<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION NO. 333-6457
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CORRECTIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 11-3182580
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
SUITE 1000
1819 MAIN STREET
SARASOTA, FLORIDA 34236
(941) 953-9199
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
JAMES F. SLATTERY
CORRECTIONAL SERVICES CORPORATION
SUITE 1000
1819 MAIN ST.
SARASOTA, FLORIDA 34236
(941) 953-9199
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
SIDNEY TODRES, ESQ. H. WATT GREGORY, III, ESQ.
EPSTEIN BECKER & GREEN, P.C. GIROIR & GREGORY, PROFESSIONAL ASSOCIATION
250 PARK AVENUE 111 CENTER STREET -- SUITE 1900
NEW YORK, NEW YORK 10177 LITTLE ROCK, ARKANSAS 72201
(212) 351-4735 (501) 372-3000
</TABLE>
APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value.......... 2,817,500 shs. $15.625 $44,023,438 $15,180.50
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low sales prices of the Common Stock on The
Nasdaq Stock Market's National Market on June 19, 1996, pursuant to Rule
457(c).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
CORRECTIONAL SERVICES CORPORATION
CROSS-REFERENCE SHEET
(BETWEEN ITEMS IN PART I OF FORM S-1 AND PROSPECTUS)
<TABLE>
<CAPTION>
FORM S-1 ITEM NO. AND CAPTION PROSPECTUS CAPTION
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<S> <C> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Front Cover Page; Underwriting
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.................... Prospectus Summary; Safe Harbor
Provisions of the Private Securities
Litigation Reform Act; Risk Factors
4. Use of Proceeds................................ Use of Proceeds
5. Determination of Offering Price................ Not Applicable
6. Dilution....................................... Not Applicable
7. Selling Security Holders....................... Principal and Selling Stockholders
8. Plan of Distribution........................... Front Cover Page; Underwriting
9. Description of Securities to be Registered..... Description of Securities
10. Interests of Named Experts and Counsel......... Certain Transactions; Legal Matters
11. Information with Respect to the Registrant
a. Description of Business.................. Prospectus Summary; Business
b. Description of Property.................. Business
c. Legal Proceedings........................ Business
d. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters.................... Front Cover Page; Capitalization;
Dividend Policy; Description of
Securities
e. Financial Statements..................... Consolidated Financial Statements
f. Selected Financial Data.................. Selected Consolidated Financial Data
g. Supplementary Financial Information...... Not Applicable
h. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
i. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................. Not Applicable
j. Directors and Executive Officers......... Management
k. Executive Compensation................... Management
l. Security Ownership of Certain Beneficial
Owners and Management.................. Principal and Selling Stockholders
m. Certain Relationships and Related
Transactions........................... Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Not Applicable
Liabilities..................................
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 16, 1996
PROSPECTUS
2,450,000 SHARES
CORRECTIONAL SERVICES CORPORATION (LOGO)
CORRECTIONAL SERVICES CORPORATION
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
COMMON STOCK
Of the 2,450,000 shares of Common Stock offered, 2,000,000 shares are being
sold by Correctional Services Corporation (the "Company") and 450,000 shares are
being sold by certain stockholders of the Company (the "Selling Stockholders").
See "Principal and Selling Stockholders." The Company will not receive any
proceeds from the shares being sold by the Selling Stockholders.
The Common Stock is traded on The Nasdaq Stock Market's National Market
("The Nasdaq Stock Market") under the symbol "CSCQ." On August 15, 1996, the
closing sales price of the Common Stock, as reported by The Nasdaq Stock Market,
was $15.25 per share. See "Price Range of Common Stock."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
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Total(3)..................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $400,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an additional 367,500 shares to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about ,
1996.
---------------------
STEPHENS INC. J.C. BRADFORD & CO.
The date of this Prospectus is , 1996.
<PAGE> 4
[PASTE-UP]
ARCHITECTURAL RENDERING OF THE COMPANY'S SECURE JUVENILE YOUTH TRAINING CENTERS
IN POLK CITY AND PAHOKEE FLORIDA,
SCHEDULED TO BECOME OPERATIONAL IN THE FIRST QUARTER OF 1997.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH OTHERWISE MIGHT PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. All references to the Company in this
Prospectus include Correctional Services Corporation and its subsidiaries and,
unless otherwise indicated, all references to the Company's outstanding Common
Stock assume no exercise of the Underwriters' over-allotment option.
THE COMPANY
The Company is a leading developer and manager of privatized correctional
and detention facilities in the United States. Through its three divisions,
Adult, Juvenile and Community Corrections, the Company provides a diverse range
of services to local, state, and federal governmental correctional agencies. The
Company currently has agreements to operate 14 correctional and detention
facilities in New York, Florida, Arizona, Texas and the State of Washington.
Eleven of these facilities, with a total of 1,975 beds, are currently in
operation, two, with a total of 700 beds, are scheduled to become operational in
the first quarter of 1997 and one, with 100 beds, is anticipated to become
operational in the fourth quarter of 1997. Further, the Company recently was
advised that it has been selected, following a competitive bidding process, to
negotiate an agreement to design, construct, own and manage a 600-bed adult
prison in Arizona, which is anticipated to become operational in the fourth
quarter of 1997. The Company is also aggressively pursuing other privatized
correctional projects both at the request for proposal ("RFP") stage and the
pre-RFP development stage.
The Company manages both secure and non-secure facilities. The Company's
secure facilities include a detention and processing center for illegal aliens,
an adult prison, intermediate sanction facilities, driving while intoxicated
("DWI") facilities, and military-style boot camps for juvenile offenders. Its
non-secure facilities include residential programs, such as community
correctional facilities for federal and state offenders serving the last six
months of their sentences, and non-residential supervision programs.
In addition to providing fundamental residential services for adult and
juvenile inmates, the Company has developed a broad range of programs intended
to reduce recidivism, including basic and special education, substance abuse
treatment and counseling, vocational training, life skills training, and
behavioral modification counseling. The management services offered by the
Company range from project consulting to the design, development and management
of new correctional and detention facilities and the redesign, renovation and
management of older facilities. The Company believes its proven ability to
manage the full spectrum of correctional facilities and its wide variety of
programs and services will increase its marketing opportunities.
The privatized correctional services industry has experienced rapid growth
in recent years. According to the Private Adult Correctional Facility Census,
Ninth Edition, prepared by the Private Corrections Project, Center for Studies
in Criminology & Law, University of Florida, dated March 15, 1996, the rated
capacity of international privatized secure adult correctional facilities grew
from 2,620 beds in 1986 to 63,595 beds at year-end 1995 and, in a June 16, 1996
forecast prepared by the Project, is projected to grow to 197,503 beds by
year-end 2000. This projection does not include the projected growth of
privatized juvenile and community correctional facilities, both of which, the
Company believes, are also growing rapidly. According to the United States
Department of Justice, Office of Juvenile Justice and Delinquency Prevention,
between 1988 and 1994 juvenile arrests for violent crimes grew by more than 50%.
Also, according to the United States Department of Justice, Bureau of Justice
Statistics, the number of adult inmates housed in federal and state facilities
increased from 487,593 at December 31, 1985, to 1,104,074 at December 31, 1995.
The Company believes the growth in demand for privatized correctional facilities
is attributable to a number of factors, including a shortage of correctional
beds, increasing public demand that convicted offenders serve a longer portion
of their imposed sentences, the requirements imposed by legal and regulatory
authorities to remedy overcrowded conditions and outmoded facilities, and
increasing fiscal pressures on governmental agencies to deliver cost-effective
correctional services to address these issues.
3
<PAGE> 6
The Company's business strategy is to enhance its position as an industry
leader and to expand its operations, both internally and through selective
acquisitions, in order to capitalize on current growth trends in the privatized
corrections industry. The Company intends to continue emphasizing the quality
management of its facilities and to continue developing and refining its
diversified programs and services. Where appropriate, the Company may commit its
own capital for the renovation or expansion of existing facilities or the
development and construction of new facilities.
The Company was incorporated under the laws of the State of Delaware on
October 28, 1993 to acquire all of the outstanding capital stock of a number of
affiliated companies engaged in operating correctional or detention facilities.
The Company's executive offices are located at Suite 1000, 1819 Main St.,
Sarasota, Florida 34236 (telephone no. 941-953-9199).
RECENT EVENTS
In July 1996, the Company entered into an agreement with Colorado County,
Texas to operate a 100-bed military-style boot camp in Eagle Lake, Texas for
juvenile offenders aged 12 to 17. The agreement is for an initial five-year term
with three five-year renewal options to the County. The Company will act as an
advisor to the County during the construction phase, which is expected to
commence in the first quarter of 1997, with the facility scheduled to be
completed and become operational during the fourth quarter of 1997.
In August 1996, the Company was advised it had been selected, through a
competitive RFP process, to own and manage a 600-bed adult prison in Florence,
Arizona, which is anticipated to become operational in the fourth quarter of
1997. The agreement, which is to be negotiated, will be for an initial
three-year term with one two-year renewal option to the Arizona Department of
Corrections, as provided in the RFP. The Company will own the facility and is
responsible for the related costs, including design, development, construction
and start-up expenses, currently estimated at approximately $15.0 million.
On August 1, 1996, the Company filed an amendment to its Certificate of
Incorporation changing its name from Esmor Correctional Services, Inc. to
Correctional Services Corporation and increasing its authorized Common Stock
from 10,000,000 shares, $.01 par value, to 30,000,000 shares, $.01 par value.
THE OFFERING
Common Stock offered by the Company............. 2,000,000 shares
Common Stock offered by the Selling
Stockholders.................................... 450,000 shares. See
"Principal and Selling
Stockholders."
Common Stock to be outstanding after the
offering........................................ 7,145,503 shares(1)
Use of proceeds................................. To finance construction,
start-up and related costs of
the Florence, Arizona and the
Eagle Lake, Texas facilities
and the start-up costs of two
Florida facilities, repay
bank indebtedness and for
general corporate purposes.
See "Use of Proceeds."
The Nasdaq Stock Market symbol.................. CSCQ
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(1) Excludes (i) 648,112 shares of Common Stock reserved for issuance under the
Company's stock option plans, pursuant to which options to purchase 346,813
shares at a weighted average exercise price of $9.51 per share are
outstanding, of which options to purchase 195,944 shares are currently
exercisable; (ii) 200,000 shares issuable at $8.875 per share upon exercise
of non-qualified options granted to two employees and 15,000 shares
issuable at $8.75 per share upon exercise of a non-qualified option granted
to a director, of which options to purchase 66,666 shares are currently
exercisable; and (iii) 851,202 shares issuable upon exercise of outstanding
warrants at an average exercise price of $7.65 per share. See
"Management -- Stock Options" and "Description of Securities -- Warrants."
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995(1) 1995 1996
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $5,444 $10,322 $14,101 $24,273 $31,552 $16,406 $15,073
Operating expenses................ 3,840 6,292 8,651 14,899 19,732 9,915 10,242
General and administrative
expenses....................... 1,232 2,888 3,579 6,696 9,938 5,064 4,402
New Jersey facility closure
costs(1)....................... -- -- -- -- 3,910 1,488 --
------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... 372 1,142 1,871 2,678 (2,028) (61) 429
Interest expense.................. 67 36 31 133 761 215 453
------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes.......................... 305 1,106 1,840 2,545 (2,789) (276) (24)
Income tax expense (benefit)(2)... 35 390 736 1,002 (1,050) 21 (10)
------- -------- -------- -------- -------- -------- --------
Net earnings (loss)(2)............ $ 270 $ 716 $ 1,104 $ 1,543 $(1,739) (297) (14)
======= ======== ======== ======== ======== ======== ========
Net earnings (loss) per
share(2)....................... $ 0.08 $ 0.22 $ 0.34 $ 0.35 $ (.38) $ (0.07) $ (0.00)
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding.................... 3,281 3,281 3,281 4,395 4,553 4,408 4,975
OPERATING DATA:(3)
Number of beds.................... 297 731 1,222 1,805 1,575 1,585 1,975
Actual mandays.................... 81,221 186,970 282,263 507,884 609,392 320,122 305,489
Available mandays................. 82,869 221,176 285,132 519,746 635,754 337,354 320,870
Average occupancy................. 98.0% 84.5% 99.0% 97.7% 95.9% 94.9% 95.2%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ (601) $ 5,271
Total assets........................................................ 24,836 46,534
Long-term debt, including current portion........................... 6,572 --
Subordinated notes.................................................. 4,032 4,032
Total stockholders' equity.......................................... 10,801 39,071
</TABLE>
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(1) The 1995 consolidated financial statements have been restated with respect
to the closure of the New Jersey facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Calendar Year
1995 Compared to Calendar Year 1994" and Note L-1 of Notes to Consolidated
Financial Statements.
(2) Net earnings and net earnings per share for 1991, 1992 and 1993 are shown on
a pro forma basis to reflect income taxes which were not applicable under
the Company's then Subchapter S Corporation status.
(3) All references to the number of beds in this Prospectus, together with all
related statistical data, refer to the number of beds under contract which
is an estimate in the contract by the contracting governmental agency of
the number of offenders expected to be assigned to the facility and not a
guarantee of a minimum or maximum number of offenders to be so assigned.
(4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby and the application of the estimated net proceeds of
$28.3 million therefrom (based on an assumed offering price of $15.25 per
share).
5
<PAGE> 8
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain qualifying forward-looking statements. Certain information
included in this Prospectus and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as certain
information included in oral statements or other written statements made or to
be made by the Company) may contain statements that are forward-looking, such as
statements relating to projected financial items and results, plans for future
expansion and other business development activities, capital spending or
financing sources, capital structure and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly impact anticipated results in the future
and, accordingly, such results may materially differ from those expressed in any
forward-looking statements by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those described under "Risk
Factors" below.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information set forth in this Prospectus,
in evaluating an investment in the shares of Common Stock offered hereby.
RISKS ASSOCIATED WITH INTERNAL EXPANSION
The Company's growth is generally dependent upon its ability to obtain
contracts to develop and manage new correctional and detention facilities. The
rate of such development depends on a number of factors, including crime rates
and sentencing patterns in various jurisdictions and the Company's ability to
integrate new facilities into its management structure. Certain jurisdictions
recently have required the successful bidders to make a significant capital
investment in connection with the financing of a particular project, a trend
which will require the Company to have sufficient capital resources in order to
compete effectively. In some cases, the Company may determine to construct and
own a facility without a contract award when it believes there is a significant
shortage of beds and a strong likelihood it will be awarded a contract; however,
there can be no assurance that any contract will, in fact, be awarded. Further,
there can be no assurance that the Company will be able to obtain contracts to
construct and/or manage new facilities or retain existing contracts upon their
expiration. See "Business -- Business Strategy."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company intends to grow through internal expansion and through
selective acquisitions. There can be no assurance that the Company will be able
to identify, acquire or profitably manage acquired operations or that operations
acquired will be profitable or achieve levels of profitability that justify the
related investment. Acquisitions involve a number of special risks, including
possible adverse short-term effects on the Company's operating results,
diversion of management's attention from existing business, dependence on
retaining, hiring and training key personnel, risks associated with
unanticipated problems or legal liabilities, and amortization of acquired
intangible assets, any of which could have a material adverse effect on the
Company's financial condition, results of operations and liquidity. See
"Business -- Business Strategy."
RESISTANCE TO PRIVATIZATION OF CORRECTIONAL AND DETENTION FACILITIES
Management 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, local sheriff's departments, and groups that believe that
correctional and detention facility operations should only be conducted by
governmental agencies. In addition, changes in the dominant political party in
any market in which the Company operates could result in significant changes to
the previous acceptance of privatization in such market. Further, some sectors
of the federal government and some state and local governments are not legally
permitted to delegate their traditional management responsibilities for
correctional and detention facilities to private companies.
6
<PAGE> 9
OPPOSITION TO FACILITY LOCATION
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 plans 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.
CONSTRUCTION RISKS
When the Company is engaged to perform design and construction services for
a facility, the Company typically acts as the primary contractor and
subcontracts with other parties who act as the general contractors. As primary
contractor, the Company is subject to the various risks of construction
including, without limitation, shortages of labor and materials, work stoppages,
labor disputes and weather interference. The Company is also subject to the risk
that the general contractor will be unable to complete construction at the
budgeted costs or be unable to fund any excess construction costs. Under such
contracts, the Company is ultimately liable for all late delivery penalties and
cost overruns.
SHORT-TERM CONTRACTS
The Company's facility management contracts are typically short-term,
ranging from one to three years, with renewal or extension options in favor of
the contracting governmental agency. The Company has three contracts subject to
renewal in 1996, and there can be no assurance that these or any other contract
will be renewed. Additionally, the contracting governmental agency typically may
terminate a facility contract without cause by giving the Company adequate
written notice. The Company customarily incurs significant development and
start-up costs in opening new facilities, and the termination or non-renewal of
a contract would require an immediate write-off of any unamortized costs
associated with the contract, and could have a material adverse effect upon the
Company's financial condition, results of operations and liquidity. See
"Business -- Facility Management Contracts."
CONTRACTS SUBJECT TO GOVERNMENTAL FUNDING
The Company's facility management contracts are subject to either annual or
bi-annual governmental appropriations. A failure by a governmental agency to
receive such appropriations could result in termination of the contract by such
agency or a reduction of the management fee payable to the Company. In addition,
even if funds are appropriated, delays in payments may occur which could have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. See "Business -- Facility Management Contracts."
UNCERTAIN OCCUPANCY LEVELS
The Company is dependent upon the governmental agency with which it has a
management contract to provide inmates for, and maintain the occupancy level of,
the managed facility. A substantial portion of the Company's revenues is
generated under facilities management contracts that specify a net rate per day
per inmate ("per diem rate"), with no minimum guaranteed occupancy levels, while
most of the Company's facilities' cost structures are relatively fixed. Under
such a per diem rate structure, a decrease in occupancy levels may have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. See "Business -- Facility Management Contracts."
FACILITY LEASE LIABILITY
The Company currently leases five of the facilities that it manages. If a
management contract for a leased facility were terminated, the Company would
continue to be obligated to make lease payments until the lease expires. See
"Business -- Facilities."
7
<PAGE> 10
IMPACT OF DISTURBANCE
An escape, riot or other disturbance at one of the Company's facilities
could have a material adverse effect on the Company's financial condition,
results of operations and liquidity. As a result of a disturbance on June 18,
1995 by detainees at the Company's Elizabeth, New Jersey facility which required
local police intervention, the facility was closed and all detainees were moved
by the Immigration and Naturalization Service (the "INS") to public detention
facilities. The disturbance received extensive media coverage which reported the
detainees' allegations of poor conditions and treatment and long delays prior to
their immigration hearings. The adverse publicity generated as a result of the
1995 disturbance could have a material adverse effect on the Company's ability
to obtain future contracts. However, in October 1995, the INS renewed the
Company's contract to manage an INS detention center in Seattle, Washington.
Thereafter, the Company signed a contract to manage a 100-bed facility in Eagle
Lake, Texas, was selected to own and manage a 600-bed adult prison in Florence,
Arizona and was re-awarded a contract to manage the 76-bed facility in Del
Valle, Texas.
In December 1995, the Company entered into an agreement to sell the assets
of the Elizabeth, New Jersey facility to an unaffiliated company that also
manages and operates detention centers. The closure of the facility and the
subsequent sale of assets resulted in charges to operations during 1995 of
$3,909,700, consisting of $416,201 to write-off the deferred development costs
and $3,493,499 to adjust the carrying value of the related assets. Following
approval by the INS of the transfer of the facility lease and management
contract, the sale closed in June 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Calendar Year 1995
Compared to Calendar Year 1994."
POTENTIAL LEGAL LIABILITY
The Company's management of correctional and detention facilities exposes
it to potential third-party claims or litigation by prisoners or other persons
for personal injury or other damages, including damages arising from a
prisoner's escape or from a disturbance or riot at a Company-managed facility.
Currently, the Company is subject to actions initiated by former employees,
inmates and detainees alleging assault, sexual harassment, personal injury,
property damage, and other injuries. See "Business -- Legal Proceedings." In
addition, the Company's management contracts generally require the Company to
indemnify the governmental agency against any damages to which the governmental
agency may be subject in connection with such claims or litigation. The Company
maintains an insurance program that provides coverage for certain liability
risks faced by the Company, including personal injury, bodily injury, death or
property damage to a third party where the Company is found to be negligent.
There can be no assurance, however, that the Company's insurance will be
adequate to cover potential third-party claims. In addition, the Company is
unable to secure insurance for some unique business risks including, but not
limited to, riot and civil commotion or the acts of an escaped offender. See
"Business -- Insurance."
REGULATION
The industry in which the Company operates is subject to a variety of
federal, state and local regulations, including education, health care and
safety regulations, which are administered by various regulatory authorities.
The Company's contracts typically include extensive reporting requirements, and
supervision and on-site monitoring by representatives of the contracting
governmental agencies. Corrections officers customarily are 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 the Company to award subcontracts on a competitive
basis or to subcontract with businesses owned by members of minority groups. The
failure to comply with any applicable laws, rules or regulations and the loss of
any required license could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. Further, current and
future operations of the Company may be subject to additional regulation as a
result of new statutes and regulations or changes in the manner in which
existing statutes and regulations are or may be interpreted or applied, which
could have a material adverse effect on the Company's financial condition,
results of operations and liquidity. See "Business -- Regulation."
8
<PAGE> 11
COMPETITION
The Company 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 the
Company's competitors have greater resources than the Company. There are few
barriers for companies seeking to enter into the management of correctional or
detention facilities. The Company 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, the Company's
Community Corrections and Juvenile Divisions compete with governmental and
not-for-profit entities. See "Business -- Competition."
DEPENDENCE UPON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The continued success of the Company is dependent to a significant degree
upon retaining its executive officers, the loss or unavailability of any of whom
could have an adverse effect on the Company. In addition, the private
correctional services industry has a high turnover rate for facility operational
employees, and the Company's ability to retain existing contracts and obtain new
contracts is in part dependent upon its ability to hire and retain operational
employees. See "Management."
OPERATING LOSS
For the year ended December 31, 1995, the Company incurred an operating
loss of $2,027,689 as a result of the $3,909,700 charge to operations resulting
from the closure of the Elizabeth, New Jersey facility. Since such date, the
Company realized an operating profit of $428,986 for the six months ended June
30, 1996.
INDEBTEDNESS
At June 30, 1996, the Company had total indebtedness of $10,603,777,
$6,572,043 of which will be retired following completion of this offering.
Additional indebtedness may be incurred thereafter to fund the construction and
ownership of correctional facilities. Interest payments on indebtedness are a
charge against the Company's earnings and repayments of indebtedness adversely
affect its cash flow and liquidity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financing."
ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors to establish the terms and provisions
of different series of preferred stock and the business combination provisions
of the Delaware General Corporation Law may discourage unsolicited takeover bids
by third parties. See "Description of Securities."
AFFILIATED TRANSACTIONS
Prior to its initial public offering in February 1994, the Company entered
into leases and engaged in transactions with officers, directors and principal
stockholders and/or their affiliates which were not negotiated at arm's length;
two of such leases are still in effect. Since its initial public offering, the
Company has followed a policy that any such transactions 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. See "Certain Transactions."
CONTROL BY MANAGEMENT
Upon completion of this offering, executive officers and directors of the
Company and their immediate families will own approximately 20% of the shares of
Common Stock outstanding and may thereby have significant influence on
stockholder actions.
NO CASH DIVIDENDS
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future; in any event, the payment of any such dividends is
restricted under the Company's bank loan agreement. See "Dividends."
9
<PAGE> 12
CAPITALIZATION
The following table sets forth the Company's capitalization as of June 30,
1996 and as adjusted to reflect the sale of the 2,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
of $28.3 million therefrom (based on an assumed offering price of $15.25 per
share):
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion..................... $ 6,572 --
Subordinated notes(1)......................................... 4,032 4,032
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none outstanding............................. -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
5,145,503 shares outstanding; 7,145,503 shares, as
adjusted................................................. 51 71
Additional paid-in capital.................................. 11,070 39,320
Retained earnings........................................... (320) (320)
------- -------
Total stockholders' equity.......................... 10,801 39,071
------- -------
Total capitalization........................... $21,405 $43,103
======= =======
</TABLE>
- ---------------
(1) See Note H of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by it hereby are estimated at $28.3 million ($33.5 million
if the Underwriters' over-allotment option is exercised in full) based on an
assumed offering price of $15.25 per share.
Of the net proceeds, approximately $15.0 million will be applied to fund
the design, development, construction and start-up costs of the Florence,
Arizona adult prison to be owned by the Company and anticipated to become
operational in the fourth quarter of 1997, approximately $6.6 million will be
applied to retire bank indebtedness, approximately $3.0 million will be applied
to fund the start-up costs of two 350-bed detention facilities in Florida
scheduled to become operational in the first quarter of 1997, and approximately
$800,000 will be applied to fund the start-up costs and the Company's allocable
portion of the construction costs of the juvenile boot camp in Eagle Lake,
Texas, which is also anticipated to become operational in the fourth quarter of
1997. The balance of $2.9 million will be available for general corporate
purposes, including the possible funding of construction and ownership costs of
additional privatized correctional facilities and possible acquisitions in the
correctional services industry. Although the Company from time to time receives
information from various companies concerning potential acquisition
transactions, the Company has not entered into any agreements or commitments
regarding any such transaction, and there can be no assurance that any such
transaction will be entered into. Pending application, the net proceeds will be
invested in short-term, investment grade, interest-bearing securities and/or
money market funds.
The bank indebtedness being repaid from the net proceeds of this offering
consists of $4.6 million which bears interest at 8.92%, is repayable in monthly
installments and was incurred to repay indebtedness to another bank, and the
balance of $2.0 million bears interest at a variable rate, currently 8.6%. All
outstanding loan balances are repayable January 15, 1998. The Company recently
renegotiated certain provisions of the related bank loan agreement and is
holding discussions to increase the amount of funds available thereunder. There
can be no assurance such discussions will be successful.
10
<PAGE> 13
DIVIDENDS
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying any such dividends in the foreseeable future. The
Company's bank loan agreement precludes the payment of dividends prior to
December 31, 1996. Thereafter, such dividends are limited to ten percent (10.0%)
of the Company's net earnings after taxes, provided that the Company is in
compliance with the financial covenants of the bank loan agreement.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "CSCQ." The following table sets forth the high and low closing sales
prices for the calendar quarters indicated from February 2, 1994, the date of
the Company's initial public offering, as reported by the Nasdaq National
Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994:
First Quarter (from February 2)...................................... 10 1/4 6 1/2
Second Quarter....................................................... 10 1/2 7 1/2
Third Quarter........................................................ 10 1/4 8 3/8
Fourth Quarter....................................................... 10 3/4 9 3/8
1995:
First Quarter........................................................ 20 1/4 9 7/8
Second Quarter....................................................... 22 1/2 10 1/2
Third Quarter........................................................ 15 1/2 7
Fourth Quarter....................................................... 13 3/4 7 1/4
1996:
First Quarter........................................................ 13 5/8 8 9/1
Second Quarter....................................................... 20 1/8 8 5/8
Third Quarter (through August 15, 1996).............................. 17 10 3/4
</TABLE>
---------------------
On August 15, 1996, the closing sales price of the Company's Common Stock
was $15.25.
On April 17, 1996, there were approximately 2,200 holders of the Company's
Common Stock, including beneficial owners of shares registered in nominee or
street name.
The Company also has Series A Warrants to purchase its Common Stock at a
purchase price of $7.75 per share which trade on The Nasdaq Stock Market under
the symbol "CSCQW." On August 15, 1996, the closing sales price of the Series A
Warrants was $8.00. See "Description of Securities -- Warrants."
11
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the five years
ended December 31, 1995 and as of December 31, 1995 have been derived from the
audited consolidated financial statements of the Company. The statement of
operations data for the six months ended June 30, 1995 and 1996 and the balance
sheet data for June 30, 1996 have been derived from the unaudited consolidated
financial statements of the Company and, in the opinion of management, include
all adjustments (consisting of normal and recurring adjustments) which are
necessary to present fairly the results of operations and financial position of
the Company for the periods and dates presented. The selected consolidated
financial and operating data for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year. The
information set forth below is qualified in its entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements, the Notes thereto, and the other financial and statistical
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995(1) 1995 1996
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $5,444 $10,322 $14,101 $24,273 $31,552 $16,406 $15,073
Operating expenses............. 3,840 6,292 8,651 14,899 19,732 9,915 10,242
General and administrative
expenses.................... 1,232 2,888 3,579 6,696 9,938 5,064 4,402
New Jersey facility closure
costs(1).................... -- -- -- -- 3,910 1,488 --
------ ------- ------- ------- ------- ------- -------
Operating income (loss)........ 372 1,142 1,871 2,678 (2,028) (61) 429
Interest expense............... 67 36 31 133 761 215 453
------ ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes....................... 305 1,106 1,840 2,545 (2,789) (276) (24)
Income tax expense
(benefit)(2)................ 35 390 736 1,002 (1,050) 21 (10)
------ ------- ------- ------- ------- ------- -------
Net earnings (loss)(2)......... $ 270 $ 716 $ 1,104 $ 1,543 $(1,739) $ (297) $ (14)
====== ======= ======= ======= ======= ======= =======
Net earnings (loss) per
share(2).................... $ 0.08 $ 0.22 $ 0.34 $ 0.35 $ (0.38) $ (0.07) $ (0.00)
====== ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding................. 3,281 3,281 3,281 4,395 4,553 4,408 4,975
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995(1) 1996
------ ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ (107) $ 269 $ (102) $ 1,356 $ 4,540 $ (601)
Total assets.............................. 1,961 2,807 4,745 14,518 23,340 24,836
Long-term debt, including current
portion................................ -- -- -- 3,835 5,221 6,572
Subordinated notes........................ -- -- -- -- 5,362 4,032
Total stockholders' equity................ 806 1,081 1,926 7,093 9,222 10,801
</TABLE>
- ---------------
(1) The 1995 financial statements have been restated with respect to the closure
of the New Jersey facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Calendar year 1995
Compared to Calendar year 1994" and Note L-1 of Notes to Consolidated
Financial Statements.
