stock transferred to the
Company.
Supplemental Cash Flow Information.
A. The Company issued Common Stock with a fair value of
$731,000 in exchange for its investment in Hi-Tech
Leasing, Inc.
-13-
<PAGE>
CORRECTIONS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE L - INVESTMENT IN WHOLLY-OWNED SUBSIDIARIES (Contd.)
A summary of non-cash assets owned by Hi-Tech Leasing,
Inc. on the date of sale follows:
Marketable Securities $ 446,675
Notes Receivable 59,534
Investment in Financing
Leases 10,035
Non cash assets acquired $ 516,244
Cash & Cash Equivalents 220,744
Net Assets of Subsidiary
Acquired $ 736,988
B. The Company settled an obligation from an affiliate
through the conveyance of 100% of its interest in
Professional Programmers, Inc.
-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto
incorporated in Part II, Item 8 of this Form 10-K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 464,577
<SECURITIES> 974,660
<RECEIVABLES> 111,391
<ALLOWANCES> 2,500
<INVENTORY> 131,911
<CURRENT-ASSETS> 1,684,941
<PP&E> 142,303
<DEPRECIATION> 141,201
<TOTAL-ASSETS> 1,758,638
<CURRENT-LIABILITIES> 92,298
<BONDS> 0
0
0
<COMMON> 728
<OTHER-SE> 1,684,645
<TOTAL-LIABILITY-AND-EQUITY> 1,758,638
<SALES> 160,541
<TOTAL-REVENUES> 342,592
<CGS> 200,033
<TOTAL-COSTS> 525,199
<OTHER-EXPENSES> 1,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (137,759)
<INCOME-TAX> 0
<INCOME-CONTINUING> (137,759)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137,759)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