(2) Net earnings and net earnings per share for 1991, 1992 and 1993 are shown on
a pro forma basis to reflect income taxes which were not applicable under
the Company's then Subchapter S Corporation status.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Revenues generated under federal, state and local governmental agency
contracts for the management of correctional and detention facilities are the
Company's principal source of income. Certain contracts are based on a fixed per
diem rate per offender, some of which have guaranteed minimum payments; others
provide for fixed monthly rates irrespective of the number of offenders.
Contracts typically are short-term, ranging from one to three years, with
renewal options in favor of the governmental agency, thereby subjecting the
Company to the attendant risks. See "Risk Factors -- Short-Term Contracts."
The Company pays all costs of operating the managed facilities, except rent
in the case of government-owned facilities. The Company's primary expenses are
categorized as operating, general and administrative, and interest expenses.
Operating expenses consist of payroll (employee salaries, wages and fringe
benefits, and payroll taxes) and resident expenses (food service, medical
services, utilities, supplies and maintenance and repairs). General and
administrative expenses include rent, insurance, professional fees, travel and
lodging and depreciation and amortization.
The Company typically incurs development costs, which may range from
$50,000 to $100,000, in responding to a governmental agency RFP. Such costs
include planning and developing the project, preparing the bid proposal, travel
and legal expenses, and incentive compensation for administrative employees. If
management believes the recovery of such costs is probable, the costs are
deferred until the anticipated contract has been awarded, at which time the
deferred costs are amortized on a straight-line basis over the term of the
contract (including option periods). Development costs of unsuccessful or
abandoned bids are expensed. The time period from incurring initial development
costs on a project to the commencement of operations ranges from six to eighteen
months.
After a contract has been awarded, the Company incurs start-up costs from
the date of the award until commencement of operations. Start-up costs include
recruitment, training and travel of personnel and certain legal costs, and are
capitalized until operations commence, at which time such costs are amortized on
a straight-line basis over the term of the contract (including option periods).
From the inception of operations, the Company fully staffs the facility in
accordance with the terms of its contract with the governmental agency. During
the initial period of operations (usually one to four months), an operating loss
may be sustained while the governmental agency assigns, on an incremental basis,
offenders to the facility. Revenues generated during this initial period under
per diem contracts increase as the offender population increases.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
total revenues:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ---------------
1993 1994 1995(1) 1995 1996
----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses........................ 61.4 61.4 62.5 60.4 67.9
General and administrative expenses....... 25.4 27.6 31.5 30.9 29.2
New Jersey facility closure costs(1)...... -- -- 12.4 9.1 --
----- ----- ----- ----- -----
Operating income.......................... 13.3 11.0 (6.4) (0.4) 2.9
Interest expense.......................... 0.2 0.5 2.4 1.3 3.0
----- ----- ----- ----- -----
Earnings (loss) before income taxes....... 13.1 10.5 (8.8) (1.7) (0.1)
Income tax expense (benefit)(2)........... 5.2 4.1 (3.3) 0.1 (0.1)
----- ----- ----- ----- -----
Net earnings (loss)(2).................... 7.8% 6.4% (5.5)% (1.8)% (0.0)%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The 1995 consolidated financial statements have been restated with respect
to the closure of the New Jersey facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Calendar Year
1995 Compared to Calendar Year 1994" and Note L-1 of Notes to Consolidated
Financial Statements.
(2) Net earnings (loss) for 1993 are shown on a pro forma basis to reflect
income taxes which were not applicable under the Company's then Subchapter S
Corporation status.
13
<PAGE> 16
Six Months 1996 Compared to Six Months 1995
Revenues decreased 8.1% from $16,406,361 for the six months ended June 30,
1995 to $15,072,711 for the six months ended June 30, 1996. The net decrease in
revenues for the 1996 period as compared to the 1995 period resulted principally
from the discontinuance of the Company's operations at its Elizabeth, New Jersey
INS facility on June 18, 1995 and lower occupancy rates at the Company's Fort
Worth and Houston, Texas facilities. This decrease was offset in part by
revenues generated by the Canadian, Texas facility which began operations in
April 1995, the Bartow, Florida facility which began operations in July 1995 and
the Phoenix, Arizona facility which began operations in April 1996.
Operating expenses increased 3.3% from $9,914,657 for the six months ended
June 30, 1995 to $10,241,743 for the six months ended June 30, 1996 primarily
due to increases in payroll, which increased $483,908, or 7.9%, partially offset
by a $151,396, or 5.7%, decrease in resident expenses. These changes resulted
primarily from the opening of the facilities noted above, the addition of
management personnel in the corporate office, and the discontinuance of
operations at the Company's Elizabeth, New Jersey INS facility. As a percentage
of revenues, operating expenses increased from 60.4% for the six months ended
June 30, 1995 to 67.9% for the six months ended June 30, 1996.
General and administrative expenses decreased 13.1% from $5,064,367 for the
six months ended June 30, 1995 to $4,401,982 for the six months ended June 30,
1996. The decline in general and administrative expenses was attributable
primarily to the closure of the Elizabeth, New Jersey INS facility in June 1995.
As a percentage of revenues, general and administrative expenses were 30.9% and
29.2% for the six months ended June 30, 1995 and 1996, respectively. In
addition, at June 30, 1995 the Company wrote off $1,488,000 of development and
other costs associated with the closure of the Elizabeth, New Jersey INS
facility.
Interest expense increased 110.6% from $214,908 for the six months ended
June 30, 1995 to $452,511 for the six months ended June 30, 1996. This increase
resulted primarily from indebtedness attributable to the placement of $5.7
million of subordinated debt at a 10% interest rate in the third quarter of
1995, the proceeds of which were used to fund the purchase and renovation of the
Phoenix, Arizona facility.
As a result of the foregoing factors, the Company had a net loss of $13,525
or ($0.00) per share, for the six months ended June 30, 1996 compared to a net
loss of $296,571, or ($0.07) per share, for the six months ended June 30, 1995.
Calendar Year 1995 Compared to Calendar Year 1994
Revenues increased 30.0% from $24,272,989 in 1994 to $31,552,152 in 1995,
principally attributable to the revenues produced from the Company's Elizabeth,
New Jersey facility, the Ft. Worth, Texas facility and the Travis County, Texas
facility, whose operations commenced in September and October 1994. In addition,
on July 1, 1995, operations began at the Bartow, Florida facility pursuant to a
contract with the Florida Department of Juvenile Justice. Increases in 1995
revenues also resulted from contractual increases in per diem rates.
Operating expenses increased $4,832,605, or 32.4%, from $14,899,192 in 1994
to $19,731,797 in 1995 primarily due to increases in payroll and resident
expenses, which increased $3,862,117, or 36.2%, and $970,487, or 22.9%,
respectively. The increases in payroll and resident expenses resulted
principally from the opening in late 1994 of the facilities noted above and the
addition of management personnel in the corporate office. Payroll expenses
accounted for 43.9% and 46.0% of total revenues in 1994 and 1995, respectively.
As a percentage of total revenues, operating expenses were 61.4% and 62.5%,
respectively, in 1994 and 1995.
General and administrative expenses increased from $6,695,599 in 1994 to
$9,938,344 in 1995, an increase of $3,242,745, or 48.4%, attributable to
expenses associated with operations of the Elizabeth, New Jersey facility from
January 1 to June 18, 1995 (when the facility was closed) and to expenses
associated with the Ft. Worth and Travis facilities for a full year and to the
Bartow facility since July 1, 1995. As a percentage of revenues, general and
administrative expenses were 27.6% and 31.5% for 1994 and 1995, respectively.
Due to a disturbance at the Company's Elizabeth, New Jersey INS facility on
June 18, 1995, the facility was closed and all detainees located therein were
moved by the INS to other facilities. On December 15, 1995,
14
<PAGE> 17
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 $6,223,000. The purchase price is payable in
non-interest bearing monthly installments of $123,000 through August 1999
beginning in the month the Buyer commences operations of the facility. If the
INS re-awards the contract to the Buyer, the unpaid balance is payable in
non-interest bearing monthly installments of $123,000 beginning in the first
month of the re-award term, and the Company will record as income the unpaid
balance. On June 13, 1996 the Company, the Buyer and the INS executed a Novation
Agreement whereby the Buyer became the successor-in-interest to the contract
with the INS. In addition, the Company's lease for the New Jersey facility was
assigned to the Buyer. The Company has no continuing obligation with respect to
the Elizabeth, New Jersey INS facility.
The receivable from the sale of the equipment and leasehold improvements
reflected on the balance sheet at December 31, 1995, and June 30, 1996
represented the present value of the consideration to be received through August
1999 (discounted at 11.5% per annum) reduced by the estimated closing costs
(legal and consulting) and the facility's estimated carrying costs through July
1, 1996. The statement of operations for 1995 reflects a provision for closure
costs of $3,909,700, which represents $416,201 from the write-off of deferred
development costs related to the facility and $3,493,499 resulting from the
adjustment of the carrying value of the related assets discussed above. During
the six months ended June 30, 1996, the reserve for carrying and closing costs
was reduced by approximately $300,000 of payments for rent and other carrying
and closing costs.
The Company has revised the present value of the $6,223,000 purchase price
for the sale of equipment and leasehold improvements described above, reducing
to zero the present value of the $1,800,000 portion of the purchase price, or
$1,300,000, contingent upon re-award of the related management contract and
increased the provision for closure costs in a like amount for the year ended
December 31, 1995. The effect of the adjustments on the accompanying financial
statements at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
Net loss.................................................... $ (959,391) $ (1,739,391)
Net loss per common share................................... (0.21) (0.38)
Receivable from sale of equipment and leasehold
improvements.............................................. 4,507,882 3,207,882
Deferred income taxes....................................... 600,000 1,120,000
Retained earnings (deficit)................................. 473,492 (306,508)
</TABLE>
Interest expense increased $628,387 from $133,315 in 1994 to $761,702 in
1995, as a result of additional borrowings in 1995, incurred primarily to fund
development and start-up costs and fixed asset acquisitions for the Phoenix,
Arizona facility.
The provision for income taxes aggregated $1,002,000 in 1994 as compared to
an income tax benefit of $1,050,000 in 1995. The effective tax rate was 39.4% in
1994 and 37.6% in 1995.
The Company had a net loss of $1,739,391 for 1995 compared to net income of
$1,542,883 for 1994, principally as a result of the closure of the Company's New
Jersey INS facility.
Calendar Year 1994 Compared to Calendar Year 1993
Revenues increased 72.1% from $14,101,194 in 1993 to $24,272,989 in 1994.
The commencement of operations in December 1993 of the Company's south Texas
Intermediate Sanction Facility in Houston, Texas, operated for the Texas
Department of Criminal Justice, Pardons and Paroles Division and the
commencement of full scale operations in September 1994 of the Company's
Immigration and Naturalization Service facility in Elizabeth, New Jersey were
the primary reasons for the increase in revenue. Operations also commenced at
the Company's Fort Worth, Texas and Travis County, Texas facilities on October
1, 1994.
Operating expenses increased $6,247,917, or 72.2%, from $8,651,275 in 1993
to $14,899,192 in 1994 primarily due to increases in payroll and resident
expenses. Payroll expenses increased $4,321,132, or 68.0%, and resident expenses
increased $1,926,786, or 83.0%, for 1994 as compared to 1993. The increases in
payroll and resident expenses resulted from the opening of the facilities noted
above. Payroll expenses accounted for
15
<PAGE> 18
49.1% and 51.6% of total expenses for the years ended December 31, 1994 and
1993, respectively. Resident expenses accounted for 19.5% and 18.9% of total
expenses in 1994 and 1993, respectively. As a percentage of revenues, operating
expenses were 61.4% in each of the years ended December 31, 1993 and 1994.
General and administrative expenses for the years ended December 31, 1993
and 1994 were $3,578,738 and $6,695,599, respectively, an increase of $3,116,861
or 87.1%. The opening of the above-noted facilities accounted for a significant
portion of the increase in general and administrative expenses. As a percentage
of revenues, general and administrative expenses were 25.4% and 27.6% for the
years ended December 31, 1993 and 1994, respectively. The 1994 increase was
attributable primarily to depreciation and amortization costs associated with
the construction of the Company's New Jersey facility and related development
and start-up costs and the write-off of deferred loan costs of $111,854.
Interest expense increased $102,529 from $30,786 in 1993 to $133,315 in
1994, as a result of higher interest rates in 1994 and additional borrowings.
The provision for income taxes increased $266,000, or 36.1%, from $736,000
in 1993 to $1,002,000 in 1994. The effective tax rate was 40.0% in 1993 and
39.4% in 1994.
As a result of the forgoing factors, net earnings increased $438,488, or
39.7%, from $1,104,395 in 1993 to $1,542,883 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through private
placements and public sales of its securities, cash generated from operations
and borrowings from banks.
The Company had a working capital deficit at June 30, 1996 of $601,261, a
decline of $5,141,357, from the Company's working capital at December 31, 1995,
principally attributable to funds used for construction of the Company's
Phoenix, Arizona facility, which opened April 11, 1996. The Company's current
ratio declined to 0.91 to 1 at June 30, 1996 from 1.95 to 1 at December 31,
1995. At June 30, 1996, the projected start-up costs for the two 350-bed
detention facilities in Florida, scheduled to become operational in the first
quarter of 1997, were estimated at $3.0 million. Thereafter, the Company
received awards for two new facilities, scheduled to become operational in the
fourth quarter of 1997, for which the projected costs to the Company are
estimated at $15.8 million. Approximately $18.8 million of the net proceeds of
this offering have been allocated to fund construction, start-up and related
costs with respect to these facilities. See "Use of Proceeds."
Net cash provided by operating activities was $235,696 for the six months
ended June 30, 1996 as compared to $2,654,688 for the six months ended June 30,
1995. The decrease was attributable primarily to the reduction in depreciation
and amortization resulting from the closure of the Elizabeth, New Jersey INS
facility and changes in working capital. Net cash of $5,477,369 was used in
investing activities for the six months ended June 30, 1996 as a result of fixed
asset acquisition costs of $4,738,933, the majority of which related to the
Company's Phoenix, Arizona facility and $1,254,675 in additional deferred
development and start-up costs, as compared to net cash of $3,686,808 used in
investing activities for the six months ended June 30, 1995. Net cash of
$1,522,682 was provided by financing activities in the six months ended June 30,
1996 as compared to $962,068 in the six months ended June 30, 1995. The
principal source of such funds in both periods was bank borrowings.
Net cash provided by operating activities was $3,226,138 in 1995 as
compared to net cash used in operating activities of $202,197 in 1994. The
increase in cash provided by operations resulted from the substantial add-back
of depreciation, amortization and write-down of fixed asset and deferred
development costs, net of deferred taxes (principally associated with the
Elizabeth, New Jersey facility), and from the substantial reduction in accounts
receivable and the increase in accounts payable and accrued liabilities.
Net cash of $8,684,961 was used in investing activities in 1995 compared to
$8,095,533 in 1994. During 1995, the Company incurred fixed asset acquisition
costs of $6,110,693, of which approximately $5,600,000 related to the building
of the Canadian, Texas facility and to the purchase and initial renovation costs
of the Phoenix, Arizona facility. The Company expended $1,824,268 in deferred
development and start-up costs during the year ended December 31, 1995. Such
costs related principally to the Phoenix, Arizona facility (which commenced
operations on April 11, 1996) and the Pahokee and Polk County, Florida contract
awards.
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<PAGE> 19
Net cash of $8,907,125 was provided by financing activities in 1995
compared to $7,915,150 in 1994. The principal source of such funds in 1995 was
the Company's private placement offering of subordinated debt and equity
securities.
FINANCING
Effective December 31, 1995, the Company entered into an $11,000,000
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
NationsBank, N.A. ("NationsBank"). Pursuant to the terms of the Loan Agreement,
the Company, from time to time, may borrow up to the lesser of $6,000,000 or
85.0% of the Company's eligible accounts receivable. Loan proceeds are to be
used for working capital, including deferred development and start-up costs in
connection with new or existing facilities. Interest on the revolving credit
loan is computed, at the Company's option, at either NationsBank prime rate plus
0.75% or the London International Bank Rate plus 3.35%. Under the Loan
Agreement, NationsBank also made a term loan to the Company in the principal
amount of $5,000,000, which was applied to repay the Company's indebtedness of
$5,002,869 to another bank. The term loan bears interest at 8.92% and is
repayable in monthly installments of $83,330 until January 15, 1998, at which
time the Loan Agreement terminates and any remaining unpaid balances are due and
payable. After September 30, 1996, the interest rate payable under the revolving
credit loan will be based on the Company's financial performance set forth in
the Loan Agreement. The Company may prepay any borrowings without interest or
penalty. The Company has granted NationsBank a first priority security interest
in all of its assets, including a first real estate mortgage on the land and
building of the Phoenix, Arizona facility. The Company is required to pay
NationsBank 0.25% of the average unused portion of the revolving credit loan.
The Company was not in compliance with a cash flow-based debt service coverage
ratio at March 31, 1996 and renegotiated such ratio. At June 30, 1996, the
Company was in compliance with the amended ratio. The Company currently is
holding discussions with NationsBank to increase the amount of funds available
under the Loan Agreement, but there can be no assurance that such discussions
will be successful.
During the year ended December 31, 1995, the Company completed a private
placement of 5,676.6 units at $1,000 per unit, each unit consisting of (i) a ten
percent (10.0%) subordinated promissory note due July 1, 1998 in the principal
amount of $1,000; and (ii) four-year warrants to purchase 154 shares of Common
Stock at $7.75 per share. The Company received gross proceeds of $5,676,600 from
the sale of the units, of which $365,000 was attributed to the value of the
warrants. During such period, the Company also completed the private placement
of 496,807 shares of Common Stock at $7.75 per share, receiving gross proceeds
of $3,850,254. Approximately $8,500,000 of the proceeds of the two placements
was used to finance costs associated with the Company's Phoenix, Arizona
facility and the balance for expenses related to the private placements and for
working capital.
INFLATION
Inflation has not affected the Company's results of operations. Certain
multi-year contracts have built-in fixed price adjustments in succeeding years
which take into account increases in various type of expenses (i.e., payroll and
related expenses, rent, insurance).
IMPACT OF NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123 accounting provisions were followed. Management has determined not
to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and, accordingly, will continue following APB No.
25's accounting provisions. See Note A of Notes to Consolidated Financial
Statements.
17
<PAGE> 20
BUSINESS
The Company is a leading developer and manager of privatized correctional
and detention facilities in the United States. Through its three divisions,
Adult, Juvenile and Community Corrections, the Company provides a diverse range
of services to local, state, and federal governmental correctional agencies. The
Company currently has agreements to operate 14 correctional and detention
facilities in New York, Florida, Arizona, Texas and the State of Washington.
Eleven of these facilities, with a total of 1,975 beds, are currently in
operation, two, with a total of 700 beds, are scheduled to become operational in
the first quarter of 1997 and one, with 100 beds, is anticipated to become
operational in the fourth quarter of 1997. Further, the Company recently was
advised it has been selected, following a competitive bidding process, to
negotiate an agreement to design, construct, own and manage a 600-bed adult
prison in Arizona, which is anticipated to become operational in the fourth
quarter of 1997. The Company is also aggressively pursuing other privatized
correctional projects both at the RFP stage and the pre-RFP development stage.
The Company manages both secure and non-secure facilities. The Company's
secure facilities include a detention and processing center for illegal aliens,
an adult prison, intermediate sanction facilities, DWI facilities, and
military-style boot camps for juvenile offenders. Its non-secure facilities
include residential programs, such as community correctional facilities for
federal and state offenders serving the last six months of their sentences, and
non-residential supervision programs.
In addition to providing fundamental residential services for adult and
juvenile inmates, the Company has developed a broad range of programs intended
to reduce recidivism, including basic and special education, substance abuse
treatment and counseling, vocational training, life skills training, and
behavioral modification counseling. The management services offered by the
Company range from project consulting to the design, development and management
of new correctional and detention facilities and the redesign, renovation and
management of older facilities. The Company believes its proven ability to
manage the full spectrum of correctional facilities and its wide variety of
programs and services will increase its marketing opportunities.
MARKET FOR THE COMPANY'S SERVICES
The continuing pressure to control costs and address increasing inmate
populations has generated strong growth in the privatization of correctional
services. According to the Private Adult Correctional Facility Census, Ninth
Edition, prepared by the Private Corrections Project, Center for Studies in
Criminology & Law, University of Florida, dated March 15, 1996, the rated
capacity of international privatized adult secure correctional facilities grew
from 2,620 beds in 1986 to 63,595 beds at year-end 1995 and, in a June 16, 1996
forecast prepared by the Project, is projected to grow to 197,503 beds by
year-end 2000. This projection does not include any projected growth for
privatized juvenile offender and community correctional facilities, both of
which, the Company believes, are also growing rapidly. According to the United
States Department of Justice, Office of Juvenile Justice and Delinquency
Prevention, between 1988 and 1994 juvenile arrests for violent crimes grew by
more than 50%.
The Company believes the growth in demand for privatized correctional and
detention facilities is being fueled by a number of factors. First, the United
States continues to experience a shortage of correctional beds. According to the
United States Department of Justice, Bureau of Justice Statistics, the number of
adult inmates housed in federal and state facilities increased from 487,593 at
December 31, 1985, to 1,104,074 at June 30, 1995. Second, inmates convicted of
violent crimes generally serve only one-third of their sentences, and the public
is demanding that a longer portion of their sentences be served. Third, courts
and various governmental agencies are requiring overcrowded conditions to be
remedied, outdated facilities to be replaced, and services to be expanded. As a
result of increasing fiscal pressures, many governmental agencies are turning to
the private sector to deliver cost-effective correctional services to address
these needs.
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<PAGE> 21
BUSINESS STRATEGY
The Company's business strategy is to enhance its position as a leading
developer and manager of a diverse range of quality privatized correctional and
detention facilities, and to expand its operations, both internally and through
acquisitions, in order to capitalize on current growth trends in the industry.
Key elements of the Company's strategy are as follows:
Maintaining Quality Facility Operations. The Company recognizes the
importance of maintaining high quality management and operations at its
facilities. The Company seeks to operate all its facilities in accordance
with the guidelines of the American Correctional Association ("ACA"), an
independent organization comprised of professionals in the corrections
industry, and uses compliance audit teams to rigorously examine all aspects
of the Company's facilities and operations. The Company's senior level
ethics and compliance officer, who reports directly to the President and
Board of Directors, provides additional oversight and monitoring of
facility operations. The Company also promotes quality performance by its
facility administrators and management teams and holds Company-wide
conferences for facility administrators to exchange information and enhance
performance at all its facilities. The Company encourages tours of its
facilities for governmental representatives as it believes the quality of
its operations can best be demonstrated through on-site visits.
Capitalizing on Diversity of Services. The diversified correctional
services provided by the Company include housing adult inmates or detained
persons in secure facilities, providing non-secure residential and
management services in community correctional facilities and managing and
operating juvenile offender facilities, both secure and non-secure,
including military-style boot camps. The Company believes that its proven
ability to manage the full spectrum of privatized correctional facilities
will increase its marketing opportunities and will be beneficial where
particular governmental policies favor certain types of programs or
services over others.
Enhancing Proven Programs. In awarding management contracts,
contracting governmental agencies frequently give significant weight to the
potential effectiveness of the programs to be provided by the bidder. The
Company's programs include basic and special education, substance abuse
treatment and counseling, vocational training, job placement, life skills
training and behavioral modification counseling, all of which are intended
to reduce recidivism. The Company's staff of professionals seek to
continually enhance and improve these programs, monitor resident offender
performance and develop new programs to address perceived needs.
Developing New Business Opportunities. The growing demand for
privatized correctional facilities at all levels of government has enabled
the Company to pursue more projects meeting its criteria. The Company
pursues projects based on the probability of success, geographic location,
size, potential profitability, and political and community acceptability.
This approach is intended to optimize resource allocation, profitability
and financial return. The Company (i) currently owns a correctional
facility in Arizona, (ii) in August 1996 was selected to finance,
construct, own and operate an adult prison in Arizona, (iii) has agreed to
fund approximately $650,000 of construction and related costs for a
juvenile boot camp in Texas and (iv) has used its capital to renovate and
improve other facilities which it operates. The Company believes its
willingness to commit its capital to facility ownership and renovation
enhances its growth opportunities.
Strategic Acquisitions. Historically, the Company's growth has been
generated internally, primarily through the competitive bid process.
However, the Company continues to evaluate strategic acquisitions,
particularly where an acquisition would enhance the Company's capabilities
or add to the services it offers in the correctional services industry. At
present, the Company has not entered into any agreements or commitments for
an acquisition.
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<PAGE> 22
DIVISIONAL STRUCTURE
In January 1996, the Company organized its operations into three divisions,
Adult, Juvenile and Community Corrections.
Adult. The Adult Division operates five secure facilities located in
Seattle, Washington; Houston, Del Valle and Mansfield, Texas; and Phoenix,
Arizona, with a total of 1,216 beds. This Division will operate the 600-bed
prison to be constructed and owned by the Company in Florence, Arizona,
anticipated to become operational in the fourth quarter of 1997. In
addition to providing housing for adult inmates, the Company provides a
variety of rehabilitation and educational services intended to reduce
recidivism. The Company also provides health care, transportation, food
services and work and recreational programs for adult inmates.
Juvenile. The Juvenile Division operates (or upon completion of the
facility will operate) six facilities located (or to be constructed) in
Bartow, Polk City and Pahokee, Florida; and Canadian, Mansfield and Eagle
Lake, Texas, for convicted youths aged 12 to 24, with a total of 1,054
beds. The Polk City and Pahokee facilities are scheduled to be operational
in the first quarter of 1997 and the Eagle Lake facility is anticipated to
become operational in the fourth quarter of 1997. The Company 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, and
detention facilities. The Company believes these 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 its program participants.
Community Corrections. The Community Corrections Division operates
three facilities, located in Brooklyn and Manhattan, New York; and Ft.
Worth, Texas, with a total of 505 beds. These are non-secure residential
facilities for adult male and female offenders transitioning from
institutional to independent living. Offenders are eligible for these
programs based upon the type of offense committed and behavior while
incarcerated in prison. If qualified, offenders may generally spend the
last six months of their sentence in a community corrections program, whose
mission is to reduce the likelihood of an inmate committing an offense
after release by assisting in the reunification process with family and the
community. Normally, in order to remain in the program, offenders must be
employed, participate in substance abuse programs, submit to frequent
random drug testing, and pay a predetermined percentage of their earnings
to the government to offset the cost of the program. The Company supervises
these activities and also provides life skills training, case management,
home confinement supervision and family reunification programs at these
facilities. The Company 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 to prisons.
FACILITY MANAGEMENT CONTRACTS
Each facility is managed under an agreement with a federal, state or local
corrections agency which provides for fixed per diem payments to the Company for
each offender assigned to the facility or a fixed monthly payment irrespective
of the number of offenders so assigned. Some contracts also provide for minimum
revenue guarantees to the Company. As is standard in the industry, the Company's
contracts are short-term, generally one to three years, and contain multiple
renewal options in favor of the contracting governmental agency. The exercise of
the renewal option by the governmental agency is discretionary and contingent
upon appropriation of funds. If funds are not appropriated, the contract may be
terminated by the agency, the per diem rate payable to the Company may be
reduced or delays in payment may occur. The contracts also generally contain
"termination for the convenience of the government" and "stop work order"
clauses which allow the agency to terminate a contract without cause or
financial penalty to the government. Termination or non-renewal could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Calendar Year 1995 Compared to Calendar Year 1994."
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<PAGE> 23
CONTRACT AWARD PROCESS
Most governmental procurement and purchasing activities are controlled by
procurement regulations, and take the form of RFPs, and most of the Company's
new business results 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 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. The Company engages independent consultants to
assist it in responding to RFPs. Approximately six to eighteen months is
generally required from the issuance of the RFP to the contract award. In some
cases, the Company has been asked to assist governmental agencies in developing
their RFPs.
Before responding to an RFP, the Company researches and evaluates, among
other factors: (i) the current size and growth projections of the available
correctional and detention population; (ii) whether or not a minimum capacity
level is guaranteed; (iii) the willingness of the contracting authority to allow
the Company to house populations of similar classification within the proposed
facility for other governmental agencies; and (iv) the willingness of the
contracting authority to allow the Company 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, the Company'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.
OPERATIONS
The Company 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. The Company, either directly or through subcontractors,
also provides health care (including medical, dental and psychiatric services)
and food service. Certain facilities also offer special rehabilitation and
educational programs, such as academic or vocational education, job and life
skills training, counseling, substance abuse programs, and work and recreational
programs.
The Company's contracts generally require the Company to operate each
facility in accordance with all applicable local, state and federal laws, rules
and regulations and the standards and guidelines of the ACA. The ACA establishes
guidelines and standards by which an adult correctional institution may gain
accreditation. The Company believes that the ACA, which currently only
recommends operating guidelines for but does not accredit juvenile correctional
facilities, will eventually accredit these kinds of facilities. 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. The Company 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. The Company's Seattle INS Detention Center
and Tarrant County Community Correctional Facility are fully accredited by the
ACA and certain other facilities currently are being reviewed for accreditation.
The Company's goal is to obtain and maintain ACA accreditation for all of its
facilities. Mr. Richard P. Staley, the Company's Senior Vice President and a
director, is a member of the ACA and a certified ACA standards auditor for jail
and detention facilities.
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<PAGE> 24
EMPLOYEE TRAINING
All jurisdictions require corrections officers to complete a specified
amount of training prior to employment. In most cases, Company employees must
undergo at least 160 hours of 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 Company policies,
operational procedures and management philosophy, 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 performed. Each Company employee having contact with
offenders receives a minimum 40 hours of additional training each year, and each
management employee receives a minimum 24 hours of training each year.
FACILITIES
The Company operates both pre-disposition and post-disposition secure and
non-secure correctional and detention facilities, and non-secure community
correctional facilities for federal, state and local governmental agencies.
Pre-disposition secure detention facilities provide secure residential detention
for individuals awaiting trial and/or the outcome of judicial proceedings, and
for illegal 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. The Company
operates three types of post-disposition facilities: secure prisons,
intermediate sanction facilities and military-style boot camps. 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. 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.
The Company also operates non-secure residential and non-residential
community corrections programs. Non-secure residential facilities, known as
half-way houses, provide residential correctional services for offenders in need
of less supervision and monitoring than are provided in a secure environment.
Offenders in community correctional 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
the Company. 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 Company employees monitor the offender on a case management basis at
his/her work site and home.
As a result of a disturbance on June 18, 1995 by detainees at the Company's
Elizabeth, New Jersey INS facility which required local police intervention, the
facility was closed and all detainees were moved by the INS to public detention
facilities. The disturbance received extensive media coverage, which reported
the detainees' allegations of poor conditions and treatment and long delays
prior to their immigration hearings. The adverse publicity generated as a result
of the 1995 disturbance could have a material adverse effect on the Company's
ability to obtain future contracts. See "Risk Factors -- Impact of Disturbance"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Calendar Year 1995 Compared to Calendar Year 1994."
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<PAGE> 25
The following information is provided with respect to the facilities for
which the Company has management contracts or has been selected to negotiate a
management contract:
<TABLE>
<CAPTION>
OCCUPIED CONTRACTING OWNED,
FACILITY NAME, LOCATION AND CONTRACTED BEDS-- TYPE OF GOVERNMENTAL LEASED OR
YEAR OPERATIONS COMMENCED BEDS(1) AVERAGE(2) FACILITY AGENCY MANAGED(3)
- ------------------------------------------------------- ----------- ------------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
ADULT DIVISION
Seattle INS Detention Center 150 153 Secure Detention INS Managed
Seattle, Washington (1989) Facility
South Texas Intermediate 400 356 Secure Intermediate State Managed
Sanction Facility Sanction Facility
Houston, Texas (1993)
Tarrant County Community 190 180 Secure Intermediate County Managed
Correctional Facility(4) Sanction Facility
Mansfield, Texas (1992)
Travis County Substance 76 63 Secure Intermediate County Managed
Abuse Treatment Facility Sanction Facility
Del Valle, Texas (1994)
Arizona State Prison, Phoenix West 400 308 State Prison State Owned
Phoenix, Arizona (1996)
Arizona State Prison, Florence 600 * State Prison State Owned
Florence, Arizona (est. 1997)
JUVENILE DIVISION
Tarrant County Community 120 114 Secure Boot County Managed
Correctional Center(4) Camp Facility
Mansfield, Texas (1992)
Hemphill County Juvenile Facility 60 82 Secure Boot Camp County Leased
Canadian, Texas (1995) Facility
Bartow Youth Training Center 74 71 Secure and Residential State Managed
Bartow, Florida (1995) Correctional Facility
Pahokee Youth Training Center(5) 350 * Secure Correctional State Managed
Pahokee, Florida (est. 1997) Facility
Polk County Youth Training Center(5) 350 * Secure Correctional State Managed
Polk City, Florida (est. 1997) Facility
Colorado County Juvenile Residential 100 * Secure Boot Camp County Managed
Facility Facility
Eagle Lake, Texas (est. 1997)
COMMUNITY CORRECTIONS DIVISION
Brooklyn Community Corrections Center 95 110 Residential Correctional Federal Leased
Brooklyn, New York (1989) Facility Bureau of
Prisons
Manhattan Community Corrections Center 60 127 Residential Correctional Federal Leased
New York, New York (1990) Facility Bureau of
Prisons
New York State Community Corrections 150 137 Residential Correctional State Leased
Center Facility
Brooklyn/New York, New York (1992)
Fort Worth Community Corrections Center 200 110 Residential Correctional State Leased
Forth Worth, Texas (1994) Facility
</TABLE>
- ---------------
(1) The number of beds under contract generally is an estimate in the contract
by the contracting governmental agency of the number of offenders expected
to be assigned to the facility and not a guarantee of a minimum or maximum
number of offenders to be so assigned. Certain facilities have bed capacity
in excess of the number of beds under contract and therefore may be
occupied by a greater number of offenders than is estimated pursuant to the
contract.
(2) Average for the six months ended June 30, 1996.
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<PAGE> 26
(3) A managed facility is a facility for which the Company provides management
services pursuant to a management contract with the applicable governmental
agency but, unlike a leased or owned facility, the Company has no property
interest in the facility. The Company has granted NationsBank a first
priority security interest in all of its assets, including a first real
estate mortgage on the land and building of the Phoenix, Arizona facility.
(4) This facility is listed both as part of the Company's Adult Division and its
Juvenile Division as the facility houses both adult and juvenile offenders.
(5) The contracting state agency charged with oversight responsibility for the
Pahokee and Polk City, Florida facilities has been changed from the
Correctional Privatization Commission to the Department of Juvenile Justice
and related contract modifications are being finalized.
* Not yet operational.
COMPETITION
The business in which the Company engages is highly competitive, with few
barriers to entry. To the Company's knowledge, there are approximately 17
companies engaged in the management and operation of privatized correctional and
detention facilities, of which the Company is the fifth largest in terms of
number of beds. The Company's competitors include local companies with
significant local relationships and knowledge of local conditions, as well as
companies that manage and operate facilities in many states and abroad with
financial resources substantially greater than the Company's, including
Corrections Corporation of America and Wackenhut Corrections Corporation. The
Company's Community Corrections and Juvenile Divisions also compete with
not-for-profit entities.
The Company competes on the basis of the 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. The
Company also attempts to achieve a competitive advantage by seeking additional
contracts from governmental agencies with which it has existing contractual
relationships and by identifying and marketing its services to correctional
agencies that have no previous experience with privatization services.
EMPLOYEES
At July 31, 1996, the Company had approximately 695 full-time employees,
consisting of clerical and administrative personnel, security personnel, food
service personnel and facility administrators. None of the Company's employees
is subject to a collective bargaining agreement. The Company believes its
relationship with its employees is good.
Each of the Company's facilities is managed as a separate entity by an
experienced facility administrator. Other facility personnel include
administrative, security, medical, food service, counseling, classification and
educational and vocational training personnel. The Company conducts background
screening checks and drug testing on potential facility employees. Some of the
services rendered at certain facilities, such as medical services and education
or training, are provided by third-party contractors.
INSURANCE
Each management contract with a governmental agency requires the Company 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 the Company's operations.
The Company maintains general liability insurance in the amount of $5,000,000
and an umbrella policy in the amount of $20,000,000 for itself and each of its
subsidiaries. There can be no assurance that the aggregate amount and kinds of
the Company's insurance are adequate to cover all risks it may incur or that
insurance will be available in the future. In addition, the Company is unable to
secure insurance for some unique business risks including, but not limited to,
riot and civil commotion or the acts of an escaped offender.
REGULATION
The industry in which the Company operates is subject to federal, state and
local regulations which are administered by a variety of regulatory authorities.
Generally, providers of correctional services must comply with a variety of
applicable federal, state and local regulations, including education, health
care and safety regulations. Management contracts frequently include extensive
reporting requirements. In addition, many
24
<PAGE> 27
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.
The Company's failure to comply with any applicable laws, rules or
regulations or the loss of any required license could have a material adverse
effect on the Company's financial condition, results of operations and
liquidity. Further, the current and future operations of the Company may be
subject to additional regulations as a result of new statutes and regulations
and changes in the manner in which existing statutes and regulations are or may
be interpreted or applied. Any such additional regulations could have a material
adverse effect on the Company's financial condition, results of operations and
liquidity.
LEGAL PROCEEDINGS
The nature of the Company's business results in numerous claims or
litigation against the Company for damages arising from the conduct of its
employees or others.
In May 1993, a former employee of the Company filed suit in the United
States District Court, Southern District of New York, claiming he was
intentionally assaulted by employees of the Company and claiming $5,000,000 in
damages on each of six causes of action. In January 1996, a lawsuit was filed
with the Supreme Court of New York, County of Kings, by a former employee
alleging sexual harassment and discrimination, physical assault, rape and
negligent screening of employees and claiming damages of $4,000,000, plus
attorney fees. 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 $500,000,000 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 July 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 unspecified 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.
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.
OFFICES
The Company leases approximately 6,400 square feet of executive office
space located at 1819 Main Street, Sarasota, Florida from an unaffiliated party
at a base monthly rental of approximately $8,300 with an increase of
approximately $530 per month on each October 1 through the expiration of the
lease on September 30, 2000. The lease does not contain any renewal options. The
Company leases an office at 9603 Gayton Road, Richmond, Virginia from an
unaffiliated party at a current base monthly rental of $1,661, increasing five
percent (5%) per year during the term ending May 31, 1998. The Company also
leases an office at 276 Fifth Avenue, New York, New York from an unaffiliated
party at a monthly rental of $2,231, expiring October 31, 1998.
The Company believes that all of its properties are well maintained and in
good repair and are adequate for the purpose for which they are maintained. For
information with respect to correctional and detention facilities owned, leased
or managed by the Company, see "Business -- Facilities."
25
<PAGE> 28
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the executive officers and directors of the
Company, together with their respective ages and offices:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- --------------------------------- --- --------------------------------------------
<S> <C> <C>
James F. Slattery................ 46 Chairman, President, Chief Executive Officer
and Director
Michael C. Garretson............. 51 Executive Vice President and Chief Operating
Officer
Aaron Speisman................... 48 Executive Vice President, Secretary and
Director
Ira M. Cotler.................... 33 Executive Vice President-Finance
Richard P. Staley................ 64 Senior Vice President and Director
Lee Levinson..................... 54 Chief Financial Officer
Melvin T. Stith(1)............... 49 Director
Raymond S. Evans(1).............. 59 Director
Stuart M. Gerson(1).............. 52 Director
Shimmie Horn..................... 23 Director
</TABLE>
- ---------------
(1) Member of Audit, Compensation and Stock Option Committees.
JAMES F. SLATTERY co-founded the Company in October 1987 and has been its
President, Chief Executive Officer and a director since the Company's inception
and Chairman since August 1994. Prior to co-founding the Company, Mr. Slattery
had been a managing partner of Merco Properties, Inc., a hotel operation
company, and 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 Corp., a developer and manager of privatized correctional
and detention facilities, and from August 1990 to August 1993 was Director of
Area Development for Euro Disney S.C.A., the operator of a European theme park.
AARON SPEISMAN co-founded the Company in October 1987 and has been its
Executive Vice President, Secretary and a director since the Company's
inception. From October 1987 to March 1994, Mr. Speisman also served as Chief
Financial Officer of the Company. Since June 1, 1996, Mr. Speisman has been
employed by the Company on a part-time basis.
IRA M. COTLER was elected the Company's Executive Vice President-Finance 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.
26
<PAGE> 29
RICHARD P. STALEY has served as the Company's Senior Vice President since
November 1988 and as a director since May 1994. 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.
LEE LEVINSON became an employee of the Company in February 1994 and was
elected Chief Financial Officer in March 1994. From 1989 until December, 1993,
Mr. Levinson was a partner at Fleischman & Company, independent certified public
accountants. Mr. Levinson is a certified public accountant.
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.
RAYMOND S. EVANS was elected a director in May 1994. For more than the past
five years, Mr. Evans has been a partner of the law firm of Ruskin, Moscou,
Evans & Faltischek, P.C.
STUART M. GERSON was elected a director in June 1994. Since March 1993, Mr.
Gerson has been a partner 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 the Company in June 1996. 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 and a co-founder of the Company.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified.
COMPENSATION OF DIRECTORS
Employee-directors receive no compensation for serving on the Board of
Directors other than reimbursement of expenses incurred in attending meetings.
Non-employee directors are paid an annual directors' fee of $5,000 plus $500 for
each Board meeting attended and $250 for each Committee meeting attended. In
addition, all non-employee directors participate in the Company's 1994
Non-Employee Director Stock Option Plan and are reimbursed for expenses incurred
in attending meetings.
27
<PAGE> 30
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned in
1993, 1994 and 1995 by the Company's Chief Executive Officer and by each other
executive officer whose compensation exceeded $100,000 in 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------------------------ NUMBER OF SHARES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED COMPENSATION(2)
- ---------------------- ----- -------- ------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery 1995 $189,000 -- $13,010 5,000 $30,263
President and 1994 $180,000 $77,230 $10,860 13,125 $22,376
Chief Executive 1993 $179,621 -- $10,860 -- $18,012
Officer
Aaron Speisman 1995 $106,014 -- $ 9,300 5,000 $13,676
Executive Vice 1994 $ 98,092 $ 1,000 $ 9,300 13,125 $13,676
President and 1993 $ 85,629 -- $ 9,300 -- $20,602
Secretary
Lee Levinson 1995 $110,615 $ 1,000 $ 4,167 6,250 --
Chief Financial 1994 $ 90,269 $ 1,000 $ 7,615(3) 12,813 --
Officer 1993 -- -- -- -- --
</TABLE>
- ---------------
(1) Consists of car lease payments.
(2) Consists of life insurance premiums.
(3) Consists of $7,615 of consulting fees prior to his employment by the
Company.
In addition to the compensation described above, for 1993 and 1994, Mr.
Slattery received S Corporation distributions of $389,200 and $28,000,
respectively, and Mr. Speisman received S Corporation distributions of $264,100
and $25,000, respectively.
The following table sets forth information concerning stock options granted
executive officers named in the Summary Compensation Table:
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED
--------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTION TERM
OPTIONS ALL PRICE EXPIRATION -------------------
NAME GRANTED EMPLOYEES PER SHARE DATE 5% 10%
-------------------------- ----------- ---------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery......... 5,000 9.2% $ 20.63 6/15/2000 $28,498 $62,974
Aaron Speisman............ 5,000 9.2% $ 20.63 6/15/2000 $28,498 $62,974
Lee Levinson.............. 6,250 11.5% $ 11.00 3/1/2000 $18,994 $41,973
</TABLE>
The following table sets forth the value of unexercised stock options held
by the executive officers named in the Summary Compensation Table:
OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-
SHARES UNDERLYING THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------------ -------------------------- --------------------------
<S> <C> <C>
James F. Slattery......................... 6,563/11,562 $ 6,497/$ 6,497
Aaron Speisman............................ 6,563/11,562 $ 6,497/$ 6,497
Lee Levinson.............................. 6,407/12,656 $ 15,435/$15,435
</TABLE>
28
<PAGE> 31
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Slattery
which expires February 9, 1999 and provides for minimum annual compensation of
$189,000, 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 $1,000,000, such bonus not to exceed $200,000. As
of June 1, 1996, Mr. Speisman is employed under an agreement which provides for
Mr. Speisman's employment on a part-time basis at an annual salary of $35,000.
The Company has also entered into employment agreements with Messrs.
Garretson and Cotler which expire January 20, 1999 and provide for compensation
of $115,000 and $129,000, respectively, annual salary increases, automobile
allowances, reimbursement of business expenses, health or disability insurance,
related benefits, a bonus equal to 3% of pre-tax profits in excess of
$1,000,000, such bonus not to exceed $50,000 and $75,000, respectively, and the
grant to each of options to purchase 100,000 shares of Common Stock. See "Stock
Options -- Other Options." Mr. Cotler is also entitled to payment for relocation
and related costs.
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 that 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 provided. In 1994 and 1995, Mr. Banks earned approximately $238,000
and $334,000, respectively.
STOCK OPTIONS
1993 Stock Option Plan
Under the 1993 Stock Option Plan (the "1993 Plan") 500,000 shares of Common
Stock are reserved for issuance upon exercise of options designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified options. Under the 1993 Plan, ISOs
may be granted to employees and officers of the Company and non-qualified
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
The 1993 Plan is administered by the Company's Stock Option Committee which
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISO's,
the rate of exercise of each option, the option purchase price per share, the
manner of exercise, the form of payment upon exercise, and whether restrictions
such as repurchase rights are to be imposed on the shares following exercise.
Options granted under the 1993 Plan expire five years after the date of grant
and may not be granted at a price less than the fair market value of the Common
Stock on the date of grant (110% of fair market value in the case of persons
holding 10% or more of the voting stock of the Company). The aggregate fair
market value of shares for which ISOs granted to any employee are exercisable
for the first time by such employee during any calendar year (under all stock
option plans of the Company and any related corporation) may not exceed
$100,000. No options may be granted under the 1993 Plan after October 2003;
however, options granted under the 1993 Plan prior thereto may extend beyond
that date. Options granted under the 1993 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.
During fiscal 1994 and 1995, options to purchase 225,313 shares and 54,375
shares, respectively, were granted under the 1993 Plan at exercise prices
ranging from $4.76 to $20.63 per share. In 1996, options to purchase 48,700
shares were granted under the 1993 Plan at exercise prices ranging from $8.875
to $15.25 per share.
29
<PAGE> 32
1994 Non-Employee Director Stock Option Plan
Under the 1994 Non-Employee Director Stock Option Plan (the "Directors
Plan") 196,875 shares of Common Stock are reserved for issuance to non-employee
Directors. Under the Directors Plan, each non-employee Director is automatically
granted, (i) a non-qualified option to purchase 10,000 shares of Common Stock
upon election to the Board of Directors; and (ii) a non-qualified option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders at which the Director is reelected to the Board of Directors. The
exercise price of each option is the fair market value of the Common Stock on
the date of grant. Each option expires five years from the date of grant and
vests in two annual installments of 50% each on the first and second anniversary
of the date of grant. Options granted under the Directors Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. In the event an optionee ceases to
be a member of the Board of Directors (other than by reason of death or
disability), then the non-vested portion of the option immediately terminates
and becomes void and any vested and unexercised portion of the option may be
exercised for a period of 180 days from the date the optionee ceased to be a
member of the Board of Directors. In the event of death or permanent disability
of an optionee, all options accelerate and become immediately exercisable until
the scheduled expiration date of the option.
During 1994 and 1995, options to purchase 65,000 shares and 25,000 shares,
respectively, were granted under the Directors Plan at exercise prices ranging
from $7.05 to $18.75 per share. In 1996, options to purchase 30,000 shares were
granted under the Directors Plan at exercise prices ranging from $17.75 to
$17.875 per share.
Other Options
In January 1996, in connection with their respective employment, the
Company granted Messrs. Garretson and Cotler options to purchase 100,000 shares
each, at an exercise price of $8.875 per share (fair market value on the date of
grant). The options, which were not granted pursuant to the 1993 Plan and are
non-qualified options under the Code, vest one-third upon grant, an additional
one-third one year from the date of grant and the one-third balance two years
from the date of grant. In April 1996, the Company granted Stuart M. Gerson, a
director of the Company, non-qualified options to purchase 15,000 shares at an
exercise price of $8.75 per share (fair market value on the date of grant) in
consideration for consulting services (see "Certain Transactions").
CERTAIN TRANSACTIONS
The Company subleases a building located at 12-16 East 31st Street, New
York, New York from LeMarquis Operating Corp. ("LMOC"), a corporation owned 25%
by Esther Horn and 8% by James F. Slattery. The Company currently utilizes
approximately fifty percent of the building for the Manhattan Community
Corrections and the New York Community Corrections programs. LMOC leases this
building from an unaffiliated party at a current base monthly rental of
approximately $15,456 (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 has the right to use
as much of the building as it requires 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, the Company pays rent of $18,000 per month above the rent paid by LMOC
to the building's owner for a total monthly rent of approximately $50,802. The
Company has, to date, invested $690,000 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 initial term of the Company's sublease expired April 30, 1995, and is
currently in its first renewal term expiring April 30, 2000. The sublease
contains two additional successive five-year renewal options beginning May 1,
2000. The monthly rent above the rent paid by LMOC to the building's owner will
increase to $22,000 per month during the second renewal term beginning May 1,
2000 and to
30
<PAGE> 33
$26,000 per month during the third renewal term beginning May 1, 2005. The
Company 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 the building paid annual
rent of approximately $300,000 to LeMarquis Enterprises 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. The Company paid any cash flow deficiency to Enterprises. This
arrangement terminated in February 1994, and all of the building's revenues,
including rent from the residential and commercial tenants, are now received and
expenses paid by the Company. The revenue from this portion of the building was
approximately $210,000 in 1994 and $205,000 in 1995. The Company anticipates
that operating the portion of the building occupied by residential and
commercial tenants will result in a net expense to the Company of approximately
$25,000 per month. Due to New York rent stabilization laws, the Company is
unable to increase the rent paid by the residential tenants in this building in
response to increased rent or expenses incurred 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 expires December 31, 1998. The lease
establishes a monthly rental of $40,000 and contains three five-year renewal
options. The monthly rental for the first option period, which runs from January
1, 1999 through December 31, 2003, 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.
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.
Stuart M. Gerson, a director of the Company, is a member of Epstein Becker
& Green, P.C., a law firm which has represented the Company on certain matters
and which is representing the Company in connection with this offering. In April
1996, in consideration for certain consulting services, the Company granted Mr.
Gerson options to purchase a total of 15,000 shares of Common Stock at an
exercise price of $8.75 per share, the fair market value of the shares on the
date of grant. The options, which were not granted pursuant to either the 1993
Plan or the Directors Plan and are non-qualified options under the Code, vest
50% one year from the date of grant and the remaining 50% two years from the
date of grant. See "Legal Matters."
31
<PAGE> 34
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of the date of this Prospectus
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to own beneficially five percent or more of
such Common Stock, (ii) each director of the Company, (iii) each person named in
the Summary Compensation Table, (iv) each Selling Stockholder and (v) all
executive officers and directors as a group, together with the number of shares
being sold by each of them and their respective percentage ownership of such
shares before this offering and as adjusted to reflect the sale of the Common
Stock offered hereby:
<TABLE>
<CAPTION>
SHARES OWNED PRIOR SHARES OWNED AFTER
TO OFFERING OFFERING
------------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT SHARES BEING SOLD NUMBER PERCENT
--------------------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
Esther Horn(2)................... 868,438 16.8% 175,000 693,438 9.7%
James F. Slattery(3)............. 788,125 15.3% -- 788,125 11.0%
Aaron Speisman(4)................ 645,763 12.5% 175,000 470,763 6.6%
David Fuld....................... 318,125 6.2% 70,000 248,125 3.5%
Jennifer Anna Speisman
1992 Trust..................... 98,438 1.9% 15,000 83,438 1.2%
Joshua Israel Speisman
1992 Trust..................... 98,438 1.9% 15,000 83,438 1.2%
Ira M. Cotler(5)................. 50,701 1.0% -- 50,701 *
Richard P. Staley(6)............. 41,581 * -- 41,581 *
Michael C. Garretson(7).......... 36,458 * -- 36,458 *
Raymond S. Evans(8).............. 24,044 * -- 24,044 *
Lee Levinson(9).................. 18,061 * -- 18,061 *
Stuart M. Gerson(10)............. 19,475 * -- 19,475 *
Melvin T. Stith(11).............. 8,750 * -- 8,750 *
Shimmie Horn(12)................. 1,312 * -- 1,312 *
All officers and directors as a
group (ten
persons)(2)(4)(5)(6)(7)
(8)(9)(10)(11)(12)............. 1,634,270 30.4% 175,000 1,459,270 19.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Except for David Fuld, whose address is 88-55 161st Street, Flushing, New
York 11367, all addresses are c/o Correctional Services Corporation, 1819
Main Street, Suite 1000, Sarasota, Florida 34236.
(2) Former director, widow of founder and mother of Shimmie Horn, a current
director. Includes options to purchase 9,063 shares of Common Stock.
(3) Includes options to purchase 15,625 shares of Common Stock. Does not
include options to purchase 2,500 shares of Common Stock not exercisable
within 60 days.
(4) Director and founder. Does not include 98,438 shares of Common Stock owned
by the Jennifer Anna Speisman 1992 Trust and 98,438 shares of Common Stock
owned by the Joshua Israel Speisman 1992 Trust, trusts for the benefit of
Mr. Speisman's children, as to which Mr. Speisman disclaims beneficial
ownership. Includes options to purchase 15,625 shares of Common Stock and a
Series A Warrant to purchase 7,700 shares of Common Stock but does not
include options to purchase 2,500 shares of Common Stock not exercisable
within 60 days.
(5) Includes 2,612 shares of Common Stock owned by his wife as to which he
disclaims beneficial ownership. Also includes options to purchase 44,239
shares of Common Stock, a Series A Warrant to purchase 3,850 shares of
Common Stock and other warrants to purchase 10,906 shares of Common Stock.
Does not include options to purchase 66,667 shares of Common Stock not
exercisable within 60 days.
(6) Includes options to purchase 41,081 shares of Common Stock. Does not
include options to purchase 19,544 shares of Common Stock not exercisable
within 60 days.
(7) Consists of options to purchase 36,458 shares of Common Stock. Does not
include options to purchase 66,667 shares of Common Stock not exercisable
within 60 days.
(8) Includes options to purchase 15,425 shares of Common Stock. Does not
include options to purchase 7,500 shares of Common Stock not exercisable
within 60 days.
32
<PAGE> 35
(9) Includes 3,282 shares of Common Stock owned by wife and 1,969 shares of
Common Stock owned by his minor child, as to which he disclaims beneficial
ownership. Also includes options to purchase 12,813 shares of Common Stock.
Does not include options to purchase 11,250 shares of Common Stock not
exercisable within 60 days.
(10) Consists of options to purchase 15,625 shares of Common Stock and a Series
A Warrant to purchase 3,850 shares of Common Stock. Does not include
options to purchase 22,500 shares of Common Stock not exercisable within 60
days.
(11) Consists of options to purchase 8,750 shares of Common Stock. Does not
include options to purchase 13,750 shares of Common Stock not exercisable
within 60 days.
(12) Does not include options to purchase 10,000 shares of Common Stock not
exercisable within 60 days.
The Company is unaware of any arrangements which may result in a change in
control of the Company.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01
per share.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that holders
of more than 50% of the shares voted for the election of directors can elect all
of the directors. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors from sources available
therefor. In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of Common Stock are entitled to
share ratably in the assets of the Company available for distribution to
stockholders after payment of liabilities and after provision for each class of
stock, if any, having preference over the Common Stock. Holders of Common Stock
have no preemptive rights. All outstanding shares are, and all shares to be sold
and issued as contemplated hereby will be, fully paid and non-assessable and
legally issued. The Board of Directors is authorized to issue additional shares
of Common Stock within the limits authorized by the Company's charter and
without stockholder action.
PREFERRED STOCK
The Preferred Stock may be issued from time to time without stockholder
approval in one or more classes or series, and the Board of Directors is
authorized to fix the dividend rights, dividend rates, any conversion rights or
rights of exchange, any voting rights, rights and terms or redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any class or series of Preferred Stock, the number of shares constituting such
class or series and the designation thereof. The shares of any class or series
of Preferred Stock need not be identical. Depending upon the rights of such
Preferred Stock, the issuance of Preferred Stock could have an adverse effect on
holders of Common Stock by delaying or preventing a change in control of the
Company, making removal of the present management more difficult or resulting in
restrictions upon the payment of dividends and other distributions to the
holders of Common Stock. There are currently no shares of Preferred Stock
outstanding.
WARRANTS
Series A Warrants
Each Series A Warrant entitles the registered holder to purchase one share
of Common Stock at an exercise price of $7.75 per share, subject to adjustment
in the event of a stock split, recapitalization, stock dividend, combination,
consolidation or certain sales or issuances of Common Stock at less than market
value, at any time through July 1, 1999. The Series A Warrants are not
redeemable. As of June 30, 1996, there were Series A Warrants outstanding to
purchase 682,144 shares of Common Stock.
33
<PAGE> 36
Other Warrants
As compensation for services rendered in connection with the Company's
initial public offering and 1995 private placements, the Company issued warrants
to purchase 109,375 shares of Common Stock (after giving effect to the Company's
5% stock dividend and five for four stock split) and 59,681 shares of Common
Stock, respectively, at purchase prices of $5.76 and $10.00, respectively. All
of such warrants remain outstanding.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for the Common Stock and the warrant agent for the
Series A Warrants is American Stock Transfer & Trust Co., New York, New York.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS
The Company's Certificate of Incorporation and By-Laws provide that the
Company shall indemnify each director and such of the Company's officers,
employees and agents as the Board of Directors shall determine from time to time
to the fullest extent provided by the laws of the State of Delaware.
The Company carries insurance providing indemnification, under certain
circumstances, to all of the Company's directors and officers for claims against
them by reason of, among other things, any act or failure to act in their
capacities as directors or officers. The current annual premium for this
insurance is approximately $80,000, all of which is paid by the Company. To
date, no sums have been paid to any past or present director or officer of the
Company under this or any prior indemnification insurance policy.
The Company has also entered into Indemnity Agreements with certain of its
directors and executive officers. The Indemnity Agreements provide for
indemnification of such persons to the fullest extent permitted by the
provisions of the General Corporation Law of the State of Delaware. The
Indemnity Agreements provide that the Company will pay any costs which an
indemnitee actually and reasonably incurs because of the claims made against him
by reason of the fact that he is or was a director or officer of the Company,
except that the Company is not obligated to make any payment where a final
determination is rendered that: (i) the indemnitee obtained remuneration in
violation of law; (ii) the indemnitee violated Section 16(b) of the Securities
Exchange Act of 1934, or similar state or common law provisions, in connection
with a claim for an accounting of profits from the purchase or sale by the
indemnitee of securities of the Company; (iii) the indemnitee's conduct was
deliberately dishonest or constituted willful misconduct; or (iv)
indemnification is not lawful.
34
<PAGE> 37
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Stephens Inc.
and J.C. Bradford & Co. are acting as Representatives (the "Representatives"),
has severally agreed to purchase the aggregate number of shares of Common Stock
set forth opposite its name below, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. In the
Underwriting Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock offered hereby if any shares of Common Stock are purchased. In the event
of default by an Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the nondefaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Stephens Inc. ....................................................................
J.C. Bradford & Co. ..............................................................
---------
Total................................................................... 2,450,000
========
</TABLE>
The Company has granted the Underwriters an option, exercisable in whole or
in part, from time to time, for thirty days after the date hereof, to purchase
up to 367,500 additional shares of Common Stock to cover over-allotments, if
any, at the public offering price, less the underwriting discount set forth on
the cover page of this Prospectus. If the Underwriters exercise this option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the 2,450,000 shares of Common Stock offered hereby.
The Underwriters have advised the Company that sales of Common Stock to
certain dealers may be made at a concession of an amount not in excess of $
per share and that the Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $ per share on sales to certain other dealers.
After this offering, the public offering price, the concession and the
re-allowance may be changed by the Underwriters.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain civil liabilities under the Securities Act
and to afford the Underwriters certain rights of contribution.
The Underwriters do not intend to confirm sales of shares of Common Stock
to any account over which they exercise discretionary authority without prior
authorization. The Representatives intend to continue to make a market in the
Common Stock after the completion of this offering.
Certain Selling Stockholders and the Company's directors and executive
officers have agreed with the Underwriters not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock, with limited
exceptions, for a period of 180 days from the date of this offering. The Company
has agreed to comply with a similar restriction for a period of 120 days from
the date of this offering.
In connection with the this offering, the Representatives have advised the
Company that certain Underwriters and dealers, if any, or their respective
affiliates who are qualified registered market makers on The Nasdaq Stock
Market, may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before commencement of offers or sales of the
Common Stock. The passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
35
<PAGE> 38
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company and the Selling
Stockholders by Epstein Becker & Green, P.C., New York, New York. Stuart M.
Gerson, a director of the Company, is a member of Epstein Becker & Green, P.C.
and members of the firm own, directly and indirectly, $195,000 of the Company's
10% subordinated promissory notes, 3,400 shares of Common Stock and warrants and
options to purchase 65,615 shares of Common Stock. Giroir & Gregory,
Professional Association, Little Rock, Arkansas, has acted as counsel to the
Underwriters with respect to certain legal matters in connection with this
offering.
EXPERTS
The consolidated financial statements of Correctional Services Corporation
and subsidiaries as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 have been audited by Grant Thornton
LLP, independent certified public accountants, as stated in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such material may be
inspected and copies made at the regional offices of the Commission at 7 World
Trade Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago Illinois 60661-2511. This material may
also be inspected and copies made at, and upon written request copies obtained
at prescribed rates from, the Public Reference Section of the Commission at Room
1024 at its principal office, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Registration Statement, including the exhibits and
schedules thereto, can also be accessed through the EDGAR terminals in the
Commission's Public Reference Rooms in Washington, Chicago and New York or
through the World Wide Web at http://www.sec.gov.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 with the
Commission in Washington, D.C., in accordance with the provisions of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits filed
as part thereof. Statements herein contained concerning the provisions of any
document are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
The Registration Statement and the exhibits may be inspected, without charge, at
the offices of the Commission, or copies thereof obtained at prescribed rates
from the Public Reference Section of the Commission at the address set forth
above. The Registration Statement, including the exhibits and schedules thereto,
can also be accessed through the EDGAR terminals in the Commission's Public
Reference Rooms in Washington, Chicago and New York or through the World Wide
Web at http://www.sec.gov.
36
<PAGE> 39
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(Unaudited)........................................................................ F-3
Consolidated Statements of Operations (for the Years Ended December 31, 1993, 1994
and 1995, and the Six Months Ended June 30, 1995 and 1996 (Unaudited).............. F-4
Consolidated Statement of Stockholders' Equity (for the Years Ended December 31,
1993, 1994 and 1995, and the Six Months Ended June 30, 1996 (Unaudited)............ F-5
Consolidated Statements of Cash Flows (for the Years Ended December 31, 1993, 1994
and 1995, and the Six Months Ended June 30, 1995 and 1996 (Unaudited).............. F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GRANT THORNTON LOGO
Board of Directors
Correctional Services Corporation (formerly Esmor Correctional Services, Inc.)
We have audited the accompanying consolidated balance sheets of
Correctional Services Corporation and Subsidiaries (formerly Esmor Correctional
Services, Inc.) as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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 of the financial statements provide a reasonable
basis for our opinion.
In our opinion, the 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, 1994 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note L-1, the financial statements as previously reported
have been restated in regards to the valuation of the Receivable from Sale of
Equipment and Leasehold Improvements.
GRANT THORNTON LLP
New York, New York
March 1, 1996 (Except for Notes L-1 and L-2, as to which the
dates are August 13, 1996 and March 6, 1996, respectively)
F-2
<PAGE> 41
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................. $ 308,446 $ 3,756,748 $ 37,757
Restricted cash....................................... -- 750,000 233,761
Accounts receivable................................... 4,804,014 3,374,229 3,785,150
Receivable from sale of equipment and leasehold
improvements....................................... -- -- 738,000
Prepaid expenses and other............................ 640,643 1,415,306 1,008,725
----------- ----------- -----------
Total current assets.......................... 5,753,103 9,296,283 5,803,393
BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- AT
COST, NET............................................. 7,518,001 7,226,323 11,693,805
RECEIVABLE FROM SALE OF EQUIPMENT AND LEASEHOLD
IMPROVEMENTS.......................................... -- 3,207,882 2,769,882
OTHER ASSETS
Deferred development and start-up costs, net.......... 1,061,671 1,729,270 2,774,791
Deferred income taxes................................. -- 1,120,000 1,120,000
Other................................................. 185,562 760,769 674,239
----------- ----------- -----------
$14,518,337 $23,340,527 $24,836,110
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.............. $ 2,639,515 $ 3,535,165 $ 3,431,109
Current portion of long-term debt..................... 1,757,384 1,221,022 2,973,545
----------- ----------- -----------
Total current liabilities..................... 4,396,899 4,756,187 6,404,654
LONG-TERM DEBT.......................................... 3,028,020 4,000,000 3,598,498
SUBORDINATED PROMISSORY NOTES........................... -- 5,362,295 4,031,734
COMMITMENTS AND CONTINGENCIES........................... -- -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding............ -- -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,407,828, 4,911,688 and 5,145,503
shares issued and outstanding as of 1994, 1995 and
June 30, 1996, respectively........................ 44,079 49,117 51,455
Additional paid-in capital............................ 5,616,456 9,479,436 11,069,802
Retained earnings (deficit)........................... 1,432,883 (306,508) (320,033)
----------- ----------- -----------
7,093,418 9,222,045 10,801,224
----------- ----------- -----------
$14,518,337 $23,340,527 $24,836,110
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 42
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Resident fees................ $14,062,059 $23,655,226 $30,482,683 $15,793,952 $14,713,854
Other income................. 39,135 617,763 1,069,469 612,409 358,857
----------- ----------- ----------- ----------- -----------
14,101,194 24,272,989 31,552,152 16,406,361 15,072,711
----------- ----------- ----------- ----------- -----------
Expenses
Operating.................... 8,651,275 14,899,192 19,731,797 9,914,657 10,241,743
General and administrative... 3,578,738 6,695,599 9,938,344 5,064,367 4,401,982
Interest..................... 30,786 133,315 761,702 214,908 452,511
New Jersey facility closure
costs..................... -- -- 3,909,700 1,488,000 --
----------- ----------- ----------- ----------- -----------
12,260,799 21,728,106 34,341,543 16,681,932 15,096,236
----------- ----------- ----------- ----------- -----------
Earnings (loss)
before income
taxes.............. 1,840,395 2,544,883 (2,789,391) (275,571) (23,525)
Income tax expense (benefit)... 736,000 1,002,000 (1,050,000) 21,000 (10,000)
----------- ----------- ----------- ----------- -----------
NET EARNINGS
(LOSS)............. $ 1,104,395(1) $ 1,542,883 $(1,739,391) $ (296,571) $ (13,525)
=========== =========== =========== =========== ===========
Net earnings (loss) per common
share........................ $ .34(1) $ .35 $ (.38) $ (.07) $ 0.00
=========== =========== =========== =========== ===========
Weighted average shares
outstanding.................. 3,281,250 4,394,734 4,552,707 4,407,828 4,974,752
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Net earnings and earnings per share for 1993 are shown on a pro forma basis
to reflect income taxes which were not applicable under the Company's prior
Subchapter S Corporation status.
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 43
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON CAPITAL PAID-IN EARNINGS
STOCK STOCK CAPITAL (DEFICIT) TOTAL
------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993............. $ 21,000 $ 1,934,429 $ (874,309) $ 1,081,120
Net earnings........................... 1,840,395 1,840,395
Cash distributions to stockholders..... (910,000) (910,000)
Noncash distributions to
stockholders......................... (87,000) (87,000)
Investment in Esmor Houston, Inc....... 1,000 -- -- 1,000
------- -------- ----------- ---------- -----------
BALANCE AT JANUARY 1, 1994............. 22,000 1,934,429 (30,914) 1,925,515
Common stock issuance.................. $33,583 (22,000) 4,093,437 -- 4,105,020
5% common stock dividend............... 1,680 -- (1,680) -- --
Combined deficit of affiliated
companies prior to recapitalization
of Company........................... -- -- (30,914) 30,914 --
Cash distributions paid prior to
recapitalization of Company.......... -- -- (480,000) -- (480,000)
Five-for-four common stock split....... 8,816 -- (8,816) -- --
Net earnings........................... -- -- 110,000 1,432,883 1,542,883
------- -------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994........... 44,079 -- 5,616,456 1,432,883 7,093,418
Exercise of stock options.............. 70 -- 33,250 -- 33,320
Common stock issuance.................. 4,968 -- 3,464,730 -- 3,469,698
Issuance of warrants with subordinated
promissory notes..................... -- -- 365,000 -- 365,000
Net loss............................... -- -- -- (1,739,391) (1,739,391)
------- -------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995........... 49,117 -- 9,479,436 (306,508) 9,222,045
Exercise of options and warrants
(unaudited) (Note K)................. 2,338 1,590,366 -- 1,592,704
Net loss (unaudited)................... (13,525) (13,525)
------- -------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1996 (UNAUDITED)... $51,455 $ -- $11,069,802 $ (320,033) $10,801,224
======= ======== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 44
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings................................. $1,840,395 $ 1,542,883 $(1,739,391) $ (296,571) $ (13,525)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization..................... 243,445 776,255 1,168,850 1,940,366 480,605
Write-off of bad debt............................. 66,000 -- -- -- --
Amortization of subordinated promissory note
discount........................................ -- -- 50,695 -- 49,894
New Jersey facility asset impairment.............. -- -- 2,771,424 -- --
New Jersey deferred development costs writedown... -- -- 416,201 -- --
Amortization of deferred loan costs............... -- 111,854 127,568 -- 127,118
Deferred income tax benefit....................... -- -- (1,120,000) (272,000)
Changes in operating assets and liabilities
Accounts receivable............................. (570,813) (3,148,906) 1,429,785 659,853 (410,921)
Prepaid expenses and other...................... (188,187) (269,641) (774,644) (1,121,750) 406,581
Advances and unearned revenue................... (613,649) -- -- -- --
Accounts payable and accrued liabilities........ 980,002 785,258 895,650 1,744,790 (104,056)
Reserve for New Jersey facility carrying
costs......................................... -- -- -- -- (300,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 1,757,193 (202,197) 3,226,138 2,654,688 235,696
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................ (116,497) (7,693,761) (6,110,693) (2,652,457) (4,738,933)
Development and start-up costs...................... (698,543) (401,772) (1,824,268) (1,034,351) (1,254,675)
Proceeds from related company....................... 320,000 -- -- -- --
Payments to related company......................... (338,000) -- -- -- --
Other assets........................................ (71,763) -- -- -- --
(Increase) decrease in restricted cash -- unexpended
construction funds................................ -- -- (750,000) -- 516,239
---------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (904,803) (8,095,533) (8,684,961) (3,686,808) (5,477,369)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Investments by stockholders......................... 1,000 -- -- -- --
Proceeds from issuance of common stock.............. -- 4,105,020 3,469,698 -- --
Proceeds from long-term borrowing................... -- 4,078,261 1,500,000 1,200,000 21,966
Payments on long-term borrowings.................... -- (242,857) (1,282,715) -- (418,922)
Proceeds (payments) on short-term debt.............. 726,848 (15,198) 218,333 (179,024) 1,747,978
Issuance of subordinated promissory notes and
warrants.......................................... -- -- 5,676,600 -- --
Debt issuance costs................................. -- -- (652,101) -- --
Net proceeds from exercise of stock options and
warrants.......................................... -- -- 33,320 -- 212,248
Other assets........................................ (717,115) 469,924 (56,010) (58,908) (40,588)
Distributions to stockholders....................... (910,000) (480,000) -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided by financing activities..... (899,267) 7,915,150 8,907,125 962,068 1,522,682
---------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (46,877) (382,580) 3,448,302 (70,052) (3,718,991)
Cash and cash equivalents at beginning of year........ 737,903 691,026 308,446 308,446 3,756,748
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 691,026 $ 308,446 $ 3,756,748 $ 238,394 $ 37,757
========== =========== =========== =========== ===========
Supplemental disclosures of cash flows information:
Cash paid during the year for
Interest.......................................... $ 31,000 $ 179,500 $ 602,700 $ 121,350 $ 482,044
Income taxes...................................... -- $ 927,800 $ 789,500 $ 725,435 $ 81,910
</TABLE>
Supplemental disclosure of noncash activity:
The valuation of the warrants issued, $365,000, with the subordinated
promissory notes in 1995 are included in Additional Paid-in Capital.
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 45
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Correctional Services Corporation and Subsidiaries (formally Esmor
Correctional Services, Inc.) (See Note N) operate and manage detention and
correctional facilities for Federal, state and local government agencies.
1. Principles of Consolidation
The consolidated financial statements include the accounts of Esmor
Correctional Services, Inc. and its wholly-owned subsidiaries, Esmor, Inc.,
Esmor Management, Inc., Esmor Brooklyn, Inc., Esmor Seattle, Inc., Esmor
Manhattan, Inc., Esmor Mansfield, Inc., Esmor Houston, Inc., Esmor New Jersey,
Inc., Esmor Ft. Worth, Inc., Esmor Canadian, Inc. and Esmor Travis, Inc.
(collectively the "Company" or the "Esmor companies"). All significant
intercompany balances and transactions have been eliminated.
2. Revenue Recognition
Revenue is recognized at the time the service is provided. Revenues are
principally derived from government agencies. The Company's accounts receivable
balance is considered fully collectible based on historical experience and
management's current evaluation. Accordingly, no allowance for doubtful accounts
has been provided in the accompanying financial statements.
3. Building, Equipment and Leasehold Improvements
Building, equipment and leasehold improvements are carried at cost.
Depreciation of building is computed under the straight-line method over a 20
year period. Depreciation of equipment is computed under 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 ten years.)
4. Deferred Development and Start-up Costs
Deferred development costs consist of costs that can be directly associated
with a specific anticipated contract and, if the recoverability from that
contract is probable, they are deferred until the anticipated contract has been
awarded. At the commencement of operations of the facility, the deferred
development costs are amortized over the life of the contract (including option
periods) as development costs. Costs of unsuccessful or abandoned contracts are
charged to expense when their recovery is not considered probable. Facility
start-up costs are incurred (after a contract is awarded) in connection with the
opening of new facilities under the contract. These costs, which are required
under the contract, to the extent recoverable, are capitalized from the date of
award until commencement of operations, at which time they are amortized on a
straight-line basis over the term (including option periods) ranging from one to
five year periods of the government contracts.
5. Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109") in 1994. The standards for SFAS
No. 109 required that the Company utilize an asset and liability approach for
financial accounting and reporting for income taxes. The primary objectives of
accounting for income taxes under SFAS 109 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. The adoption of SFAS No. 109 had an insignificant effect on the
Company's financial statements.
Prior to 1994 the Company was a Subchapter S Corporation. As such, the
Company's taxable income was includable in the individual income tax returns of
its shareholders for federal and certain state income tax
F-7
<PAGE> 46
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes. The statement of operations for the year ended December 31, 1993
reflects the pro forma effect on income taxes as if the Company's earnings had
been subjected to federal and state income taxes as a C Corporation.
6. Earnings (Loss) Per Share
The computation of net earnings (loss) per common share is based upon the
weighted average number of common shares outstanding during the year plus common
stock equivalents representing shares issuable upon the assumed exercise of
stock options and warrants. Common stock equivalents were not included for the
year ended December 31, 1995, as their effect would be anti-dilutive. The
Company is contemplating an offering in the amount of approximately $32,000,000,
from which proceeds will be used to retire approximately $6,572,000 of debt (See
Note N). The supplementary pro forma earnings (loss) per common share for the
year ended December 31, 1995 and six months ended June 30, 1996 as if this debt
has been retired at the beginning of the respective period, would be $(.28) and
$.03 per share (assuming 5,037,226 and 5,373,058 weighted average common shares
outstanding).
7. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Restricted cash of $750,000 and $233,761 at December 31, 1995 and June 30,
1996, respectively, represents payments to be made in 1996 to a contractor for
the completion of the Phoenix, Arizona facility.
8. Reclassifications
Certain reclassifications have been made to the 1994 balances to conform to
the 1995 presentation.
9. 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. While actual results could differ from those estimates,
management does not expect the variances, if any, to have a material effect on
the consolidated financial statements. For discussion of the realization of
Receivable from Sale of Equipment and Leasehold Improvements (see Note L).
10. Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). The standards for SFAS
No. 121 require that the Company recognize and measure impairment losses of
long-lived assets and certain identifiable intangibles and to value long-lived
assets to be disposed of. The primary objectives under SFAS No. 121 are to (a)
recognize an impairment loss of an asset whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable or (b) if
planning to dispose of long-lived assets or certain identifiable intangibles,
such assets have been reflected in the Company's consolidated financial
statements at the net asset value less cost to sell. The effect of adopting SFAS
121 was not considered material to the consolidated financial statements.
F-8
<PAGE> 47
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. Interim Financial Statements
Information in the accompanying consolidated financial statements and notes
to the consolidated financial statements for the interim periods is unaudited.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the full
year.
12. Impact of New Accounting Standard
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," to measure
compensation or to adopt the fair value based method prescribed by SFAS No. 123.
If APB No. 25's method is continued, pro forma disclosures are required as if
SFAS No. 123's accounting provisions were followed. Management has determined
not to adopt SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and accordingly, will continue following APB No.
25's accounting provisions. All other requirements of SFAS No. 123 were
implemented on January 1, 1996 and are not expected to have a material effect on
the Company's financial statements.
NOTE B -- CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES
The Company currently operates eleven secure and non-secure corrections or
detention programs in the states of Florida, New York, Texas and Washington for
Federal, state and local government agencies. The Company has entered into
agreements with the state of Arizona, whereby operations are scheduled to
commence in April 1996, and the state of Florida, whereby operations are
scheduled to commence in the first quarter of 1997. 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 corrections
facilities for federal and state offenders serving the last six months of their
sentences and non-residential programs such as home confinement supervision.
The Company is compensated on the basis of the number of offenders 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.
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
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Fair
Value of Financial Instruments," requires disclosure of the estimated fair value
of an entity's financial instrument assets and liabilities. For the Company,
financial instruments consist principally of cash and cash equivalents,
subordinated promissory notes and long-term debt.
F-9
<PAGE> 48
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
<TABLE>
<CAPTION>
JUNE 30,
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------- -----------------------
1994 1995
----------------------- ----------------------- (UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 308,000 $ 308,000 $3,757,000 $3,757,000 $ 38,000 $ 38,000
Long-term debt............ $4,785,000 $4,785,000 $5,221,000 $5,221,000 $6,572,000 $6,572,000
Subordinated promissory
notes................... -- -- $5,362,000 $5,362,000 $4,032,000 $4,032,000
</TABLE>
3. Receivable from Sale of Equipment and Leasehold Improvements
The carrying value of the Receivable from Sale of Equipment and Leasehold
at December 31, 1995 and June 30, 1996 is $3,207,892 and $3,507,882 (unaudited),
respectively. The Company believes the fair value of the Receivable from Sale of
Equipment and Leasehold Improvements is not practicable to estimate (See Note
L-1).
NOTE D -- PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- 1996
1994 1995 ------------
-------- ---------- (UNAUDITED)
<S> <C> <C> <C>
Prepaid insurance................................... $393,605 $ 190,754 $ 154,757
Prepaid real estate taxes........................... 126,174 122,473 134,731
Prepaid and refundable income taxes................. -- 665,878 281,134
Other............................................... 120,864 436,201 438,103
-------- ---------- ------------
$640,643 $1,415,306 $ 1,008,725
======== ========= =========
</TABLE>
NOTE E -- BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Building, equipment and leasehold improvements, at cost, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Building.......................................... $ -- $5,742,749 $ 9,963,334
Equipment......................................... 3,477,778 1,138,276 1,643,410
Leasehold improvements............................ 4,962,912 1,000,678 1,014,063
---------- ---------- ------------
8,440,690 7,881,703 12,620,827
Less accumulated depreciation..................... (922,689) (655,380) (927,002)
---------- ---------- ------------
$7,518,001 $7,226,323 $ 11,693,805
========= ========= ==========
</TABLE>
F-10
<PAGE> 49
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the years ended December 31, 1993, 1994 and 1995,
and for the six months ended June 30, 1995 and 1996 was approximately $113,000,
$639,000, $1,040,000, $853,000 (unaudited) and $271,000 (unaudited),
respectively.
NOTE F -- OTHER ASSETS
Deferred development and start-up costs are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Development costs................................ $ 874,286 $1,663,804 $ 2,269,969
Start-up costs................................... 425,043 354,880 929,388
---------- ---------- ------------
1,299,329 2,018,684 3,199,357
Less accumulated amortization.................... (237,658) (289,414) (424,566)
---------- ---------- ------------
$1,061,671 $1,729,270 $ 2,774,791
========= ========= =========
</TABLE>
The June 30, 1996 and December 31, 1995 balance of $2,774,791 (unaudited)
and $1,729,270, respectively includes development costs of approximately $69,000
and $48,500, respectively, related to unawarded contracts.
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred refinancing costs.......................... $ 43,946 $587,424 $ 469,584
Deposits............................................ -- 125,773 139,095
Deferred lease option costs......................... 40,000 34,664 30,662
Other............................................... 101,616 12,908 34,898
-------- -------- -----------
$185,562 $760,769 $ 674,239
======== ======== =========
</TABLE>
Amortization expense of deferred development and start-up costs for the
years ended December 31, 1993, 1994 and 1995, and for the six months ended June
30, 1995 and 1996 was approximately $130,000, $137,000, $202,000, $122,000
(unaudited) and $205,000 (unaudited), respectively.
NOTE G -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable................................... $1,289,334 $1,324,963 $1,903,341
Accrued expenses................................... 509,812 1,722,848 1,136,118
Payroll and related taxes.......................... 357,956 284,633 265,301
Construction costs (including retainage)........... 349,683 120,120 120,120
Income taxes....................................... 132,730 82,601 6,229
---------- ---------- ----------
$2,639,515 $3,535,165 $3,431,109
========= ========= =========
</TABLE>
F-11
<PAGE> 50
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- DEBT
Effective December 31, 1995, the Company and NationsBank, N.A. entered into
a loan and security agreement totaling $11.0 million expiring on January 15,
1998. The agreement consists of $5 million term loan at a fixed rate of 8.92%,
which refinanced previous debt with another bank, and a $6 million revolving
line of credit for working capital purposes. The term loan is repayable in
monthly installments of $83,333 until the facility's expiration date, at which
time the remaining balance is due. Borrowings under the revolver are based, at
the Company's option, on .75% over the bank's prime rate or the London
International Bank Rate (LIBOR) plus 3.35%. After September 30, 1996 the
interest rate charged under either method will be based on the Company's
financial performance as specified in the agreement. Further, the Company is
required to pay an annual commitment fee of .25% of the average unused portion
of the facility. The Company may prepay any borrowings without interest or
penalty. The Company's subsidiaries have guaranteed the Company's obligation
under the agreement. The Company has granted the bank a first priority security
interest in all of its assets, including a first real estate mortgage on the
land and building to be used for its Phoenix, Arizona facility. The lending
agreement contains certain financial covenants including a debt service coverage
ratio and a senior liabilities to tangible net worth and subordinated debt
ratio. The Company was not in compliance with its debt service coverage ratio as
of March 31, 1996. NationsBank, N.A. has agreed to waive this covenant for March
31, 1996, and has amended the debt service coverage ratio covenant under the
agreement. The agreement precludes the payment of dividends and stock repurchase
or redemptions prior to December 31, 1996. Thereafter, such dividends, purchase
or redemptions is limited to 10% of the Company's net earnings after taxes
provided that the Company is in compliance with the above-noted financial
covenants.
Through a series of transactions that closed in July, August and September
1995, the Company issued 5,676.6 units at $1,000 per unit, in a private
placement of its securities ("1995 Private Placement"). Each unit consists of
(i) a 10% subordinated promissory note due July 31, 1998 in the principal amount
of $1,000, interest payable quarterly and (ii) a four year warrant to purchase
154 shares of common stock at $7.75 per share. The Company received gross
proceeds of $5,676,600 in connection with the 1995 Private Placement and
recorded the market value of the warrants, $365,000, as promissory note discount
amortized over three years. The net proceeds from such issuance are being used
to construct and renovate its Phoenix, Arizona facility.
The Company's prior revolving credit and term loan agreement dated July 18,
1994, with a bank, provided the Company with maximum borrowings of $5,000,000,
at the bank's prime rate plus 1% per annum, in the form of: (i) a $1,000,000
revolving credit agreement expiring July 28, 1996 and (ii) a $4,000,000 term
loan agreement with the outstanding principal payable in monthly installments
through August 31, 1999. The Company had granted the prior bank a first priority
security interest in all of its assets. On March 24, 1995, the Company entered
into a $1,500,000 project loan and term loan agreement with a bank. Proceeds
from the loan were used to finance the cost of construction of the Company's
Canadian, Texas facility. As noted above, these loans have been repaid in full
by the loan and security agreement with NationsBank, N.A.
On July 28, 1995, the Company entered into an agreement with the bank under
which this bank (i) waived its right to declare the revolving credit and term
loan agreement dated July 28, 1994 and the project loan and term loan agreement
dated March 24, 1995 in default in the event of the expiration of the Company's
Elizabeth, New Jersey contract with the United States Department of Justice,
Immigration and Naturalization Services ("INS"), and (ii) consented to the
Company's 1995 Private Placement, see above. In addition, the Company granted
the prior bank a first priority deed of trust, assignment of rents and security
interest on its Phoenix, Arizona facility and the assignment of leases and rents
on its Elizabeth, New Jersey facility. Pursuant to the agreement, the maturity
date of the term loan agreements became July 1, 1997, payable in monthly
installments of $92,000 with the balance due July 1, 1997. Under the agreement,
the Company prepaid $250,000 of the term loans in September 1995. In connection
with the agreement, the
F-12
<PAGE> 51
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
President and Executive Vice President gave limited personal guarantees, not to
exceed $1,200,000 each. On December 31, 1995, the term loan, revolving line of
credit and project loan agreements were paid in full by the loan and security
agreement with NationsBank, N.A.
Borrowings under the long-term debt and revolving line of credit agreements
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Term loans....................................... $4,785,404 $5,000,000 $4,603,043
Revolving line of credit......................... -- 221,022 1,969,000
---------- ---------- ----------
4,785,404 5,221,022 6,572,043
Less
Current maturities............................. 1,757,384 1,221,022 (2,973,545)
---------- ---------- ----------
$3,028,020 $4,000,000 $3,598,498
========= ========= =========
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996......................................................... $1,221,022
1997......................................................... 1,000,000
1998......................................................... 3,000,000
----------
$5,221,022
=========
</TABLE>
NOTE I -- RENTAL AGREEMENTS
Minimum rental commitments under non-cancelable leases as of December 31,
1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING RELATED
DECEMBER 31, TOTAL COMPANIES
------------- ---------- ----------
<S> <C> <C>
1996..................................................... $1,770,000 $1,080,000
1997..................................................... 1,735,000 1,080,000
1998..................................................... 1,670,000 1,080,000
1999..................................................... 980,000 600,000
2000..................................................... 700,000 600,000
Thereafter............................................... 200,000 200,000
---------- ----------
$7,055,000 $4,640,000
========= =========
</TABLE>
The Company leases one of its facilities from a related party under a
sublease arrangement, which expires April 30, 2000. The Company has a five-year
option to renew this sublease arrangement. A portion of this building and annex
are occupied by residential and commercial tenants.
The Company leases another building from a related party. The lease
commenced January 1, 1994 and expires December 31, 1998. Thereafter, the Company
has three successive five-year options to renew. In addition to the base rent,
the Company pays taxes, insurance, repairs and maintenance on this building.
Rental expense for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1995 and 1996 aggregated $1,360,000, $1,428,000,
$1,510,000, $934,000 (unaudited) and $833,000 (unaudited) respectively, and is
included in general and administrative expenses. Rent expense to related
companies aggregated $1,218,000, $966,000, $1,038,000 and $507,000 (unaudited)
and $485,000 (unaudited) for the years ended December 31, 1993, 1994 and 1995,
and the six months ended June 30, 1995 and 1996, respectively.
F-13
<PAGE> 52
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- INCOME TAXES
The income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------- -------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal...................... $ 625,000 $ 800,000 $ (42,000) $ -- $(12,000)
State and local.............. 111,000 202,000 112,000 148,000 2,000
Deferred
Federal, state and local..... -- -- (1,120,000) (127,000)
--------- ---------- ----------- -------- --------
$ 736,000 $1,002,000 $(1,050,000) $ 21,000 $(10,000)
========= ========== =========== ======== ========
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
and the effective tax rate as a percentage of pretax income:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- --------------
1993 1994 1995 1995 1996
---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Statutory federal rate.......................... 34.0% 34.0% (34.0)% (34.0)% (34.0)%
State taxes, net of federal tax benefit......... 4.0 4.0 5.0 35.4 5.6
Non-deductible items............................ 2.0 1.4 1.2 3.3 1.1
Other........................................... -- -- (9.8) 2.9 (15.2)
--- --- ----- ---- -----
40.0% 39.4% (37.6)% 7.6% (42.5)%
=== === ===== ==== =====
</TABLE>
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 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Depreciation and loss on New Jersey facility
closing....................................... $ 27,000 $ 986,000 $ 986,000
Vacation accrual................................ 42,000 52,000 52,000
Development costs............................... -- 42,000 42,000
Accrued expenses................................ -- 70,000 70,000
Other........................................... -- (30,000) (30,000)
-------- ---------- ----------
69,000 1,120,000 1,120,000
Valuation allowance............................. (69,000) -- --
-------- ---------- ----------
$ -- $1,120,000 $ 1,120,000
======== ========== ==========
</TABLE>
The Company, after considering its previous pattern of profitability,
excluding the New Jersey facility charge, and its anticipated future taxable
income, believes it is more likely than not that the deferred tax assets will be
realized.
NOTE K -- STOCKHOLDERS' EQUITY
On August 4, 1994, the Company's Board of Directors declared a 5% stock
dividend payable on September 16, 1994 to stockholders of record on September 2,
1994. On March 8, 1995, the Company's Board of Directors authorized a
five-for-four stock split in the form of a 25% stock dividend payable on April
5, 1995
F-14
<PAGE> 53
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to stockholders of record on March 23, 1995. All references in the financial
statements to average number of shares outstanding, per share amounts and stock
option data for prior periods presented have been restated to reflect the 5%
stock dividend and five-for-four stock split.
During September 1995, the Company completed the private placement of
496,807 shares of common stock at $7.75 per share. The Company received gross
proceeds of $3,850,254, net of issuance costs of $380,556. The net proceeds are
being used for its Phoenix, Arizona facility.
On February 2, 1994, the Company completed a public offering of 833,333
shares of common stock. The net proceeds received by the Company after deducting
applicable issuance costs and expenses aggregated $4,105,020. In connection with
the public offering, the Company sold to the representative of the underwriters,
for a nominal sum, warrants to purchase from the Company 109,375 shares of
common stock. The warrants are exercisable for a period of four years commencing
February 2, 1995 at an exercise price of 107% of the initial public offering
price ($4.76), increasing to 114% of the initial public offering price on
February 2, 1996, 121% of the initial public offering price on February 2, 1997
and 128% of the initial public offering price on February 2, 1998. As of June
30, 1996 all of the warrants remain outstanding.
In connection with the 1995 Private Placement, the Company sold to the
agent for the private placement, for a nominal sum, warrants to purchase from
the Company 59,681 share of common stock. The warrants are exercisable for a
period of five years commencing September 15, 1995 at an exercise price of
$10.00. As of June 30, 1996 all of the warrants remain outstanding.
In connection with the 1995 Private Placement, warrants issued with units
totalled 874,198 which are exercisable at $7.75 per share. During the six months
ended June 30, 1996, 192,052 warrants were exercised simultaneously with the
tendering of subordinated notes. At December 31, 1995 and June 30, 1996 warrants
outstanding totalled 874,198 and 682,146 (unaudited), respectively. (See Note
H).
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 all detainees located therein were
moved by the INS 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 $6,223,000. The purchase price is payable in non-interest bearing
monthly installments of $123,000 through August 1999 beginning in the month that
the Buyer commences operations of the facility. If the INS re-awards the
contract to the Buyer, the unpaid balance is payable in monthly non-interest
bearing installments of $123,000 beginning in the first month of the re-award
term and the Company will record as income the unpaid balance. On June 13, 1996
the Company, the Buyer and the INS executed a novation agreement whereby the
Buyer became the successor-in-interest to the contract with the INS. In
addition, the Company's lease for the New Jersey facility was assigned to the
Buyer. The Company has no continuing obligation with respect to the Elizabeth,
New Jersey facility.
The receivable from sale of the equipment and leasehold improvements
reflected in the balance sheet at December 31, 1995, and June 30, 1996
represented the present value of the consideration to be received through August
1999, of $3,207,882 and $2,769,882 (unaudited), respectively ($4,428,000
discounted using an interest rate of 11.5% per annum) reduced by the estimated
closing costs (legal and consulting) and the facility's estimated carrying costs
through July 1, 1996. The statement of operations for 1995 reflects a provision,
"New Jersey facility closure costs," of $3,909,700 which represents $416,201
from the write-off of deferred development costs related to the facility and
$3,493,499 resulting from the adjustment of the carrying
F-15
<PAGE> 54
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the related assets discussed above. During the six months ended June
30, 1996 the reserve for carrying and closing costs was reduced by approximately
$300,000 of payments for rent and other carrying and closing costs.
In connection with the filing of a Registration Statement with the
Securities and Exchange Commission, the Company has revised the present value of
the $6,223,000 purchase price of sale of equipment and leasehold improvements
described above, reducing to zero the present value of the $1,800,000 portion of
the purchase price, or $1,300,000, contingent upon re-award of the related
management contract and increased the provision for New Jersey facility closure
costs in a like amount for the year ended December 31, 1995. The effect of the
adjustments on the accompanying financial statements at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- ------------
<S> <C> <C>
Net loss............................................................ $ (959,391) $ (1,739,391)
Net loss per common share........................................... (0.21) (0.38)
Receivable from sale of equipment and leasehold improvements........ 4,507,882 3,207,882
Deferred income taxes............................................... 600,000 1,120,000
Retained earnings (deficit)......................................... 473,492 (306,508)
</TABLE>
2. Legal Matters
In May 1993, former employee of the Company filed suit in the United States
District Court, Southern District of New York claiming that he was intentionally
assaulted by employees of the Company. This employee alleges six causes of
action, claiming, among other things, that he was deprived of due process and
equal protection and is claiming $5,000,000 in damages on each of his six causes
of action. The Company believes such claims to be without merit and is
vigorously defending this action. The ultimate outcome of the lawsuit cannot be
determined at this time, and accordingly, no adjustment has been made to the
consolidated financial statements.
In January 1996 a lawsuit was filed with the Supreme Court of New York by a
former employee of the Company, alleging sexual harassment and discrimination,
as well as physical assault, rape and negligent screening of employees. Total
damage sought by plaintiff amount to $4,000,000 plus attorney fees. The Company
believes that such claims to be without merit and intends to vigorously defend
itself in this action. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made in the consolidated
financial statements.
On March 6, 1996 former inmates at one of the Company's facilities filed an
action in the Supreme Court of the State of New York, County of Bronx.
Plaintiffs claim on behalf of themselves and others similarly situated, personal
injuries and property damage purportedly caused by negligence and intentional
acts of the Company. The lawsuit claims $500,000,000 each for compensatory and
punitive damages. The Company intends to vigorously defend itself in this
action. The Company has notified its insurance carrier and has requested
indemnity and defense. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made to the consolidated
financial statements.
In July 1996 a lawsuit was filed with the Superior Court for the State of
New Jersey by nine plaintiffs who were detainees at the Company's former
Elizabeth, New Jersey facility or their spouses. The detainees allege that they
were mistreated at the hands of local law enforcement authorities while they
were detainees at a facility formerly operated by the Company. No specific
damage amounts are set forth in the complaint. However, in claim forms submitted
to the Company prior to the commencement of the litigation, individual damages
of $10,000,000 per plaintiff were demanded. The action has been moved to the
United States District Court for the District of New Jersey, Newark Division.
The Company intends to vigorously defend itself in this action. The Company has
notified its insurance carrier and has requested indemnity and defense. The
ultimate outcome of the lawsuit cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
F-16
<PAGE> 55
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to claims and suits in the ordinary course of
business. Management believes that the ultimate outcome of all such proceedings
will not have a material adverse effect on the results of operations or
financial condition of the Company.
3. Contracts
Renewal of government contracts (Note B) 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.
4. Officers' Compensation
Effective February 9, 1994, the President entered into five-year employment
agreements with the Company that provides annual compensation of $189,000,
annual cost of living increases and an annual bonus of five percent of pre-tax
earnings greater than $1,000,000, not to exceed $200,000.
In January 1996, the Company entered into three-year employment agreements
with its Chief Operating Officer and Executive Vice President -- Finance, which
provide annual compensation of $115,000 and $129,000, respectively, and a bonus
equal to 3% of pre-tax profits in excess of $1,000,000, not to exceed $50,000
and $75,000, respectively. Pursuant to the terms of the employment agreement,
each executive was granted an option to purchase 100,000 shares of common stock.
The option was granted at the fair market value of the stock on the date of
grant which was $8.875 per share. The options are exercisable as follows: one-
third on the date of grant, one-third one year from the date of grant and the
remaining one-third two years from the date of grant.
Compensation to such officers aggregated $265,000, $280,000, $294,000,
$147,000 (unaudited), and $234,000 (unaudited) for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996,
respectively.
5. Other
Approximately 99.7%, 97.5% and 96.6% and of the Company's revenues for the
years ended December 31, 1993, 1994 and 1995, respectively, relate to amounts
earned from Federal, state and local contracts. The Company's contracts with
government agencies where revenues exceeded 10% of the Company's total
consolidated revenues were with the U. S. Bureau of Prisons, INS, the New York
State Department of Corrections, and the Texas Department of Criminal Justice.
6. Phoenix, Arizona Facility -- Renovation Costs to Complete
At December 31, 1995 and June 30, 1996, the Company has incurred
approximately $604,000 and $4,457,000 (unaudited) for the renovation of the
Phoenix, Arizona facility. Total anticipated construction costs upon completion
approximate $4,516,000. In addition, the Company has restricted cash of $750,000
and $233,761, (unaudited) as of December 31, 1995 and June 30, 1996,
respectively, for final payments of the renovation costs of this facility.
7. Fiduciary Funds
The Company acts as a fiduciary disbursing agent on behalf of a
governmental entity whereby certain governmental entity funds are maintained in
a separate bank account. These funds are for payments to the
F-17
<PAGE> 56
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
general contractor which is constructing a government owned facility. The
Company is responsible for managing the construction process. Once completed,
operations at these facilities will be under management by the Company. At June
30, 1996, approximately $1,126,000 of such funds were being held in the separate
bank account which was disbursed to the general contractor in July 1996. 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.
8. Construction Commitments
In connection with certain facility contracts the Company has commitments
to construct and develop facilities totalling approximately $3,800,000. In
addition, the Company intends to enter into a facility contract pursuant to
which the Company is required to construct and develop a facility for a total
cost of approximately $15,000,000.
NOTE M -- STOCK OPTIONS
In October 1993, the Company adopted a stock option plan (the "Stock Option
Plan"). This plan provides for the granting of both: (i) incentive stock options
to employees and/or officers of the Company and (ii) nonqualified options to
consultants, directors, employees or officers of the Company. The total number
of shares which may be sold pursuant to options granted under the stock option
plan is 500,000. The Company, in June 1994, adopted a Non-employee Directors
Stock Option Plan, which provides for the grant of nonqualified options to
purchase up to 196,875 shares of the Company's common stock.
Options granted under both 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 the Stock Option Plan will expire not more
than five years from the date of grant.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
NON-EMPLOYEE
STOCK DIRECTORS STOCK NON-PLAN
OPTION PLAN OPTION PLAN OPTIONS
----------- --------------- --------
<S> <C> <C> <C>
Balance at January 1, 1994.......................... -- -- --
Granted........................................... 225,313 65,000 --
----------- --------------- --------
Outstanding at December 31, 1994.................... 225,313 65,000 --
Granted........................................... 54,375 25,000 --
Exercised......................................... (7,000) -- --
----------- --------------- --------
Outstanding at December 31, 1995.................... 272,688 90,000 --
Granted........................................... 46,200 30,000 215,000
Cancelled......................................... (33,750) (16,562) --
Exercised......................................... (41,563) (200) --
----------- --------------- --------
Outstanding at June 30, 1996 (unaudited)............ 243,575 103,238 215,000
========= =========== =======
</TABLE>
<TABLE>
<S> <C> <C>
Option prices per share
Granted................................................ $4.76-$20.63 $7.05-$18.75
Exercised.............................................. $4.76
</TABLE>
At December 31, 1995 and June 30, 1996, stock options for 225,314 shares
($4.76-$8.00 a share) and 195,944 shares ($4.76-$11 a share) were exercisable
under the stock option plans, respectively. At June 30, 1996, non-plan stock
options for 66,666 shares ($8.875 a share) were exercisable.
F-18
<PAGE> 57
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SUBSEQUENT EVENTS
1. Proposed Public Offering of Securities
The Company is in the process of filing a registration statement for a
proposed sale of 2,450,000 shares of common stock. Of the 2,450,000 shares of
common stock offered, 2,000,000 shares are being sold by the Company and 450,000
shares by certain stockholders. The Company will not receive any proceeds from
the shares being sold by stockholders. The Company intends to retire bank
indebtedness (Note H) with a portion of the net proceeds of the proposed
offering.
2. New Jersey Facility
On June 13, 1996 the INS agreed to transfer the facility lease and
management contract to a unrelated Company. (See Note L-1.)
3. On August 1, 1996 the Company's Certificate of Incorporation was amended
which changed the name of the Company to Correctional Services Corporation and
increased the number of authorized shares of Common Stock from 10,000,000 to
30,000,000 shares.
F-19
<PAGE> 58
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Safe Harbor Provisions of the Private
Securities Litigation Reform Act.... 6
Risk Factors.......................... 6
Capitalization........................ 10
Use of Proceeds....................... 10
Dividends............................. 11
Price Range of Common Stock........... 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 18
Management............................ 26
Certain Transactions.................. 30
Principal and Selling Stockholders.... 32
Description of Securities............. 33
Underwriting.......................... 35
Legal Matters......................... 36
Experts............................... 36
Available Information................. 36
Additional Information................ 36
Consolidated Financial Statements..... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,450,000 SHARES
CORRECTIONAL SERVICES CORPORATION (LOGO)
CORRECTIONAL
SERVICES
CORPORATION
COMMON STOCK
--------------------
PROSPECTUS
--------------------
STEPHENS INC.
J.C. BRADFORD & CO.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1994, Registrant issued an aggregate of 3,281,248 shares of its
Common Stock to the stockholders of seven affiliated corporations in exchange
for all outstanding shares of capital stock of such corporations. The name and
number of shares of Registrant's Common Stock issued to each of such
stockholders are as follows:
<TABLE>
<CAPTION>
STOCKHOLDER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Morris Horn.......................................................... 984,375
James F. Slattery.................................................... 918,750
Aaron Speisman....................................................... 623,437
David Fuld........................................................... 328,125
Steve Orlow.......................................................... 98,437
The Jennifer Anna Speisman 1992 Trust................................ 98,437
The Joshua Israel Speisman 1992 Trust................................ 98,437
Joel Shafran......................................................... 65,625
Bernard Shafran...................................................... 65,625
----------------
Total...................................................... 3,281,248
=============
</TABLE>
In September 1995, Registrant completed private placements of its
securities, issuing (i) to five accredited investors an aggregate of 496,807
shares of its Common Stock at $7.75 per share (ii) to approximately 100
accredited investors an aggregate of $5,676,600 of its 10% subordinated
promissory notes due July 1, 1998 combined with warrants to purchase an
aggregate of 874,198 shares of its Common Stock at $7.75 per share, and (iii) to
Janney Montgomery Scott, Inc. (the placement agent for the private placements) a
warrant to purchase 59,681 shares of its Common Stock at $10.00 per share.
In November 1993, July 1994, and December 1995, Registrant executed
promissory notes and other documents to evidence a $4 million credit facility
with Extebank, N.A., a $5 million combined term loan from and credit facility
with Marine Midland Bank, N.A., and an $11 million combined term loan from and
credit facility with NationsBank, N.A.
The foregoing transactions of Registrant were exempt from registration
under the Securities Act of 1933, as amended, under Section 4(2) thereof and/or
Regulation D promulgated thereunder, and all equity securities issued in
connection therewith were legended to reflect their restricted status.
The number of shares of Common Stock described in the foregoing
transactions have been adjusted to give effect to Registrant's 5% stock dividend
or 5 for 4 stock split.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<C> <C> <S>
1 -- Form of Revised Underwriting Agreement.
3.1.1 -- Copy of Certificate of Amendment to Registrant's Certificate of
Incorporation.
3.1.2 -- Copy of Certificate of Correction to Registrant's Certificate of
Incorporation.
3.1.3 -- Copy of Certificate of Correction to Registrant's Certificate of Amendment
to Registrant's Certificate of Incorporation.
5 -- Opinion by Epstein Becker & Green, P.C., as to legality.
10.26.1 -- Second Amendment to Loan Agreement with NationsBank, N.A. (South).
10.46 -- Management Agreement between the Company and Colorado County, Texas for
operation of the Eagle Lake, Texas juvenile boot camp.
</TABLE>
II-1
<PAGE> 60
<TABLE>
<C> <C> <S>
10.47 -- Letter dated August 6, 1996 from the Arizona Department of Corrections,
advising the Company of the Department's intent to award the Company the
contract for 600 privatized beds pursuant to an RFP.
11 -- Computation of Per Share Earnings.
23.1 -- Consent of Grant Thornton LLP (contained on page II-4).
23.2 -- Consent of Epstein Becker & Green, P.C. (included in Exhibit 5).
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Financial Statement Schedules:
Schedules have been omitted for the reason that they are not required or
are not applicable or because the required information is included in the
financial statements or the notes thereto.
II-2
<PAGE> 61
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this Registration Statement or amendment thereto to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sarasota,
State of Florida, on the 13th day of August, 1996.
CORRECTIONAL SERVICES CORPORATION
By: * JAMES F. SLATTERY
------------------------------------
James F. Slattery
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
* JAMES F. SLATTERY President and Director August 13, 1996
- --------------------------------------------- (Principal Executive
James F. Slattery Officer)
* AARON SPEISMAN Executive Vice President, August 13, 1996
- --------------------------------------------- Secretary and Director
Aaron Speisman
* LEE LEVINSON Chief Financial Officer August 13, 1996
- --------------------------------------------- (Principal Financial and
Lee Levinson Accounting Officer)
* RAYMOND S. EVANS Director August 13, 1996
- ---------------------------------------------
Raymond S. Evans
* SHIMMIE HORN Director August 13, 1996
- ---------------------------------------------
Shimmie Horn
* STUART M. GERSON Director August 13, 1996
- ---------------------------------------------
Stuart M. Gerson
* MELVIN T. STITH Director August 13, 1996
- ---------------------------------------------
Melvin T. Stith
* RICHARD P. STALEY Senior Vice President and August 13, 1996
- --------------------------------------------- Director
Richard P. Staley
</TABLE>
*By: /s/ IRA M. COTLER
-------------------------------
Ira M. Cotler
Attorney-in-fact
II-3
<PAGE> 62
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 1, 1996 (except for Notes L-1 and
L-2, as to which the dates are August 13, 1996 and March 6, 1996, respectively),
accompanying the financial statements of Correctional Services Corporation and
Subsidiaries (formally Esmor Correctional Services, Inc.) contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
New York, New York
August 15, 1996
II-4
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE NO.
----------
<C> <C> <S> <C>
1 -- Form of Revised Underwriting Agreement.........................
3.1.1 -- Copy of Certificate of Amendment to Registrant's Certificate of
Incorporation..................................................
3.1.2 -- Copy of Certificate of Correction to Registrant's Certificate
of Incorporation...............................................
3.1.3 -- Copy of Certificate of Correction to Registrant's Certificate
of Amendment to Registrant's Certificate of Incorporation......
5 -- Opinion by Epstein Becker & Green, P.C., as to legality........
10.26.1 -- Second Amendment to Loan Agreement with NationsBank, N.A.
(South)........................................................
10.46 -- Management Agreement between the Company and Colorado County,
Texas for operation of the Eagle Lake, Texas juvenile boot
camp...........................................................
10.47 -- Letter dated August 6, 1996 from the Arizona Department of
Corrections, advising the Company of the Department's intent to
award the Company the contract for 600 privatized beds pursuant
to an RFP......................................................
11 -- Computation of Per Share Earnings..............................
23.1 -- Consent of Grant Thornton LLP (contained on page II-4).........
23.2 -- Consent of Epstein Becker & Green, P.C. (included in Exhibit
5).............................................................
27 -- Financial Data Schedule (for SEC use only).....................
</TABLE>
<PAGE> 1
CORRECTIONAL SERVICES CORPORATION
2,450,000 SHARES*
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
, 1996
STEPHENS INC.
J.C. BRADFORD & CO.
As Representatives of the several
Underwriters named in Schedule I hereto.
c/o Stephens Inc.
111 Center Street
Little Rock, Arkansas 72201
Gentlemen:
Correctional Services Corporation, a Delaware corporation (the "Company"),
together with the Company's stockholders named on the signature page hereof
(collectively, the "Stockholders") confirm their agreement with the several
underwriters (the "Underwriters"), for whom you are acting as representatives
(the "Representatives"), for the Company to issue and sell and the Stockholders
to sell 2,000,000 shares and 450,000 shares, respectively (the "Underwritten
Shares"), of the Company's common stock, par value $.01 per share ("Common
Stock") to the Underwriters. The Company's common stock is more fully described
in the Registration Statement and the Prospectus hereinafter mentioned.
For the sole purpose of covering over-allotments in connection with the
sale of the Underwritten Shares, the Company confirms its agreement to grant to
the Underwriters the option (the "Option") described in Section 2 hereof to
purchase all or any part of 367,500 shares of Common Stock (the "Option
Shares"). The Underwritten Shares and the Option Shares to be purchased pursuant
to this Underwriting Agreement (this "Agreement") are herein called the "Shares"
and the proposed offering of the Shares by the Underwriters is hereinafter
referred to as the "Public Offering."
The Company has filed with the Securities and Exchange Commission (the
"Commission"), pursuant to the Securities Act of 1933, as amended (the "Act"),
and published rules and regulations adopted by the Commission under the Act (the
"Rules"), a registration statement on Form S-1 ("Form S-1") (File No. 333-6457),
including a Preliminary Prospectus, relating to the Shares, and such amendments
to such registration statement as may have been filed with the Commission to the
date of this Agreement. The Company will next file with the Commission one of
the following: (A) prior to effectiveness of such registration statement, a
further amendment to such registration statement, including the form of final
prospectus, (B) after effectiveness of such registration statement, a Term Sheet
(if required by Rule 434) relating to the Shares that shall identify the
Preliminary Prospectus that it supplements, and/or an Integrated Prospectus, in
either case in accordance with Rules 434, 430A and 424(b), (C) after
effectiveness of such registration statement (if the Company does not rely on
Rule 434), a final prospectus in accordance with Rules 430A and 424(b). The
Company has furnished to the Representatives copies of such registration
statement, each amendment to it filed by the Company with the Commission, each
Preliminary Prospectus and Integrated Prospectus filed by the Company with the
Commission. The registration statement as amended at the time it becomes or
became effective (the "Effective Date"), including financial statements and all
- ---------------
* Plus up to 367,500 additional shares of Common Stock to cover over-allotments.
<PAGE> 2
exhibits and any information deemed to be included by Rule 430A, is called the
"Registration Statement." The term "Preliminary Prospectus" means any
Preliminary Prospectus (as referred to in Rule 430 or Rule 430A of the Rules)
included at any time as a part of the registration statement. The term
"Integrated Prospectus" means a prospectus relating to the Shares that is first
filed pursuant to Rules 434(c)(2) and 424(b). The term "Prospectus" means (1) if
the Company relies on Rule 434 in connection with the offering of the Shares,
the Term Sheet relating to the Shares that is first filed pursuant to Rule
424(b) (7) after the date hereof; (2) if the Company does not rely on Rule 434,
the prospectus relating to the Shares that is first filed pursuant to Rule
424(b) after the date hereof; or (3) if the Company does not so rely on Rule 434
and no filing pursuant to Rule 424(b) is required, the form of final prospectus
relating to the Shares included in the Registration Statement at the Effective
Date. The term "Term Sheet" means any abbreviated term sheet that satisfies the
requirements of Rule 434.
Any reference herein to the Registration Statement, any Preliminary
Prospectus, any Integrated Prospectus or the Prospectus shall be deemed to refer
to and include any documents incorporated by reference therein on or before the
Effective Date or the date of such Preliminary Prospectus, Integrated Prospectus
or the Prospectus, as the case may be.
As the Representatives, you have advised the Company and the Stockholders
that (a) you are authorized to enter into this Agreement on behalf of the
several Underwriters and (b) the Underwriters are willing, acting severally and
not jointly, to purchase the amounts of the Underwritten Shares set forth
opposite their respective names in Schedule I hereto, plus their pro rata
portion of the Option Shares if you elect to exercise the over-allotment Option
in whole or in part for the accounts of the several Underwriters.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the Company,
the Stockholders and the Underwriters hereby agree as follows:
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
STOCKHOLDERS
(a) The Company represents and warrants to, and agrees with, each
Underwriter as follows:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own its properties and conduct its
business as described in any Integrated Prospectus and the Prospectus. Each
significant subsidiary (as defined by the Act) of the Company (each a
"Subsidiary" and collectively, the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation, in good standing
under the laws of the jurisdiction of its organization, with full corporate
power and authority to own or lease its properties, and conduct its
business. The Company and the Subsidiaries are duly qualified to transact
business in all jurisdictions in which the conduct of its business or the
ownership or lease of its properties requires such qualifications and in
which the failure to so qualify would have a Material Adverse Effect. The
Company owns all of the outstanding capital stock of its subsidiaries, free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest.
(ii) The outstanding shares of Common Stock of the Company have been
duly and validly authorized and issued and are fully paid and
non-assessable; the Shares are duly and validly authorized, and, if not now
issued, when issued and paid for as contemplated herein, will be fully paid
and non-assessable. There are no preemptive or other restrictive rights to
subscribe for or to purchase, or any restriction upon the voting or
transfer of any class of the Company's Common Stock pursuant to the
Company's Certificate of Incorporation, Bylaws, or other governing
documents or any agreement or other instrument to which the Company or any
of its Subsidiaries is a party or by which any of them may be bound, other
than as provided herein. Neither the filing of the Registration Statement
nor the offering of the Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of any class of the Company's
securities, except that the Company has agreed to register no sooner than
35 days after the Effective Date) the shares of Common Stock underlying
warrants issued to Janney Montgomery Scott Inc. and its affiliates in
connection with the Company's initial public offering and September 1995
private placement.
2
<PAGE> 3
Notice with respect to the Shares has been provided to the Nasdaq Stock
Market, Inc. on a Nasdaq National Market Notification Form for Listing of
Additional Shares.
(iii) The Shares conform with the statements concerning them in any
Integrated Prospectus and the Prospectus. As of the Closing Date (as
defined below) and any Option Closing Date (as defined below), if
applicable, the Company will have the authorized capitalization set forth
under the captions "Capitalization" and "Description of Securities" in any
Integrated Prospectus and the Prospectus. No further corporate approval or
authority on behalf of the Company will be required for the issuance and
sale of the Shares to be sold by the Company as contemplated herein. The
description of the Company's stock option, and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in any Preliminary Prospectus, Integrated Prospectus
or the Prospectus, and any amendments and supplement thereto, accurately
and fairly presents in all material respects the information required to be
shown with respect to such plans, arrangements, options and rights.
(iv) Any Preliminary Prospectus, Integrated Prospectus, the Prospectus
and the Registration Statement have been carefully prepared by the Company
in conformity, in all material respects, with the requirements of the Act
and the Rules, including Form S-1. The Company meets the requirements of,
and is entitled to use, Form S-1 for the Public Offering. The Registration
Statement has been filed with the Commission pursuant to the Act.
(v) Neither the Commission nor any other agency, body, authority,
court or arbitrator of competent jurisdiction has, by order or otherwise,
prohibited or suspended the use of any Preliminary Prospectus, Integrated
Prospectus or the Prospectus relating to the proposed offering of the
Shares or instituted proceedings for that purpose. The Registration
Statement, the Prospectus, any Integrated Prospectus and any Preliminary
Prospectus and any amendments or supplements thereto at the time they
became or become effective or were filed or are filed with the Commission
contained or will contain all statements which are required to be stated
therein by, and in all material respects conformed or will conform to the
requirements of, the Act and the Rules. Neither the Registration Statement,
Integrated Prospectus nor any Preliminary Prospectus nor any amendment
thereto, and neither the Prospectus nor any supplement thereto, as of its
date contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that no representation or warranty
is made as to information contained in or omitted from the Registration
Statement or any Preliminary Prospectus or the Prospectus, or any amendment
or supplement thereto, in reliance upon, and in conformity with, written
information furnished to the Company by, or on behalf of any Underwriter
through, the Representatives expressly for use in the preparation thereof
as hereinafter set forth in Section 13.
(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the consolidated financial position
and the results of operations and cash flows of the Company and the
Subsidiaries, at the indicated dates and for the indicated periods, as the
case may be. Such financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP"), consistently
applied throughout the periods involved, and all adjustments necessary for
a fair presentation of results for such periods have been made. The Summary
Consolidated Financial Data and the Selected Consolidated Financial Data
included in the Prospectus and any Integrated Prospectus present fairly in
accordance with GAAP the information shown therein and have been compiled
on a basis consistent with that of the audited and unaudited financial
statements from which they were derived. The Company and its Subsidiaries
have maintained and will maintain and keep accurate books and records
reflecting their assets and maintain internal accounting controls which
provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded
as necessary to permit the preparation of the Company's consolidated
financial statements and to maintain accountability for the assets of the
Company, (C) access to the assets of the Company and the Subsidiaries is
permitted only in accordance with management's authorization, and (D) the
recorded
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accounts of the assets of the Company and the Subsidiaries are compared
with existing assets at reasonable intervals.
(vii) Except as is disclosed in the Prospectus or any Integrated
Prospectus, there is no action or proceeding pending or, to the knowledge
of the Company, threatened against the Company, any of its Subsidiaries or
any of their respective officers or any of their properties, assets or
rights before any court or administrative or governmental agency or other
body which might reasonably be expected to (A) result in any material
adverse change in the condition (financial or otherwise), or in the
earnings, business, affairs, properties, business prospects or results of
operations of the Company and its Subsidiaries taken as a whole ("Material
Adverse Change" or "Material Adverse Effect," as the case may be), whether
or not arising in the ordinary course of business, (B) affect the
performance of this Agreement or the consummation of the transactions
herein contemplated, except as disclosed in the Prospectus or any
Integrated Prospectus, and for which the Company maintains a reserve in an
amount which it believes is adequate to cover potential liabilities, or (C)
be required to be disclosed in the Registration Statement.
(viii) The Company and each of its Subsidiaries is not in violation of
any law, ordinance, governmental rule or regulation or court decree to
which they are subject which violation might reasonably be expected to have
a Material Adverse Effect.
(ix) The Company and its Subsidiaries have good and marketable title
to all of the properties and assets reflected in the Prospectus and any
Integrated Prospectus as being owned by them, subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except those securing
indebtedness reflected in the Prospectus and any Integrated Prospectus or
which do not materially affect the present or proposed use of such
properties or assets. The Company and its Subsidiaries occupy their leased
properties under valid, subsisting and binding leases with only such
exceptions as in the aggregate are not material and do not interfere in any
material respect with the conduct of the business of the Company and its
Subsidiaries. There exists no default by the Company or, to its knowledge,
any other party under the provisions of any lease, contract or other
obligation to which the Company is a party which could reasonably be
expected to result in a Material Adverse Change.
(x) The Company and its Subsidiaries have filed all Federal, State and
other tax returns and reports which have been required to be filed and are
not the subject of valid extensions of time to file and have paid all taxes
indicated by said returns and all assessments received to the extent that
such taxes have become due and there is no tax deficiency that has been or,
to the Company's knowledge, might be asserted against the Company or any of
its Subsidiaries that might reasonably be expected to have a Material
Adverse Effect (as defined herein). All material tax liabilities are
appropriately provided for in accordance with GAAP on the books of the
Company and its Subsidiaries.
(xi) Since the respective dates as of which information is given in
the Registration Statement, any Integrated Prospectus and the Prospectus,
as they may be amended or supplemented, (A) there has not been any Material
Adverse Change nor to the knowledge of the Company is any such change
threatened, (B) there has not been any transaction entered into by the
Company or its Subsidiaries that is material to the earnings, business,
affairs, properties, business prospects or operations of the Company or its
Subsidiaries, other than transactions in the ordinary course of business
and changes and transactions contemplated by the Registration Statement,
any Integrated Prospectus and the Prospectus, as they may be amended or
supplemented, (C) there has not been any material change in the capital
stock, long term debt or material liabilities of the Company or its
Subsidiaries. Neither the Company nor any Subsidiary has any material
contingent obligations or liabilities which are not disclosed in the
Registration Statement, any Integrated Prospectus and the Prospectus, and
(D) there has not been any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company or any of its
Subsidiaries.
(xii) The filing of the Registration Statement, any Integrated
Prospectus and related Prospectus and the execution and delivery of this
Agreement have been duly authorized by the Board of Directors of the
Company; this Agreement constitutes a valid and legally binding obligation
of the Company
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<PAGE> 5
enforceable against the Company in accordance with its terms except as the
indemnification and contribution provisions hereunder may be limited by
applicable law and the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium and other laws affecting creditors'
rights generally and by general principles of equity. The Company is not in
breach or violation of or default under any indenture, mortgage, deed of
trust, lease, contract, note or other agreement or instrument to which it
is a party or by which it or any of its properties is bound and which
breach, violation or default might reasonably be expected to have a
Material Adverse Effect. The consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not result in a
breach or violation of any of the material terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease,
contract, note or other agreement or instrument to which the Company or any
Subsidiary is a party, or of the Company's or any Subsidiary's Certificate
of Incorporation or Bylaws or any law, decree, order, rule, writ,
injunction or regulation applicable to the Company or any Subsidiary of a
court or of any regulatory body or administrative agency or other
governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and performance of its obligations
hereunder (except such additional steps as may be required under the Act
and as may be necessary to qualify the Shares for public offering by the
Underwriters under state securities or Blue Sky laws) has been obtained or
made and is in full force and effect.
(xiv) The Company and each Subsidiary hold all material licenses,
authorizations, charters, certificates and permits from governmental
authorities which are necessary to the conduct of their respective
businesses and neither the Company nor any Subsidiary has received notice
of any proceeding relating to the revocation or modification of any of such
licenses, authorizations, charters, certificates or permits. The Company
and its Subsidiaries own or otherwise possess rights to use the patents,
patent rights, licenses, inventions, copyrights, trademarks, service marks
and trade names presently employed by them in connection with the
businesses now operated by them, and neither the Company nor any of its
Subsidiaries has any knowledge that it has infringed or received any notice
of infringements of or conflict with asserted rights of others with respect
to any of the foregoing.
(xv) Grant Thornton, L.L.P, independent auditors, who have certified
certain of the financial statements filed with the Commission and included
as part of the Registration Statement and Prospectus, are independent
public accountants within the meaning of the Act, the Rules and Regulation
S-X of the Commission and Rule 101 of the Code of Professional Ethics of
the American Institute of Certified Public Accountants.
(xvi) There are no agreements, contracts or other documents of a
character required to be described in the Registration Statement, any
Integrated Prospectus or the Prospectus or required by Form S-1 to be filed
as exhibits to the Registration Statement or incorporated by reference in
the Registration Statement which are not described, filed or incorporated
as required.
(xvii) No labor dispute exists or to the Company's knowledge is
imminent with the Company's or any Subsidiary's employees which could
reasonably be expected to result in a Material Adverse Effect and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers or distributors that might
reasonably be expected to result in any Material Adverse Effect to the
Company or its Subsidiaries. No collective bargaining agreement exists with
any of the Company's employees and, to the Company's knowledge, no such
agreement is imminent.
(xviii) Except as contemplated by Section 2 hereof and as disclosed in
any Integrated Prospectus or in the Prospectus and permitted by the Rules,
the Company has not (itself or through any person) taken and will not take,
directly or indirectly, any action designed to or which might reasonably be
expected to, cause or result in a violation of Section 5 of the Act or Rule
10b-6 under the Exchange Act ("Rule 10b-6") or in stabilization or
manipulation of the price of the Company's Common Stock.
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<PAGE> 6
(xix) Without limiting the generality of any of the foregoing
representations and warranties, none of the operations of the Company or
its Subsidiaries is in violation of any environmental law or regulation or
any permit relating thereto which violation might reasonably be expected to
have a Material Adverse Effect; and neither the Company nor any of its
Subsidiaries is aware that it is under investigation or under review by any
governmental agency with respect to compliance therewith or with respect to
the generation, use, treatment, storage or release of hazardous material.
Neither the Company nor any of its Subsidiaries have any liability or, to
the Company's knowledge, contingent or potential liability in connection
with the past generation, use, treatment, storage, disposal or release of
any hazardous material. To the Company's knowledge there is no hazardous
material that may reasonably be expected to pose any material risk to
safety, health, or the environment, on, under or about any property owned,
leased or operated by the Company or any of its Subsidiaries or any
property adjacent to any such property, and there has heretofore been no
release of any hazardous material on, under or about such property, or any
such adjacent property. None of the present or past property of the Company
or any of its Subsidiaries is listed or, to the knowledge of the Company,
proposed for listing on the National Priorities List pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA") or on the Comprehensive Environmental Response
Compensation Liability Information System List ("CERCLIS") or any similar
state list of sites requiring remedial action. Neither the Company nor any
of its Subsidiaries is subject to any Environmental Property Transfer Act,
or to the extent that any such statute is applicable to any property, the
Company and its Subsidiaries have fully complied with their obligations
under such statute(s), and neither has any outstanding obligations or
liabilities under any Environmental Property Transfer Act.
(xx) Except as disclosed in the Registration Statement, the Company
and its Subsidiaries maintain insurance of the types and in the amounts
generally deemed adequate for their businesses, including, but not limited
to, insurance covering liability and real and personal property owned or
leased by the Company against theft, damage, destruction, acts of vandalism
and all other risks customarily insured against, all of which insurance is
in full force and effect.
(xxi) Neither the Company nor any Subsidiary has at any time during
the last five years (a) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation
of law, or (b) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(xxii) Each officer and director of the Company and each Stockholder
of the Company has agreed that such person will not, for a period of 180
days (30 days with respect to David Fuld) after the effective date of the
Registration Statement offer to sell, contract to sell, sell short, or
otherwise sell or dispose of any shares of Common Stock of the Company, or
any securities convertible into or exchangeable for shares of the Common
Stock owned directly by such person or with respect to which such person
has the power of disposition otherwise than hereunder or with the prior
written consent of Stephens Inc., (but such persons shall be entitled to
exercise options and warrants absent sale of the underlying shares within
such restricted period) in accordance with a lock-up agreement to be
executed by such person, a form of which is attached hereto as Exhibit "A"
and incorporated by reference herein (the "Lock-Up Agreement").
(b) Any certificate signed by any officer of the Company or by any
Stockholder, as the case may be, and delivered to you or counsel for the
Underwriters shall be deemed a representation and warrants made solely by the
Company or such Stockholder, as the case may be to the Underwriters as to the
matters covered thereby.
(c) Each Stockholder represents and warrants to, and agrees with each
Underwriter as follows:
(i) On the Effective Date, the Stockholder shall be the lawful owner
of the number of Shares to be sold by him and has, or at such time or times
as required will have good and marketable title to all such Shares, free of
all restrictions on transfer (other than those imposed by the Act, the
Company's Certificate of Incorporation and Bylaws and the securities or
Blue Sky laws of certain jurisdictions) liens, encumbrances, security
interests and claims whatsoever;
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<PAGE> 7
(ii) The Stockholder has full legal right, power and authority, and
any approvals required by law and any agreement or instrument to which the
Stockholder is a party, to enter into this Agreement and the Power of
Attorney and Custody Agreement, and this Agreement and the Power of
Attorney and Custody Agreement have been fully executed and delivered by or
on behalf of the Stockholder;
(iii) Upon delivery of payment for the Shares to be sold by the
Stockholder pursuant to this Agreement, good and marketable title to such
Shares will pass, free of all restrictions on transfer (other than those
imposed by the Act, the Company's Certificate of Incorporation and the
securities or Blue Sky laws of certain jurisdictions) liens, encumbrances,
security interests and claims whatsoever, to the Underwriters;
(iv) The Stockholder has duly executed and delivered a power of
attorney and custody agreement , a form of which is attached hereto as
Exhibit "B" and included herein (the "Power of Attorney and Custody
Agreement"), appointing James F. Slattery and Ira M. Cotler as
attorneys-in-fact (collectively the "Attorneys" and individually the
"Attorney"), and as custodians (each a "Custodian"). The Power of Attorney
and Custody Agreement constitutes a valid and binding agreement of such
Stockholder, enforceable against such Stockholder in accordance with its
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
and the Stockholder's Attorney, acting alone, is authorized to execute and
deliver this Agreement and the certificate referred to in Section 6(l)
hereof, on behalf of such Stockholder to determine the purchase price to be
paid by the several Underwriters to such Stockholder as provided in Section
2 hereof, to authorize the delivery of the Shares to be sold by such
Stockholder (the "Stockholder Shares") under this Agreement and to duly
endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto,
to accept payment therefor, and otherwise to act on behalf of such
Stockholder in connection with this Agreement;
(v) All authorizations, approvals, consents and orders necessary for
the execution and delivery by such Stockholder of the Power of Attorney and
Custody Agreement, the execution and delivery by or on behalf of such
Stockholder of this Agreement and the sale and delivery of the Stockholder
Shares under this Agreement (other than, at the time of the execution
hereof, the issuance of the order of the Commission declaring the
Registration Statement effective (if the Registration Statement has not yet
been declared effective by the Commission), and such authorizations,
approvals or consents as may be necessary under state or other securities
or Blue Sky Laws) have been obtained and are in full force and effect; and
such Stockholder has full legal right, power and authority to enter into
and perform its obligations under the Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold
by such Stockholder under this Agreement.
(vi) Such Stockholder will not for a period of 180 days (30 days with
respect to David Fuld) after the effective date of the Registration
Statement, offer to sell, contract to sell or otherwise sell or dispose of
any shares of Common Stock, any options or warrants to purchase any shares
of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock, owned directly by such Stockholder or with respect
to which such Stockholder has the power of disposition, otherwise than
hereunder or with the prior written consent of Stephens Inc. (but such
Stockholder shall be entitled to exercise options and warrants). Such
Stockholder agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of shares of Common
Stock held by such Stockholder except in compliance with the foregoing
restrictions.
(vii) Certificates in negotiable form for all Shares to be sold by
such Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Stockholder, have been place in
custody with the Custodian for the purpose of effecting delivery hereunder;
(viii) This Agreement has been duly authorized by each Stockholder
that is not a natural person and has been duly executed and delivered by or
on behalf of such Stockholder and is a valid and binding agreement of such
Stockholder, enforceable against such Stockholder in accordance with its
terms, except as the indemnification and contribution provisions hereunder
may be limited by applicable law and
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except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the transactions herein contemplated will
not result in a breach of or default under any material bond, debenture,
note or other evidence of indebtedness, or any material contract,
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which such Stockholder is a party or by which
such Stockholder or any Stockholder Shares hereunder may be bound or, to
the best of such Stockholder's knowledge, result in any violation of any
law, order, rule, regulation, writ, injunction or decree of any court or
governmental agency or body;
(ix) The Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Shares;
(x) The Stockholder has reviewed the Prospectus regarding all
information furnished by or on behalf of such Stockholder by the Company
relating to such Stockholder and the Stockholder Shares that is contained
in the representations and warranties of such Stockholder in such
Stockholder's Power of Attorney and Custody Agreement or set forth in the
Registration Statement and any Preliminary Prospectus, Integrated
Prospectus, or the Prospectus and any amendments or supplements thereto is,
and on the Closing Date and on any later date on which Option Shares are to
be purchased as the case may be, will be, true, correct and complete, and
does not, and on the Closing Date and on any later date on which Option
Shares are to be purchased, as the case may be, will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make such statements not misleading;
(xi) The Stockholder does not have, or has waived prior to the date
hereof, any preemptive right, co-sale right or right of first refusal or
other similar right to purchase any of the Shares that are to be sold by
the Company or any of the other Stockholder to the Underwriters pursuant to
this Agreement; and such Stockholder does not own any warrants, options or
similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities
from the Company, other than those described in the Registration Statement
and any Preliminary Prospectus, Integrated Prospectus, or the Prospectus
and any amendments or supplements thereto;
(xii) The Stockholder has not taken, nor will he take, directly or
indirectly, any action designed to, or which might reasonably be expected
to, cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares
owned by him pursuant to the distribution contemplated by this Agreement;
(xiii) The Stockholder will pay or cause to be paid all transfer
taxes, if any, with respect to the sale hereunder of the Shares to be sold
by him;
2. PURCHASE, SALE AND DELIVERY OF THE UNDERWRITTEN SHARES. On the basis of
the representations, warranties and covenants herein contained, and subject to
the terms and conditions herein set forth, the Company and the Stockholders
agree to sell each Underwriter, severally and not jointly, and each Underwriter
agrees, severally and not jointly, to purchase, at a price of $ per
share, the number of the Underwritten Shares set forth on Schedule I attached
hereto, subject to adjustment in accordance with Section 10 hereof.
Payment for the Underwritten Shares shall be made by certified or bank
cashier's checks in clearing house funds (which will be next day funds) or, upon
mutual agreement of the parties, by wire transfer of U.S. Funds to a designated
account of the Company and the Stockholders, drawn to the order of the Company
as applicable, against delivery of certificates for the Shares to the
Representatives for the accounts of the several Underwriters. Delivery of
certificates shall be to the Representatives c/o Stephens Inc. ("Stephens"), 111
Center Street, Little Rock, Arkansas 72201, or at such other address as Stephens
may designate in writing. Payment will be made at the offices of Stephens, or at
such other place as shall be agreed upon by Stephens and the Company, at
approximately 9:00 a.m., central time, on , 1996, such time and date
being herein referred to as the "Closing Date." The certificates for the
Underwritten Shares will be delivered in such denominations and in such
registrations as Stephens requests in writing and will be made available for
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<PAGE> 9
inspection at such locations as Stephens may reasonably request at least one
full business day prior to the Closing Date.
The certificates in negotiable form for the Stockholders Shares have been
placed in custody (for delivery under this Agreement) under the Power of
Attorney and Custody Agreement. Each Stockholder agrees that the certificates
for the Stockholder Shares of such Stockholder so held in custody are subject to
the interests of the Underwriters hereunder, that the arrangements made by such
Stockholder for such custody, including the Power of Attorney and Custody
Agreement, is to that extent irrevocable and that the obligations of such
Stockholder hereunder shall not be terminated by the act of such Stockholder or
by operation of law, whether by the death or incapacity of such Stockholder or
the occurrence of any other event, except as specifically provided herein or in
the Power of Attorney and Custody Agreement. If any Stockholder should die or be
incapacitated, or if any other such event should occur, before the delivery of
the certificates for the Stockholder Shares hereunder, the Stockholder Shares to
be sold by such Stockholder shall, except as specifically provided herein or in
the Power of Attorney and Custody Agreement, be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such death,
incapacity or other event had not occurred, regardless of whether the Custodian
shall have received notice of such death or event.
In addition, on the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants the Option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The Option may be exercised in whole or in part
(from time to time), at any time upon written notice (or oral notice,
subsequently confirmed in writing) given not more than thirty (30) days
following the date of this Agreement, by Stephens, on behalf of the
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising the
Option and the names and denominations in which the Option Shares are to be
registered. Closing on the purchase of the Option Shares (the "Option Closing
Date"), if any, shall occur no later than three (3) business days following the
date upon which notice of exercise of the Option is given to the Company, and
shall take place at the offices of Stephens, or at such other place as shall be
agreed upon by Stephens and the Company. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion as the total
number of Underwritten Shares being purchased by such Underwriter bears to the
total 2,450,000 Underwritten Shares, adjusted by you in such manner as to avoid
fractional shares. The Option may be exercised only to cover over-allotments in
the sale of the Underwritten Shares by the Underwriters. Stephens, on behalf of
the Representatives of the several Underwriters, may cancel the Option at any
time prior to its expiration by giving written notice (or oral notice,
subsequently confirmed in writing) of such cancellation to the Company. To the
extent, if any, that the Option is exercised, payment for the Option Shares
shall be made at such closing by certified or bank cashier's checks in clearing
house funds (which will be next day funds) or, upon mutual agreement of the
parties, by wire transfer of U.S. Funds to a designated account of the Company,
drawn to the order of the Company. Certificates for the Option Shares shall be
delivered in the same manner and upon the same terms as the Underwritten Shares.
3. OFFERING BY THE UNDERWRITERS. It is understood that the Public Offering
of the Underwritten Shares is to be made as soon as the Representatives deem it
advisable to do so after the Registration Statement has become effective. The
Underwritten Shares are to be initially offered to the public at the public
offering price set forth in the Prospectus. The Representatives may from time to
time thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares, in accordance with an
Agreement Among Underwriters which has been entered into by you and the several
other Underwriters.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each of
the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective and will not, either before or after
effectiveness, file any amendment thereto or supplement (including
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any Term Sheet) to the Prospectus or any Integrated Prospectus (including a
prospectus filed pursuant to Rule 424(b) which differs from the Prospectus
on file at the time the Registration Statement becomes effective) or file
any documents under the Exchange Act before the earlier to occur of (A) the
35th day following the Effective Date or (B) the closing date of the
Underwriters' purchase of the Option Shares if such document would be
deemed to be incorporated by reference into the Registration Statement, the
Preliminary Prospectus, any Integrated Prospectus or the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Act or Rules.
(b) The Company will advise the Representatives promptly of any
request of the Commission or other securities regulatory agency ("Other
Securities Regulator") for amendment of the Registration Statement or for
supplement (including any Term Sheet) to the Prospectus or any Integrated
Prospectus or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or any Integrated
Prospectus or of the institution of any proceedings for that purpose, or
comparable action taken or initiated by any Other Securities Regulator, and
the Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus or any
Integrated Prospectus and to obtain as soon as possible the lifting
thereof, if issued.
(c) The Company will use its best efforts with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions (including foreign jurisdictions) as the Representatives
may reasonably designate, and will make such applications, file such
documents, and furnish such information as may be reasonably required for
that purpose; provided however, the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not so qualified or otherwise
required to file such a consent. The Company will, from time to time,
prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a
period as the Representatives may reasonably request for distribution of
the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus, Integrated Prospectus or the Prospectus as the Representatives
may reasonably request. The Company will deliver to, or upon the order of,
the Representatives, on the Effective Date and thereafter from time to time
during the period when delivery of a Prospectus is required under the Act
as many copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representatives may reasonably request. The Company
will deliver to the Representatives at or before the Closing Date, three
(3) manually signed copies of the Registration Statement and all amendments
thereto including all exhibits filed therewith (including any document
filed under the Exchange Act and deemed to be incorporated by reference
into the Registration Statement, the Preliminary Prospectus, any Integrated
Prospectus or the Prospectus) and will deliver to the Representatives such
number of copies of the Registration Statement, but without exhibits, and
of all amendments thereto, as the Representatives may reasonably request.
(e) During the time during which a Prospectus or any Integrated
Prospectus relating to the Shares is required by law to be delivered, the
Company shall comply with all requirements imposed upon it by the Act, as
now and hereafter amended, and by the Rules, as from time to time in force,
so far as is necessary to permit the continuance of sales of or dealings in
the Shares as contemplated by the provisions hereof and the Prospectus or
any Integrated Prospectus. If, during the period in which a Prospectus or
any Integrated Prospectus is required by law to be delivered, any event
shall occur as a result of which, in the judgment of the Company or in the
opinion of counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus or any Integrated Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time
the Prospectus or any Integrated Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement
the Prospectus or any Integrated Prospectus to comply with any law or to
file under the Exchange Act any document which would be deemed to be
incorporated by reference in the Prospectus or in any Integrated Prospectus
in order to comply with the Act or the Exchange Act, the
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Company promptly will notify the Representatives and, subject to the
Representatives' prior review, prepare and file with the Commission and any
appropriate Other Securities Regulator an appropriate amendment or
supplement to the Prospectus or any Integrated Prospectus (at the expense
of the Company) so that the Prospectus or any Integrated Prospectus as so
amended or supplemented will not, in light of the circumstances when it is
so delivered, be misleading, or so that the Prospectus or any Integrated
Prospectus will comply with the law.
(f) The Company will make generally available to its security holders
in the manner contemplated by Rule 158(b) under the Act, as soon as it is
practicable to do so, but in any event not later than the forty-fifth day
after the fiscal quarter first occurring one year after the Effective Date,
an earnings statement in reasonable detail, covering a period of at least
twelve consecutive months beginning after the Effective Date, which
earnings statement shall satisfy the requirements of Section 11(a) of the
Act and will advise you in writing when such statement has been so made
available.
(g) For so long as the Company is subject to the reporting
requirements of the Exchange Act, the Company will furnish to its
stockholders, as soon as practicable after the end of each respective
period, annual reports (including financial statements audited by
independent public accountants) and unaudited quarterly reports of
earnings, and, for a period of three years commencing with the Effective
Date will furnish to the Representatives (a) concurrently with furnishing
of such reports to its stockholders, statements of income of the Company
for each quarter in the form furnished to the Company's stockholders; (b)
concurrently with furnishing to its stockholders, a balance sheet of the
Company as at the end of such fiscal year, together with statements of
earnings, stockholders' equity and cash flows of the Company for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent public accountants; (c) as
soon as they are available, copies of all reports (financial or other)
mailed to stockholders; (d) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission,
the National Association of Securities Dealers, Inc. ("NASD") or any
securities exchange; (e) every press release and every material news item
or article in respect of the Company or its affairs which was released or
prepared by the Company; and (f) any additional information of a public
nature concerning the Company or its business which you may reasonably
request. During such period, if the Company shall have active subsidiaries
the foregoing financial statements shall be on a consolidated basis to the
extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for
any significant subsidiary (as defined by the Act) which is not so
consolidated.
(h) As soon as the Company is advised thereof, it will advise the
Representatives, and confirm in writing, that the Registration Statement
and any amendments shall have become effective.
(i) The Company will use the net proceeds from the sale of the Shares
in the manner set forth in the Prospectus or in any Integrated Prospectus
under the caption "Use of Proceeds."
(j) Other than as permitted by the Act and the Rules, the Company (i)
will not distribute any prospectus or offering materials in connection with
the offering and sale of the Shares and (ii) prior to the Closing Date or
the Option Closing Date will not issue any press releases or other
communications directly or indirectly and will hold no press conferences
with respect to the Company, the financial condition, results of
operations, business, properties, assets or liabilities of the Company, or
the offering of the Shares, without the Representative's prior written
consent.
(k) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for its
Common Stock and will, use its best efforts to maintain the quotation of
the Shares on The Nasdaq National Market.
(l) Except as contemplated hereby or by the Prospectus, the Company
will not for a period of one hundred twenty (120) days after the Effective
Date of the Registration Statement, offer to sell, contract to sell, sell
or otherwise dispose of any shares of the Company's Common Stock or
securities convertible into shares of the Company's Common Stock without
your prior written consent which will not be unreasonably withheld.
Notwithstanding the above, the Company may in the ordinary course of
business
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make grants pursuant to its option plans described in the Prospectus and
issue shares of Common Stock upon the exercise of options under such plans
or warrants. The Company covenants to use its best efforts to obtain the
commitment from its executive officers, directors and the Stockholders
described in the first sentence of Section 1(c)(vi) above.
(m) If at any time during a 35-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the Underwriters'
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company
will, after written notice from the Underwriters advising the Company to
the effect set forth above, forthwith prepare, consult with Stephens Inc.
concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to the Underwriters, responding
to or commenting on such rumor, publication or event.
The foregoing covenants and agreements shall apply to any successor of the
Company, including without limitation, any entity into which the Company might
convert or merge.
5. COSTS AND EXPENSES. Whether or not the Registration Statement becomes
effective, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to Underwriters copies of the Registration Statement,
Preliminary Prospectus, any Integrated Prospectus, the Prospectus, this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement,
Underwriters' Questionnaire and Power of Attorney, and the Blue Sky Survey and
any supplements thereto; the filing fees of the Commission; the filing fees
incident to securing any required review by the NASD of the terms of the sale of
the Shares; the cost of printing certificates representing the Shares; the cost
and charges of any transfer agent or registrar; and the expenses, including the
reasonable fees and disbursements of counsel for the Underwriters, incurred in
connection with the qualification of the Shares under State securities or Blue
Sky laws and the laws of any foreign jurisdiction. Any transfer taxes imposed on
the sale of the Shares to the Underwriters will be paid by the Company or the
Stockholders as the case may be. The Company shall not, however, be required to
pay for any of Underwriters' expenses (other than those related to qualification
under State securities or Blue Sky laws) except that, if this Agreement is
terminated by the Representatives pursuant to Section 6 hereof, or by reason of
any failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on their part to be performed, unless such failure to satisfy
said condition or to comply with said terms is due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
all costs and expenses, including attorney fees and out-of-pocket expenses,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein, are
subject to the accuracy, as of the Closing Date and as of the Option Closing
Date, of the representations and warranties and agreements of the Company and
the Stockholders contained herein, to the performance by the Company and the
Stockholders of their obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 noon, eastern daylight savings time, on the date of this
Agreement, unless a later time and date is agreed to by the
Representatives, and no stop order or other order suspending the
effectiveness thereof or the qualification of the Shares under the State
securities or Blue Sky laws of any jurisdiction shall have been issued and
no proceeding for that purpose shall have been taken or, to the knowledge
of the Company, shall be contemplated or threatened by the Commission or
any Other Securities Regulator. If the Company has elected to rely upon
Rule 430A of the Rules, the price of the Shares and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been
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<PAGE> 13
transmitted to the Commission for filing pursuant to Rule 424(b) of the Act
within the prescribed time period, and prior to the Closing Date the
Company shall have provided evidence satisfactory to the Representatives of
such timely filing, or a post-effective amendment providing such
information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A under the Act. All requests
for additional information on the part of the Commission or any other
government or regulatory authority with jurisdiction (to be included in the
Registration Statement, any Integrated Prospectus or Prospectus or
otherwise) shall be complied with to the satisfaction of the Commission or
such authorities.
(b) The Representatives shall have received on the Closing Date and on
the Option Closing Date the opinion of Epstein, Becker & Green, P.C.,
counsel for the Company and the Stockholders, dated the Closing Date and
the Option Closing Date, as the case may be, addressed to the Underwriters
in form and substance satisfactory to Giroir & Gregory, Professional
Association, counsel to the Underwriters, to the effect that:
(i) The Company and its subsidiaries listed in Exhibit 21.1 to the
Registration Statement (the "Subsidiaries") have been duly incorporated
and are validly existing as corporations in good standing under the laws
of the State of their organization with full corporate power and
authority to own their properties and conduct their businesses as
described in the Registration Statement and Prospectus; the Company and
its Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their businesses or the ownership
or lease of their properties requires such qualification, except for
such jurisdictions where the failure to qualify would not have a
Material Adverse Effect; and, to the knowledge of such counsel, except
as set forth in the Prospectus and the Registration Statement, no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into any
shares of capital stock are outstanding. To the knowledge of such
counsel, except as set forth in Exhibit 21.1 to the Registration
Statement, the Company has no corporate subsidiaries.
(ii) The Company has the authorized capital stock set forth under
the captions "Use of Proceeds," "Capitalization" and "Description of
Securities" in the Registration Statement, and Prospectus; the
outstanding shares of its capital stock have been duly and validly
authorized and issued and are fully paid and non-assessable; the Shares
conform to the description thereof contained in the Prospectus; the
certificates for the Shares are in due and proper form, the Shares have
been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this
Agreement; there are no preemptive or other restrictive rights to
subscribe for or to purchase or any restriction upon the voting or
transfer of any shares of any class of the Company's capital stock
pursuant to the Company's Certificate of Incorporation or Bylaws, or, to
the knowledge of such counsel, any agreement or other instrument to
which the Company is a party or by which it is bound; to the knowledge
of such counsel neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives
rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any class of the
Company's securities, except that the Company has agreed to register
(not sooner than 35 days after the Effective Date) the shares of Common
Stock underlying warrants issued to Janney Montgomery Scott Inc. and its
affiliates in connection with the Company's initial public offering and
September 1995 private placement.
(iii) The Registration Statement has become effective under the Act
and to the knowledge of such counsel no stop order proceedings with
respect thereto have been instituted or are pending or threatened under
the Act and any and all filings required by Rule 424 and Rule 430A of
the Rules have been made.
(iv) The Registration Statement, all Preliminary Prospectuses, the
Prospectus and each amendment or supplement thereto comply as to form in
all material respects with the requirements of the Act and the Rules
except that such counsel need express no opinion as to the financial
statements, schedules and other financial or statistical information
included therein.
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<PAGE> 14
(v) To the knowledge of such counsel except as set forth in the
Registration Statement, Prospectus or an exhibit hereto, no holders of
Common Stock or other securities of the Company have registration rights
with respect to such securities and all holders of securities of the
Company having rights to registration of such shares of Common Stock, or
other securities, because of the filing of the Registration Statement by
the Company have, with respect to the offering contemplated thereby,
waived such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the
Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights except that the
Company has agreed to register (no sooner than 35 days after the
Effective Date) the shares of Common Stock underlying warrants issued to
Janney Montgomery Scott Inc. and its affiliates in connection with the
Company's initial public offering and September 1995 private placement.
(vi) All descriptions, in the Preliminary Prospectus and the
Prospectus, of statutes, regulations, legal or governmental proceedings,
contracts and other documents (including, but not limited to, those
relating to stock option plans, and the statements under the captions
"Certain Transactions" and "Description of Securities" that constitute a
summary of documents referred to therein or matters of law) are accurate
in all material respects and fairly present the information required to
be shown; and such counsel does not know of any contracts or documents
of a character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described or
filed.
(vii) Except as set forth in the Prospectus, to the knowledge of
such counsel, there are no legal, regulatory or administrative
proceedings pending or threatened against the Company or the
Subsidiaries which could have a Material Adverse Effect.
(viii) Neither the Company nor any of its Subsidiaries is, nor with
the giving of notice or lapse of time or both would be, in violation of
or in default under, nor will the execution or delivery of this
Agreement or consummation of the transactions contemplated hereby result
in a violation of, or constitute a default under, the Certificate of
Incorporation or By-laws of the Company or any of its Subsidiaries, or,
to the knowledge of such counsel, any agreement, indenture or other
instrument known to such counsel, to which the Company or the
Subsidiaries is a party or by which it is bound, or to which their
properties are subject, nor, to the knowledge of such counsel, will the
performance by the Company of its obligations under this Agreement
violate any law, rule, administrative regulation or decree of any court
or any governmental agency or body having jurisdiction over the Company
or any of its Subsidiaries or their properties or result in the creation
or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or any of its Subsidiaries which might
reasonably be expected to result in a Material Adverse Effect.
(ix) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms,
except as the indemnification and contribution provisions hereunder may
be limited by applicable law and the enforcement hereof may be limited
by bankruptcy, insolvency, reorganization, moratorium and other laws
affecting creditors' rights generally and by general principles of
equity.
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions
herein contemplated (other than required by state securities and Blue
Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made specifying the same.
(xi) To the knowledge of such counsel, the Company and its
Subsidiaries hold all material licenses, authorizations, charters,
certificates and permits from governmental authorities that are
necessary for the conduct of their businesses and the Company and its
Subsidiaries have not received notice of any proceeding relating to the
revocation or modification of any of such licenses, authorizations,
charters or permits.
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<PAGE> 15
(xii) Each Stockholder has full legal right, power and authority to
enter into and to perform such Stockholder's obligations under the Power
of Attorney and Custody Agreement and has duly executed and delivered
the Power of Attorney and Custody Agreement. The Power of Attorney and
Custody Agreement constitutes the valid and binding agreement of such
Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(xiii) Each Stockholder has full legal right, power and authority
to enter into and to perform its obligations under this Agreement and to
sell, transfer, assign and deliver the Shares to be sold by such
Stockholder hereunder.
(xiv) This Agreement has been duly executed and delivered by or on
behalf of each Stockholder and, assuming due authorization, execution
and delivery by the Underwriters, is a valid and binding agreement of
such Stockholder, enforceable in accordance with its terms, except as
the indemnification and contribution provisions hereunder may be limited
by applicable law and the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws
affecting creditors' rights generally and by general principles of
equity.
(xv) Upon the delivery and payment for the Shares as contemplated
in this Agreement, each of the Underwriters will receive valid title to
the Shares purchased by it from such Stockholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable
interest. In rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of any of
such Stockholders Shares being purchased from such Stockholders.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that the Registration Statement or any
amendment thereto at the time the Registration Statement or amendment
became effective or the Preliminary Prospectus, any Integrated Prospectus
or the Prospectus or any amendment or supplement thereto as of their
respective dates contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, not misleading (except that such counsel need
express no view as to financial statements, schedules and other financial
or statistical information included therein).
Such opinion may state that no opinion is expressed therein concerning
any laws other than those of the state of New York Federal law and the
General Corporation Law of the State of Delaware. For purposes of such
opinion, the word "knowledge" when referring to such counsel's knowledge
shall mean the conscious awareness of the individual attorneys within such
firm who have actively participated in the representation of the Company,
including but not limited to the representation of the Company in
connection with the issuance of the shares of Common Stock covered by the
Registration Statement, after due inquiry consisting solely of (i)
investigative conversations with James F. Slattery, Ira M. Cotler, Michael
C. Garretson and Lee Levinson, (ii) review of fact certificates delivered
by any such officers in connection with such opinion and (iii) review of
such other documents, to the extent provided by the Company and actually
reviewed by such counsel, as such counsel shall have deemed reasonably
necessary for purposes of the preparation of the Registration Statement.
Such opinion shall be to such further effect with respect to other legal
matters relating to this Agreement and contain only those qualifications as
Giroir & Gregory, Professional Association, counsel to the Underwriters,
may reasonably request or allow.
(c) The Representatives shall have received from Giroir & Gregory,
Professional Association, counsel to the Underwriters, an opinion dated the
Closing Date, substantially to the effects specified in subparagraph (iii)
and (iv) of paragraph (b) of this Section 6, and that the Company is a
validly organized and existing corporation under the laws of the State of
Delaware. In rendering such opinion, Giroir & Gregory, Professional
Association, may rely as to all matters governed other than by Federal law
on the opinions of counsel referred to in paragraphs (b) and (c) of this
Section 6. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to
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<PAGE> 16
the attention of such counsel which leads them to believe that the
Registration Statement or any amendment thereto at the time the
Registration Statement or amendment became effective or the Preliminary
Prospectus, any Integrated Prospectus, or the Prospectus or any amendment
or supplement thereto as of their respective dates contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, not
misleading (except that such counsel need express no view as to financial
statements, schedules and other financial or statistical information
included therein).
(d) The Representatives shall have received at or prior to the Closing
Date from Giroir & Gregory, Professional Association, a memorandum or
summary, in form and substance satisfactory to the Representatives, with
respect to the qualification or exemption therefrom for offering and sale
by the Underwriters of the Shares under the State securities or Blue Sky
laws of such jurisdictions as the Representatives may reasonably have
designated.
(e) The Representatives shall have received on the Closing Date and on
the Option Closing Date, as the case may be, signed letters from Grant
Thornton, LLP, addressed to the Underwriters dated as of the Effective Date
and again dated as of the Closing Date and as of the Option Closing Date,
as the case may be, with respect to the financial statements and certain
financial and statistical information contained in the Registration
Statement, any Integrated Prospectus and the Prospectus. All such letters
shall be in form and substance satisfactory to the Representatives and
Giroir & Gregory, Professional Association, counsel to the Underwriters.
(f) The Representatives shall have received on the Closing Date and on
the Option Closing Date, as the case may be, a certificate or certificates
of the President & Chief Executive Officer and Executive Vice President,
Finance, of the Company to the effect that, as of the Closing Date and on
the Option Closing Date, as the case may be, each of them severally
represents as follows:
(i) (A) the representations and warranties of the Company in this
Agreement are true and correct on and as of the Closing Date and on the
Option Closing Date, as the case may be, and (B) the Company has
complied with all of its agreements and covenants and has satisfied all
of the conditions on its part to be performed or satisfied at or prior
to the Closing Date and at or prior to the Option Closing Date, as the
case may be.
(ii) (A) The Registration Statement has become effective under the
Act; (B) no stop order suspending the effectiveness of the Registration
Statement or the use or effectiveness of the Prospectus and any
Integrated Prospectus has been issued; (C) no proceedings for such
purpose have been taken or, to his knowledge, are contemplated by the
Commission or any Other Securities Regulator; and (D) all requests for
additional information on the part of the Commission or, to the
Company's knowledge, any Other Securities Regulator have been complied
with.
(iii) No litigation has been instituted or threatened against the
Company or any of its Subsidiaries of a character required to be
disclosed in the Registration Statement which is not so disclosed; and
there is no material contract required to be filed as an exhibit to the
Registration Statement which is not so filed.
(iv) They have carefully examined the Registration Statement, any
Integrated Prospectus and the Prospectus and, in their opinion, since
the Effective Date, (A) the statements contained in the Registration
Statement, any Integrated Prospectus and the Prospectus remain true and
correct, (B) such Registration Statement, any Integrated Prospectus and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading and (C) since the Effective Date, no event has occurred which
should have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement or
amendment.
(h) At or prior to the Closing Date, the Board of Directors of the
Company shall have adopted a resolution to the effect that any services to
be provided to the Company by any of its affiliates or any other
arrangements or agreements between the Company and such affiliates shall be
subject to the approval of
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<PAGE> 17
a majority of the Company's outside and disinterested directors and shall
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties for comparable services.
(i) The Company shall have furnished to the Representatives such
additional information and further certificates and documents confirming
the representations and warranties contained herein and related matters as
the Representatives may reasonably have requested.
(j) Since the respective dates as of which information is given in the
Prospectus, there shall not have been any Material Adverse Change.
(k) Notice with respect to the Shares shall have been provided to The
Nasdaq Stock Market, Inc.
(l) The Representatives shall have received from the Stockholders a
certificate or certificates, dated as of the Closing Date, to the effect
that as of such date, each of them severally represent as follows:
(i) The representations and warranties of such Stockholder in this
Agreement are true and correct as of the Closing Date;
(ii) The Stockholder has in all material respects complied with all
the agreements and have satisfied all of the conditions on their part to
be performed or satisfied at or prior to the Closing Date; and
(iii) The Stockholder has carefully examined the Registration
Statement, any Integrated Prospectus and the Prospectus, regarding all
information furnished by or on behalf of such Stockholder by the Company
and, with respect to such information, as of the date of the Prospectus
and as of the Closing, neither the Registration Statement, any
Integrated Prospectus nor the Prospectus, nor any amendment or
supplement thereto include an untrue statement of a material fact
required to be stated therein or necessary in order to make the
statement therein not misleading and, with respect to such information,
since the date of the Prospectus or any Integrated Prospectus, no event
has occurred which should have been set forth in an amendment or
supplement to the Registration Statement, any Integrated Prospectus or
Prospectus, which has not been set forth, and since the respective date
as of which such information is given in the Registration Statement, any
Integrated Prospectus and Prospectus there has not been any Material
Adverse Change.
The certificates mentioned in this Agreement shall be deemed to be in
compliance with the provisions hereof only if they are in all material respects
satisfactory to the Representatives and Giroir & Gregory, Professional
Association, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
confirmed telefax at or prior to the Closing Date. In such event, the Company
and the Underwriters shall not be under any obligation to each other (except to
the extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the
Company and the Stockholders to sell and deliver the Shares are subject to the
conditions that (a) at or before 12:00 noon, eastern daylight savings time, on
the date of this Agreement, or such later time and date as the Company and the
Representatives may from time to time consent to in writing or by confirmed
telefax, the Registration Statement shall have become effective, and (b) at the
Closing Date no stop order suspending the effectiveness of the Registration
Statement shall have been issued or proceedings therefor initiated or
threatened. If either of the Conditions hereinabove provided for in this Section
7 shall not have been fulfilled when and as required by this Agreement to be
fulfilled, this Agreement may be terminated by the Company or the Stockholders
by notifying the Representatives of such termination in writing or by confirmed
telefax at or prior to the Closing Date.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
the Rules and the Exchange Act from and against
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any and all losses, claims, damages, liabilities, joint or several, and all
expenses (including reasonable costs of investigation and legal expenses) to
which such Underwriter or such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions or proceedings in respect thereof) arise out of or are
based upon any breach of any representation, warranty, agreement, or covenant of
the Company, or any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Integrated Prospectus, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Company will reimburse each
Underwriter and each such controlling person for reasonable legal and other
expenses incurred in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement,
or alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Integrated Prospectus, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Stockholder severally and not jointly agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act, the Rules and the Exchange Act from and against
any and all losses, claims, damages, liabilities, joint or several, and all
expenses (including reasonable costs of investigation and legal expenses) to
which such Underwriter or such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions or proceedings in respect thereof) arise out of or are
based upon any breach of any representation, warranty, agreement, or covenant of
the Stockholder, or any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Integrated
Prospectus, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and the Stockholder
will reimburse each Underwriter and each such controlling person for reasonable
legal and other expenses incurred in connection with investigating or defending
any such loss, claim, damage, liability, action or proceeding; provided,
however, that the Stockholder will be liable in any such case only to the extent
that such untrue statement, or alleged untrue statement, or omission or alleged
omission has been made in the Registration Statement, any Integrated Prospectus,
any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by the Stockholder specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Stockholder
may otherwise have.
Notwithstanding anything herein to the contrary, any amounts payable by the
Stockholders pursuant to the indemnification and contribution provisions set
forth in this Section 8 shall be limited to an amount not exceeding the net
proceeds received by such Stockholder from the sale of Shares hereunder.
(c) Each Underwriter severally, but not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and any Integrated Prospectus, the
Stockholders, and each person, if any, who controls the Company, within the
meaning of the Act, the Rules and the Exchange Act, from and against any losses,
claims, damages, liabilities or expenses to which the Company, the Stockholders
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Integrated Prospectus, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
and will reimburse any legal or other expenses reasonably incurred by the
Company, the Stockholders or any such director, officer, or
18
<PAGE> 19
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in such case only to the extent that such untrue
statement, or alleged untrue statement or omission or alleged omission has been
made in the Registration Statement, any Integrated Prospectus, any Preliminary
Prospectus, the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Company by or
through the Representatives expressly for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action or proceeding, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8, except to the extent that the indemnifying party is
substantially prejudiced by the omission of such notification. In case any such
action or proceeding is brought against any party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding. Any indemnified party shall have
the right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of such counsel has
been specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party has failed to assume the defense and employ counsel, or (iii)
the named parties to any such action (including any impleaded parties) include
such indemnified party and the indemnifying party, as the case may be, and such
indemnified party shall have been advised in writing by such counsel that there
may be one or more legal defenses available to it which are different from or
additional to those available to the indemnifying party, in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party, it being understood, however, that (A) the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such indemnified parties, which firm shall be designated in
writing by the indemnified party, and that (B) all such fees and expenses shall
be reimbursed as they are incurred. Subject to the foregoing provisions of this
Section 8(d), the indemnifying party shall not be liable for the costs and
expenses of any settlement of any action without the consent of the indemnifying
party.
(e) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 8 is for
any reason held to be unavailable to an indemnified party under subsection (a)
or (b) above in respect to any losses, claims, damages, liabilities or expenses
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities and expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Stockholders on the one hand
and the Underwriters on the other hand from the offering of the Shares or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
parties in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Stockholders on the one hand and the Underwriters on the other
19
<PAGE> 20
hand shall be deemed to be in the same proportion as the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bears to the underwriting discounts and
commissions received by the Underwriters. The relative fault of a party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by each party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any such action or
claim.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriters
have otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute shall be several in proportion to their respective underwriting
obligations and not joint.
(f) In any proceeding relating to the Registration Statement, any
Integrated Prospectus, any Preliminary Prospectus, the Prospectus or any
supplement or amendment thereto, each party against whom contribution may be
sought under this Section 8 hereby consents to the jurisdiction of any court
having jurisdiction over any other contributing party, agrees that process
issuing from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements of the Company, the Stockholders and
the officers of the Company herein or in certificates delivered pursuant hereto,
and the indemnity and contribution agreements contained in Section 8 hereof,
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriters or any controlling
person, or by or on behalf of the Company or any of its officers, directors or
controlling persons, and shall survive delivery of the Underwritten Shares and,
if appropriate, the Option Shares to the Representatives or termination of this
Agreement.
10. DEFAULT BY UNDERWRITERS. If any Underwriter shall fail to purchase and
pay for the Shares which such Underwriter has agreed to purchase and pay for
hereunder (otherwise than by reason of any default on the part of the Company or
the Stockholders), you, as the Representatives of the Underwriters, shall use
your best efforts to procure within twenty-four hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company and the
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Shares which the defaulting Underwriter or Underwriters failed to
purchase. If during such twenty-four hours you, as such Representatives, shall
not have procured such other Underwriters, or any others, to purchase the Shares
agreed to be purchased by the defaulting Underwriter or Underwriters, then (a)
if the aggregate number of Shares with respect to which such default shall occur
does not exceed 10% of the Shares which the Underwriters are obligated to
purchase hereby, the other Underwriters shall be obligated, severally, in
proportion to the respective number of Shares which they are obligated to
purchase hereunder, to purchase the Shares which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of Shares with
respect to which such default shall occur exceeds 10% of the Shares which the
Underwriters are obligated to purchase, the Company or you, as the
Representatives of the Underwriters will have the right, by written notice given
within the next twenty-four hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
20
<PAGE> 21
Underwriters, the Company or the Stockholders except to the extent provided in
Section 8 hereof. In the event of a default by any Underwriter or Underwriters,
as set forth in this Section 10, the time of closing may be postponed for such
period, not to exceed seven days, as you, as the Representatives, may determine
in order that the required changes in the Registration Statement, any Integrated
Prospectus, the Prospectus or in any other documents or arrangements may be
effected. The term "Underwriters" includes any person substituted for a
defaulting Underwriter. Any action taken under Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
11. NOTICES. All communications hereunder shall be in writing and, except
as otherwise provided in, will be mailed or delivered or telefaxed and confirmed
as follows: if to the Underwriters, c/o the Representatives as follows: to
Stephens Inc., 111 Center Street, Little Rock, Arkansas 72201, Attention:
Michael R. Smith, Sr., facsimile no. (501) 338-8011, with a copy to H. Watt
Gregory, III, Esq., Giroir & Gregory, Professional Association, 111 Center
Street, Suite 1900, Little Rock, Arkansas 72201, facsimile no. (501) 338-8011;
if to the Company, to Correctional Services Corporation, 1819 Main Street, Suite
1000, Sarasota, Florida 34236, Attention: James F. Slattery, facsimile no. (941)
953-9198, with a copy to Epstein, Becker & Green, P.C. 250 Park Avenue, New
York, New York 10177 Attention: Sidney Todres, Esq., facsimile no. (212)
661-0989.
12. TERMINATION. This Agreement may be terminated by notice to the Company
as follows:
(a) at any time prior to the earlier of (I) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) twenty-four
(24) hours following the time at which the Registration Statement becomes
effective;
(b) at any time prior to the Closing Date if any of the following has
occurred: (I) since the respective dates as of which information is given
in the Registration Statement, any Integrated Prospectus and the
Prospectus, any Material Adverse Change which would, in your reasonable
judgment, materially impair the investment quality of the Shares, (ii) any
outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make the offering or delivery of
the Shares impracticable, (iii) suspension of trading or general trading
halts in securities on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq National Market or the over-the-counter market or
limitation on prices (other than limitations on hours or numbers of days or
trading) for securities on either such Exchange, The Nasdaq National Market
or the over-the-counter market, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or
order of any court or other governmental authority which in your reasonable
opinion materially and adversely affects or will materially or adversely
affect the business or operations of the Company, (v) declaration of a
banking moratorium by either federal or state authorities, or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your reasonable opinion
has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 10 of this Agreement.
13. INFORMATION FURNISHED BY UNDERWRITERS. The information set forth in
the Prospectus: (a) in the last paragraph on the cover page, (b) on page
regarding stabilization, and (c) (I) in the table under the caption
"Underwriting" on page , listing the Underwriters and the number of shares
each has agreed to purchase, and (ii) in the paragraph below said table on
page , relating to the concession to dealers and the reallowance to certain
other dealers under the caption "Underwriting" in the Prospectus, constitute the
written information furnished by or on behalf of any Underwriters referred to in
paragraph (a) (v) of Section 1 hereof and in paragraphs (a) and (b) of Section 8
hereof.
14. SUCCESSORS. This Agreement has been and is made solely for the benefit
of the Underwriters, the Company, the Stockholders and their respective
successors, executors, administrators, heirs, and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or
21
<PAGE> 22
obligation hereunder The term "successors" shall not include any purchaser of
the Shares merely because of such purchase.
15. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of the Underwriters or controlling person or (c) delivery of any
payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Arkansas, without giving effect to the choice of law or
conflict of law principles thereof.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters in
accordance with its terms.
Very truly yours,
CORRECTIONAL SERVICES CORPORATION
By:
-----------------------------
Name:
Title:
[STOCKHOLDERS]
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written.
STEPHENS INC.
J.C. BRADFORD & CO.
By:
----------------------------
Stephens Inc. Senior Manager
Name:
---------------------------
Title:
--------------------------
As Representative of the several
Underwriters named in Schedule I hereto
22
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
NAME NO. OF UNDERWRITTEN SHARES
- ----------------------------------------------------------------------- --------------------------
<S> <C>
Stephens Inc...........................................................
J.C. Bradford & Co.....................................................
Total..................................................................
------------
2,450,000
===================
</TABLE>
<PAGE> 1
Exhibit 3.1.1
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "ESMOR CORRECTIONAL SERVICES, INC.", CHANGING ITS NAME FROM "ESMOR
CORRECTIONAL SERVICES, INC." TO "CORRECTIONAL SERVICES CORPORATION", FILED IN
THIS OFFICE ON THE FIRST DAY OF AUGUST, A.D. 1996, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS DOCUMENT HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 8051450
DATE: 08-01-96
<PAGE> 2
CERTIFICATE OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION
OF
ESMOR CORRECTIONAL SERVICES, INC.
-----------------------------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation
Law of the State of Delaware
-----------------------------------------
The undersigned, James F. Slattery and Aaron Spiesman, being the
President and Secretary, respectively, of ESMOR CORRECTIONAL SERVICES, INC. a
corporation organized and existing under the laws of the State of Delaware, do
hereby certify as follows:
FIRST, that the Certificate of Incorporation of said corporation be
amended as follows:
1. By striking over the whole of ARTICLE FIRST, as it now exists,
and inserting in lieu and instead thereof a new ARTICLE FIRST, reading as
follows:
"The name of the corporation (hereinafter called the
"corporation") is CORRECTIONAL SERVICES CORPORATION."
2. By striking out the whole of ARTICLE FOURTH, as it now exists,
and inserting in lieu and instead thereof a new ARTICLE FOURTH, reading as
follows:
"The total number of shares of stock which the corporation shall
have authority to issue is Thirty-One Million (31,000,000),
consisting of Thirty Million (30,000,000) shares of Common
Stock, all of a par value of One Cent ($.01) each, and One
Million (1,000,000) shares of Preferred Stock, all of a par
value of One Cent ($.01) each."
SECOND, that such amendment has been duly adopted in accordance with
the provisions of the General Corporation Law of the State of Delaware by the
written consent of the holders of not less than a majority of the outstanding
stock entitled to vote thereon and that written notice of the corporate action
has been given to these stockholders who have not consented in writing, all in
accordance with the provision of Section 223 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, we have signed this certificate this 1st day of
August, 1996.
/s/ James F. Slattery
----------------------------------
James F. Slattery, President
/s/ Aaron Speisman
----------------------------------
Aaron Speisman, Secretary
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF CORRECTION FILED TO CORRECT
A CERTAIN ERROR IN THE CERTIFICATE OF
INCORPORATION OF CORRECTIONAL SERVICES CORPORATION
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF
DELAWARE ON OCTOBER 28, 1993
Correctional Services Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is Correctional Services
Corporation. The name under which the Corporation was incorporated is Esmor
Correctional Services, Inc.
2. A Certificate of Incorporation was filed by the Secretary of
State of Delaware on October 28, 1993 and said Certificate requires correction
as permitted by Section 103 of the General Corporation Law of the State of
Delaware.
3. The inaccuracy or defect of said Certificate to be corrected is
as follows:
The description of the Preferred Stock set forth in Article FOURTH was
incorrectly set forth.
Article FOURTH is corrected to read in its entirety as follows:
"The total number of shares of stock which the corporation shall have
authority to issue is Eleven Million (11,000,000), consisting of Ten Million
(10,000,000) shares of Common Stock, all of a par value of One Cent ($.01)
each, and One Million (1,000,000) shares of Preferred Stock, all of a par value
of One Cent ($.01) each.
The Preferred Stock may be issued from time to time in series. The
shares of each series shall be subject not only to the provisions of this
Article FOURTH, which is applicable to all series of preferred shares, but also
to the additional provisions with respect to such series as are fixed from time
to time by the Board of Directors. The Board of Directors is herby authorized
and required to fix, in the manner and to the fullest extent
<PAGE> 2
provided and permitted by law, all provisions of the shares of each series of
Preferred Stock not otherwise set forth in this Certificate, including, but
not limited to:'
1. Designation of Series-Number of Shares. The distinctive
designation of each series and the number of shares constituting such series,
which number may be increased (except where otherwise provided by the Board of
Directors in its resolution creating such series) or decreased (but not below
the number of shares thereof then outstanding) from time to time by resolution
of the Board of Directors;
2. Dividend Rates and Rights. The annual rate and frequency
of payment of dividends payable on the shares of all series and the dividend
rights applicable thereto, including, in the event of Cumulative Preferred
Stock, the date from which dividends shall be cumulative on all shares of any
series issued prior to he record date for the first dividend on shares of such
series;
3. Redemption. The rights, if any, of the corporation to
redeem; the terms and conditions of redemption price or prices, if any, for the
shares of each, any, or all series;
4. Sinking Fund. The obligation, if any, of the corporation
to maintain a sinking fund for the periodic redemption of shares of any series
and to apply the sinking fund to the redemption of such shares;
5. Voluntary Liquidation Preferences. The amount payable on
shares of each series in the event of any voluntary liquidation, dissolution,
or winding up of the affairs of the corporation;
6. Conversion Rights. The rights, if any, of the holders of
shares of each series to convert such shares into the corporation's Common
Stock and the terms and conditions of such conversion; and
7. Voting Rights. The voting rights, if any, of the holders
of the shares of each series, and any other preferences, and relative,
participating, optional, or other special rights, and any qualifications,
limitations, or restrictions thereof."
-2-
<PAGE> 3
IN WITNESS WHEREOF, we have signed this certificate this 12th day of
August, 1996.
/s/ James F. Slattery
-------------------------------
James F. Slattery, President
/s/ Aaron Speisman
-------------------------------
Aaron Speisman, Secretary
-3-
<PAGE> 1
EXHIBIT 3.1.3
CERTIFICATE OF CORRECTION FILED TO CORRECT
A CERTAIN ERROR IN THE CERTIFICATE OF
AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF
CORRECTIONAL SERVICES CORPORATION
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF
DELAWARE ON AUGUST 1, 1996
Correctional Services Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is Correctional Services Corporation.
The name under which the Corporation was incorporated is Esmor Correctional
Services, Inc.
2. A Certificate of Amendment to Certificate of Incorporation was
filed by the Secretary of State of Delaware on August 1, 1996 and said
Certificate requires correction as permitted by Section 103 of The General
Corporation Law of the State of Delaware.
3. The inaccuracy of defect of said Certificate to be corrected is as
follows:
The description of the Preferred Stock set forth in Article FOURTH was
incorrectly set forth.
Article FOURTH is corrected to read in its entirety as follows:
"The total number of shares of stock which the corporation shall have
authority to issue is Thirty-One Million (31,000,000) consisting of Thirty
Million (30,000,000) shares of Common Stock, all of a par value of One Cent
($.01) each, and One Million (1,000,000) shares of Preferred Stock, all of a
par value of One Cent ($.01) each.
The Preferred Stock may be issued from time to time in series. The
shares of each series shall be subject not only to the provisions of this
Article FOURTH, which is
<PAGE> 2
applicable to all series of preferred shares, but also to the additional
provisions with respect to such series as are fixed from time to time by the
Board of Directors. The Board of Directors is hereby authorized and required to
fix, in the manner and to the fullest extent provided and permitted by law, all
provisions of the shares of each series of Preferred Stock not otherwise set
forth in this Certificate, including, but not limited to:
1. Designation of Series-Number of Shares. The distinctive
designation of each series and the number of shares constituting such series,
which number may be increased (except where otherwise provided by the Board of
Directors in its resolution creating such series) or decreased (but not below
the number of shares thereof then outstanding) from time to time by resolution
of the Board of Directors;
2. Dividend Rates and Rights. The annual rate and frequency
of payment of dividends payable on the shares of all series and the dividend
rights applicable thereto, including, in the event of Cumulative Preferred
Stock, the date from which dividends shall be cumulative on all shares of any
series issued prior to the record date for the first dividend on shares of such
series;
3. Redemption. The rights, if any, of the corporation to
redeem; the terms and conditions of redemption; and the redemption price or
prices, if any, for the shares of each, any, or all series;
4. Sinking Fund. The obligation, if any, of the corporation
to maintain a sinking fund for the periodic redemption of shares of any series
and to apply the sinking fund to the redemption of such shares;
5. Voluntary Liquidation Preferences. The amount payable on
shares of each series in the event of any voluntary liquidation, dissolution,
or winding up of the affairs of the corporation;
6. Conversion Rights. The rights, if any, of the holders of
shares of each series to convert such shares into the corporation's Common
Stock and the terms and conditions of such conversion; and
7. Voting Rights. The voting rights, if any, of the holders
of the shares of each series, and any other preferences, and relative,
participating, optional, or other special rights, and any qualifications,
limitations, or restrictions thereof."
-2-
<PAGE> 3
IN WITNESS WHEREOF, we have signed this certificate this 12th day of
August, 1996.
/s/ James F. Slattery
-------------------------------
James F. Slattery, President
/s/ Aaron Speisman
-------------------------------
Aaron Speisman, Secretary
-3-
<PAGE> 1
EXHIBIT 5
[EPSTEIN BECKER & GREEN, P.C. LETTERHEAD]
351-4735
August 13, 1996
Correctional Services Corporation
1819 Main Street
Sarasota, Florida 34236
Gentlemen:
We have acted as counsel to Correctional Services Corporation
(hereinafter called the "Company") in connection with its filing of a
registration statement on Form S-1 (Registration No. 333-6457, which
registration statement, as amended at the time of its effectiveness is
hereinafter called the "Registration Statement") covering shares of the
Company's authorized and unissued shares of common stock, $.01 par value,
including shares subject to an over-allotment option (the "Company Shares") and
shares of the Company's outstanding common stock, $.01 par value, being sold by
the Selling Stockholders named therein (the "Selling Stockholder Shares").
As such counsel, we have examined original copies, or copies certified
to our satisfaction, of the corporate records of the Company, agreements and
other instruments, certificates of public officials and such other documents as
we deemed necessary as a basis for the opinion hereinafter set forth.
On the basis of the forgoing, we are of the opinion that the Company
Shares have been validly authorized and will, when sold as contemplated by the
Registration Statement, be legally issued, fully paid and nonassessable and that
the Selling Stockholder Shares are validly authorized, legally issued, fully
paid and nonassessable.
<PAGE> 2
Correctional Services Corporation
August 13 ,1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of such Registration Statement.
Very truly yours,
EPSTEIN BECKER & GREEN, P.C.
BY: /s/ Sidney Todres
--------------------------------
Sidney Todres
<PAGE> 1
EXHIBIT 10.26.1
SECOND AMENDMENT TO LOAN AGREEMENT
THIS Amendment to Loan Agreement is dated as of ___________________,
1996 by and between NATIONSBANK, N.A. (SOUTH), a National Banking Association
(hereinafter called the "Lender") and ESMOR CORRECTIONAL SERVICES, INC., a
Delaware corporation, ESMOR MANAGEMENT, INC., a Delaware corporation, ESMOR,
INC., a New York corporation, ESMOR (BROOKLYN), INC., a New York corporation,
ESMOR CANADIAN, INC., a Texas corporation, ESMOR FORT WORTH, INC., a Texas
corporation, ESMOR HOUSTON, INC., a Texas corporation, ESMOR MANHATTAN, INC., a
New York corporation, ESMOR MANSFIELD, INC., a Texas corporation, ESMOR NEW
JERSEY, INC., a New Jersey corporation, ESMOR (SEATTLE), INC., a Washington
corporation, and ESMOR TRAVIS, INC., a Texas corporation jointly and severally
(collectively hereinafter called the "Borrower").
RECITALS:
WHEREAS, in connection with a $5,000,000 Term Loan and a $6,000,000,
Line of Credit Loan from Lender to Borrower, Lender and Borrower entered into
that certain Loan and Security Agreement dated effective December 31, 1995, as
amended by Amendment to Loan Agreement dated January 19, 1996 (collectively the
"Loan Agreement") and Borrower executed and delivered to Lender the Loan
Documents, as defined in the Loan Agreement; and
WHEREAS, Borrower has requested Lender to modify the debt service
coverage ratio requirement under the Loan Agreement and Lender has agreed to do
so provided that Borrower enter into this Amendment.
NOW THEREFORE, in consideration of the issuance of the standby letter
of credit, the covenants and provisions set forth herein, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties mutually agree as follows:
1. Paragraph 11.15a is hereby amended to provide that the Debt
Service Coverage Ratio to be maintained by borrower shall not be less than the
following ratios for the following periods: (1) 1.08 to 1.00 as of June 30,
1996; (ii) 1.10 to 1.00 as of September 30, 1996; (iii) 1.30 to 1.00 as of
December 31, 1996 and (iv) 1.50 to 1.00 throughout the term of the Loan
thereafter.
2. As amended hereby, the Loan Agreement remains in full force and
effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date and year first above written.
WITNESSES:
ESMOR CORRECTIONAL SERVICES, INC., a
Delaware corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------ -------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------ Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR MANAGEMENT, INC., a Delaware
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------ -------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------ Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR INC., a New York corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------ -------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------ Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR (BROOKLYN), INC., a New York
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------ -------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------ Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
<PAGE> 3
ESMOR CANADIAN, INC., a Texas
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------- Sarasota, FL 34236
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR FORT WORTH, INC., a Texas
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------- Sarasota, FL 34236
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR HOUSTON, INC., a Texas
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------- Sarasota, FL 34236
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR MANHATTAN, INC., a New York
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- ------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- ------------------------------- Sarasota, FL 34236
(*Print Name of Witness)
(CORPORATE SEAL)
<PAGE> 4
ESMOR MANSFIELD, INC., a Texas
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- -------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- -------------------------------- Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR NEW JERSEY, INC., a New Jersey
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- -------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- -------------------------------- Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR (SEATTLE), INC., a Washington
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- -------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- -------------------------------- Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
ESMOR TRAVIS, INC., a Texas
corporation
/s/ Mary K. Parrish By: /s/ James F. Slattery
- -------------------------------- ------------------------------
* Mary K. Parrish James F. Slattery, President
(*Print Name of Witness)
/s/ Elizabeth Hall Address: 1819 Main St., Ste. 1000
- -------------------------------- Sarasota, FL 34236
* Elizabeth Hall
(*Print Name of Witness)
(CORPORATE SEAL)
<PAGE> 5
"LENDER"
NATIONSBANK, N.A. (SOUTH), a
National Banking Association
/s/ Nydia S. Rundle By: /s/ Rick J. Halloran
- ----------------------------- --------------------------------
* Nydia S. Rundle Rick J. Halloran, Vice President
(*Print Name of Witness)
/s/ Jeannine S. Hoopes Address: 1819 Main St., Ste. 1000
- ----------------------------- Sarasota, FL 34236
* Jeannine S. Hoopes
(*Print Name of Witness)
(CORPORATE SEAL)
<PAGE> 1
EXHIBIT 10.46
MANAGEMENT AGREEMENT FOR OPERATION OF THE COLORADO COUNTY
JUVENILE RESIDENTIAL FACILITY
This Management Agreement (as amended or supplemented as herein
provided, the "Agreement") is made and entered into by and between Esmor
Correctional Services, Inc., a duly organized corporation of the State of
Delaware ("Esmor"), and Colorado County, Texas, a political subdivision of the
State of Texas (the "County").
WITNESSETH:
WHEREAS, the County desires to build and operate a post adjudication
juvenile facility containing a total of one hundred (100) juvenile detention
beds (the "Facility")
WHEREAS, the County desires to engage Esmor to manage and operate the
Facility and to provide the program services described herein (the "Programs")
under the terms and conditions contained herein.
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants hereinafter contained, and subject to the conditions herein set
forth the parties hereto covenant, agree, and bind themselves as follows:
ARTICLE ONE
DEFINITIONS
1.1 Interpretation. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
1.1.1 All references in this instrument to designated
"Articles", "Sections", "Exhibits", and other subdivisions are to the
designated Articles, Sections, Exhibits and other subdivisions of this
instrument as originally executed.
1.1.2 The words "herein", "hereof,", and "hereunder" and
other words of similar import refer to this Agreement as a whole and not to any
particular Article, Section, Exhibit, or other subdivision.
1.1.3 This Agreement contains references to documents and
other instruments that are not in existence on the date of execution hereof.
When and as such instruments are prepared and are approved by Esmor and the
County the references herein to such instruments and to any capitalized terms
used therein shall have the same effect as though such instruments existed on
the date of execution hereof.
<PAGE> 2
1.2 Service Commencement Date. Shall mean the date upon which Esmor
commences the provision of operational and management services of the Facility.
ARTICLE TWO
REPRESENTATIONS AND WARRANTIES
2.1 Representations of Esmor. Esmor represents and warrants to and
for the benefit of the County, with the intent that the County will rely
thereon for purposes of entering into this Agreement as follows:
2.1.1 Organization and Qualification. Esmor has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the State of Delaware with power and authority to own or lease its
properties and conduct its business as presently conducted.
2.1.2 Authorization. This Agreement has been duly
authorized, executed, and delivered by Esmor and, assuming due execution and
delivery by County, constitutes a legal, valid, and binding agreement against
Esmor in accordance with its terms.
2.1.3 No Violation of Agreements, Articles of Incorporation,
or Bylaws. The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not conflict with, or
result in a breach of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease, loan agreement,
license, security agreement, contract, governmental license or permit, or
other agreement or instrument to which Esmor is a party or by which its
properties are bound, or any order, rule, or regulation of any court or any
regulatory body, administrative agency, or properties, except any such
conflict, breach, or default which would not materially and adversely affect
Esmor's ability to perform its obligations under this Agreement, and will not
conflict with, or result in a breach of any of the terms and provisions of, or
constitute a default under, the Articles of Incorporation (or other
corresponding charter document) or Bylaws of Esmor.
2.1.4 No Defaults Under Agreements. Esmor is not in default,
nor is there any event in existence which, with notice or the passage of time
or both, would constitute a default by Esmor, under any indenture, mortgage,
deed of trust, lease, loan agreement, license, security agreement, contract,
governmental license or permit, or other agreement or instrument to which it is
a party or by which any of its properties are bound and which default would
materially and adversely affect Esmor's ability to perform its obligations
under this Agreement.
2
<PAGE> 3
2.1.5 Compliance with Laws. Neither Esmor nor its officers
and directors purporting to act on behalf of Esmor have been advised, and have
no reason to believe, that Esmor or such officers and directors have not been
conducting business in compliance with all applicable laws, rules, and
regulations of the jurisdictions in which Esmor is conducting business
including all safety laws and laws with respect to discrimination in hiring,
promotion or pay of employees or other laws affecting employees generally,
except where failure to be so in compliance would not materially and adversely
affect Esmor's ability to perform its obligations under this Agreement.
2.1.6 No Litigation. There is not now pending or, to the
knowledge of Esmor, threatened, any action, suit or proceeding to which Esmor
is a party, before or by any court or governmental agency or body, which might
result in any material adverse change in Esmor's ability to perform its
obligations under this Agreement, or any such action, suit or proceeding
related to the environmental or civil rights matters; and no labor disturbance
by the employees of Esmor exists or is imminent which might be expected to
materially and adversely affect Esmor's ability to perform its obligations
under this Agreement.
2.1.7 Taxes. Esmor has filed all necessary federal, state
and foreign income and franchise tax returns and has paid all taxes as shown to
be due thereon; and Esmor has no knowledge of any tax deficiency which has been
or might be asserted against Esmor which would materially and adversely affect
Esmor's ability to perform its obligations under this Agreement.
2.1.8 Disclosure. There is no material fact which materially
and adversely affects or in the future will (so far as Esmor can now reasonably
foresee) materially and adversely affect Esmor's ability to perform its
obligations under this Agreement which has not been accurately set forth in
this Agreement or otherwise accurately disclosed in writing to the County of
Esmor prior to this date hereof.
2.2 Representations of the County. The County represents and
warrants to and for the benefit of Esmor with the intent that Esmor will rely
thereon for purposes of entering into this agreement as follows:
2.2.1 Authorization. The County has the requisite power to
enter into this Agreement and perform its obligations hereunder and by
proper action has duly authorized the execution, delivery, and performance
hereof.
2.2.2 No violation of Agreements. The consummation of the
transaction contemplated by this Agreement and the fulfillment of the terms
hereof will not conflict with, or result in a breach of any of the terms and
provisions of, or constitute a
3
<PAGE> 4
default under any other agreement or instrument to which the County is party or
by which it properties, except any such conflict, breach or default which would
not materially and adversely affect the County's ability to perform its
obligations under this Agreement.
2.2.3 Disclosure. There is no material fact which materially
and adversely affects or in the future will (so far as the Count can now
reasonably foresee) materially and adversely affect the County's ability to
perform its obligations under this Agreement, which has not been accurately
set forth in this Agreement or otherwise accurately disclosed in writing to
Esmor by the County prior to the date hereof.
ARTICLE THREE
EFFECTIVE DATE, INITIAL TERM, EXTENSIONS
3.1 Effective Date of Agreement, Initial Term. This Agreement
shall become effective upon its execution and delivery, and shall continue in
full force and effect unless sooner terminated, as hereinafter provided, for an
initial term ending five (5) years from the date the Facilities are completed
(the "Commencement Date"); provided however, that the County shall have the
right to terminate this Agreement upon at least sixty (60) days advanced
written notice to Esmor, on the third anniversary of the Commencement Date.
3.2 Renewal. The County and Esmor shall have the option to renew
the term of this Agreement for a period of five (5) years by agreeing to such
renewal in writing on or before ninety (90) days prior to the expiration of
the initial term of this Agreement. The County and Esmor shall have (2)
additional options to renew the term of this Agreement for two (2) successive
option terms of five (5) years each by agreeing to each renewal in writing on
or before ninety (90) days prior to the expiration of the preceding option
period.
ARTICLE FOUR
THE FACILITY
4.1 Financing. The County has submitted a proposal in response to
a request for proposal issued by the Texas Juvenile Probation Commission (the
"TJPC") which has been accepted by the TJPC. Pursuant to the County's
proposal, the County and the TJPC will enter into an agreement (the "TJCP
Agreement") whereby the TJPC will advance up to $2,550,000.00 (the TJPC Funds")
to the County for the design and construction of the Facility. The Facility
will contain a minimum of eight (8) and a maximum of ten (10) beds which meet
TJPC standards for pre-adjucation and administrative segregation to one forth
of the amount of the TJPC
4
<PAGE> 5
Funds up to a maximum amount equal to $637,500.00 (the "Esmor Funds"). The
TJPC Funds and the Esmor Funds are sometimes referred to herein as the "Project
Funds". The County agrees to use the Project Funds solely for the purpose of
designing and constructing the Facility. The County agrees to cause the
Facility to be completed for an amount equal to the Project Funds plus whatever
County funds are available for such purposes. Esmor shall deliver the Esmor
Funds to an escrow agent acceptable to the County and Esmor pursuant to an
escrow agreement acceptable to said parties on or before thirty (30) days after
the date of execution of the TJPC Agreement with the County. The escrow
agreement shall provide that the County shall use the Esmor funds only for
the purpose of designing and constructing the Facility and that the Esmor Funds
may be drawn upon by the County prior to the use of any TJPC funds for the
purpose of constructing the Facility. This escrow agreement will have attached
as an exhibit the contracts between the County and each architect and engineer
performing design services for the County in connection with the Facility and
the construction contract for the construction of the Facility, complete with
draw schedules governing the advance of Project Funds under such contracts.
In the event an escrow agreement acceptable to Esmor is not entered
into by the County and Esmor on or before September 15, 1996, then Esmor may
terminate this Agreement upon written notice to the County.
4.2 Construction. The design and construction of the Facility
shall be performed pursuant to contracts awarded in the name of the County. The
County, at its own expense and not using Project Funds, will provide all road
work and drives necessary for the Facility. The County shall enter into a
contract with the City of Eagle Lake, Texas, wherein the City of Eagle Lake
agrees to, free of charge to the County and not using any Project Funds (i)
acquire the track of land containing at least thirteen (13) acres of land and
described in Exhibit "A" attached hereto (the "Site"), (ii) either convey the
Site to the County or lease the Site to the County for a period of at least
twenty (20) years after the Commencement Date, and (iii) provide the other
services to the Facility described on Exhibit "B" attached hereto.
Esmore shall act in an advisory role during the construction process,
and shall be available for consultation with the County, its design
professionals and contractors on the construction of the Facility; however,
Esmor shall not serve as the construction manager of the construction of the
Facility and shall not have any liability to the County or any other party for
any design or construction defect or otherwise in connection with the design or
construction of the Facility.
4.3 Payment to Esmor. In the event the TJPC fails to provide all
of the TJPC funds to the County as contemplated herein, or in
5
<PAGE> 6
the event the Facility is not completed or made operational on or before
September 15, 1997 for any reason other than Esmor's default hereunder, then
Esmor shall have the right to terminate this Agreement and the County shall
immediately pay Esmor $637,500.00.
In the event the County or Esmor terminates this Agreement at any
time, or in the event this Agreement expires and is not renewed by the county
and Esmor prior to the date twenty (20) years after the Commencement Date, the
County shall pay Esmor an amount equal to the product obtained by multiplying
$637,500.00 by a fraction, the denominator of which is twenty (20) and the
numerator of which is the number of whole and fractional years from the date of
termination until the date twenty (20) years after the Commencement Date. In
the event this Agreement is terminated and the County desires to engage another
firm to manage and operate the Facility, the County shall require such other
firm to reimburse the County for the fee paid to Esmor as set forth herein:
4.4 Compliance with Codes, Standards and Guidelines. The County
will build the Facility in compliance with all state, local and generally
recognized building and construction codes, including, without limitation, all
applicable standards and guidelines promulgated by the American Corrections
Association and Texas Juvenile Probation Commission Standards for Post
Adjudication Facilities. The County shall obtain all permits and licenses
required by any governmental entity having power to control or regulate the
operation of the Facility. The County shall cause the County Juvenile Board to
inspect the Facility annually and provide the necessary certifications for the
continued operation of the Facility.
4.5 Fixtures and Equipment. The County shall provide a complete
Facility, include in Parking lot with eighty (80) parking spaces, all
necessary systems and components such as heating, air conditioning,
electrical, plumbing, door, window and fire alarm systems, internal fixtures,
fixed furniture (including, without limitation, beds) exterior security
lighting, interior emergency lighting, interior security system, all connections
to utilities, including water, sewer, electricity, gas, telephone, etc., entry
ways, parking areas, walkways, recreation, physical fitness areas, grounds,
fences, etc. Esmor shall provide the operational administrative equipment
such as desk, chairs, telephone systems and filing equipment required to
operate the Facility.
4.6 Repairs and Maintenance. The County shall, at its own expense,
maintain the physical structure of the Facility, and make all necessary
structural repairs and improvements to the Facility including, but
not limited to, repairs and improvements to the foundation, walls, roof,
underground and concealed plumbing, heating, ventilating, and air conditioning
system, drives, parking areas, fixed furniture fixtures and equipment, fire
protection systems, appliances, wiring and electrical systems, to keep the
6
<PAGE> 7
Facility in good repair working order and condition. Esmor will, at its sole
cost and expense, replace all light bulbs and ballasts as necessary, be
responsible for janitorial and cleaning services at the Facility and perform
routine maintenance and repairs at the Facility resulting from normal wear and
tear.
4.7 Utilities. Esmor shall pay for the use of all utilities
necessary and/or required for the operation of the Facility such as
electricity, gas, telephone service, water, sewer, waste and trash removal.
4.8 Taxes and Charges. Esmor shall pay or discharge, or cause to
be paid or discharged, before the same becomes delinquent, all income, payroll,
and worker's compensation taxes assessed against Esmor in connection with its
operation of the Facility.
4.9 Administrative Offices. Esmor agrees to make three (3) offices
at the facility available for use by the County for juvenile probation staff
personnel.
ARTICLE FIVE
OPERATION AND MANAGEMENT OF THE FACILITY
5.1 General Duties and Obligations; Standards. Esmor shall provide
the operations and management services described herein and operate, maintain
and manage the Programs in compliance with all applicable federal and state
constitutional requirements and laws, with all applicable provisions and
standards (and/or any variances originally granted by the County), with all
applicable standards of the Texas Juvenile Probation Commission.
5.2 Policies. Esmor shall establish written policies, procedures
and operation manuals in regard to the Facility operation and juvenile
supervision for which it is responsible pursuant to the terms of this
Agreement. Said written policies, procedures and operation manuals shall comply
with all applicable federal and state constitutional requirements and laws, all
applicable standards of the Texas Juvenile Probation Commission. Said written
policies, procedures and operations manuals shall be the property of Esmor, and
shall continue to be the property of Esmor.
5.3 Specified Duties and Obligations. Esmor's duties and
obligations shall include, but not be limited to, each of the activities
specified below. Esmor's written system of policies, procedures and operation
manuals described in Article V, Section 5.2 shall address these specified
duties and obligations.
5.3.1 Administration of the Facility. Esmor shall appoint a
Facility Administrator to manage on-site Esmor's day-to-day operation of the
Facility. The position of Facility
7
<PAGE> 8
Administrator shall be staffed by a professional experienced in the
administration of a like correctional facility.
5.3.2 Staffing. Esmor shall at all times provide adequate
staffing of the Programs in compliance with standards and TJPC policies. Esmor
shall be responsible for employee benefits, including medical insurance,
worker's compensation insurance, and other benefits.
5.3.3 Personnel Recruitment and Selection. Esmor's
recruitment, selection and employment of all personnel shall conform to the
rules and regulations of the Equal Employment Opportunity Commission. Esmor
shall adopt and implement a non-discriminatory policy with respect to handicap,
race, color, religion, sex, age and national origin. Esmor shall provide
access to records required by law to be maintained of such non-discriminatory
action upon request by the County. A notice shall be posted in a conspicuous
location at the Facility.
5.3.4 Employee Training. Esmor shall provide, at its own
expense, adequate training for each of its employees. To the extent necessary,
Esmor shall train employees to assure their ability to comply with applicable
policies, procedures and operation manuals as specified by Esmor.
5.3.5 Programs. Esmor shall deliver to the juvenile
population all program services required by federal and state regulatory
agencies, the Texas Juvenile Probation Commission.
5.3.6 Rights of Juveniles. Esmor shall implement the proper
policies, procedures and staff training to ensure that juvenile rights are not
violated and that all activities that take place within the Programs with
respect to juveniles complies with applicable standards, policies and
procedures.
5.3.7 Juvenile Supervision. Esmor shall provide such
security and supervision of juveniles as is required by sound juvenile
correctional practices to maintain the safety, security and order of the
Programs, to carry out program requirements and to protect the safety and
well-being of juveniles, staff, visitors and surrounding community. In the
event of any disturbance caused by the juveniles, or if any security threat or
peril, should occur within the Programs or on its premises, either of which
poses a material threat to persons or property, Esmor shall immediately notify
the Eagle Lake Police Department, the Colorado County Sheriff and the County
Judge. In the event of any such occurrences Esmor shall, as requested,
cooperate with the County and any appropriate law enforcement authorities in
restoring order.
5.3.8 Securing Points of Facility Access. Esmor shall
operate and control all points of ingress and egress.
8
<PAGE> 9
5.3.9 Safety and Emergency Plan. Esmor shall operate and maintain
the Programs in compliance with the National Fire Protection Association Life
Safety Code 101, applicable State of Texas regulations to safety and emergency
planning and County policies and procedures related to safety and emergency
planning. Esmor shall have an emergency plan for various emergency events and
fire prevention and suppression plan.
5.3.10 Records and Reports. Esmor shall maintain proper and complete
books, records and accounts with respect to all activities. Said records shall
be the property of Esmor, and shall continue to be the property of Esmor. All
records, reports and other statistical data required to be kept by the TJPC
shall be collected by Esmor.
5.3.11 Juvenile Records. Esmor shall make all record entries in a
timely manner. All juvenile information maintained by Esmor shall be
considered confidential and subject to release or disclosure only (i) as
required by law, (ii) in compliance with the order of any court having
jurisdiction, (iii) in defense of any proceeding to which Esmor or its
employees or agents are a party or (iv) to physicians or other health care
providers for use in treatment.
5.3.12 Health Care Services. Esmor shall provide a physician licensed
and practicing in the State of Texas to review the medical and health care
policies, procedures and practices of Esmor. Esmor shall provide nursing
coverage by a nursing professional who shall meet the licensing and
certification requirements of the State of Texas. Esmor's medical and health
care services shall be limited to those services that the State of Texas
regulations allow to be performed by a Registered Nurse, a Licensed Practical
Nurse and a Licensed Vocational Nurse. Esmor shall provide transportation
within Colorado County, Texas for juveniles to medical appointments or for the
purpose of obtaining medical treatment not available at the Programs site,
except, in any case of medical emergency, upon which Esmor shall provide
transportation of juveniles to the nearest point of medical care. Esmor shall
not be required to assume responsibiilty for the payment of any juvenile's
prescription medications, medical care, hospitalization or
institutionalization outside the Facility but Esmor shall be responsible for
security and supervision of the juvenile outside the Facility within Colorado
County, Texas. As used herein, "medical care" means all types of health
related services, including but not limited to dental, psychological,
psychiatric, optical, chiropractic, laboratory and diagnostic, as well as the
services traditionally rendered by medical doctors. The additional costs in
connection with any juvenile's prescription medications, medical care,
hospitalization, institutionalization, and/or security and supervision outside
the Facility will be charged to the county (or other entity) referring the
juvenile to the Facility and shall be in addition to the amount due under
paragraph 6.1 hereof.
9
<PAGE> 10
5.3.13 Laundry and Juvenile Clothing. Esmor shall provide
full juvenile laundry service and clothing in compliance with applicable
standards, and appropriate to the time of year, weather conditions and type of
activity.
5.3.14 Religious Services. The County shall arrange for
religious services to be conducted for juveniles at the Facility.
5.3.15 Essentials. Esmor shall provide at its expense, all
supplies, including hygiene items, clothing, paper, envelopes, stamps, pencils,
paper, program support materials and supplies, building support materials and
supplies for juvenile quarters (e.g., sheets, pillowcases, blankets, towels)
necessary to meet applicable standards.
5.3.16 Additional Services. The County, at its option, may
contract with Esmor for additional programs or services. Esmor agrees to
cooperate with the County in the provision of such additional programs and
services.
5.3.17 Food Services. Esmor will provide all food services
for all juveniles at the Facility in compliance with applicable laws and
regulations. The County will use its reasonable best efforts to enter into a
contract with the appropriate public school district prior to the Commencement
Date which requires such school district to pay to Esmor all amounts received
by such school district for the provision of food services to juveniles at the
Facility. On or before July 1, 1997, the County shall apply to the Texas
Department of Human Services to be reimbursed for the cost of food services at
the Facility, and commencing September 1, 1997, the County shall pay to Esmor
all amounts paid to the County by the Texas Department of Human Services for
the provision of food services to juveniles at the Facility.
5.3.18 Educational Services. The County shall enter into an
agreement with the appropriate public school district to provide educational
services to juveniles at the Facility in compliance with TJPC requirements.
ARTICLE SIX
COMPENSATION AND PAYMENTS
6.1 Compensation for Services. Esmor agrees to provide residential
services and programs at a per diem rate selected by Esmor not to exceed the
maximum per diem rate allowed by the State of Texas, from time to time. The
current maximum per diem rate allowed by the State of Texas is $88.43 for a
level 4 placement; however, the parties acknowledge that this amount is subject
to change by the State of Texas. The amount due to Esmor hereunder for each
juvenile shall not be an obligation of any party other
10
<PAGE> 11
than the county (or other entity) referring such juvenile to the Facility.
Esmor agrees to pay the County an amount equal to $0.25 for each per
diem amount received by Esmor within thirty (30) days after the end of the
calendar month for which such payments are received. All such amounts paid to
the County shall be held by the County in a separate fund and used solely for
the purposes of making repairs to the Facility, paying costs of insuring the
Facility and making improvements to the Facility.
6.2 Billing. Esmor shall submit invoices to the referring county
as soon as practicable after the last day of each month for the services
performed in the month just ended. Payment for the services and any expenses
which are the responsibility of the referring county which are invoiced are due
and payable upon receipt of the invoice.
ARTICLE SEVEN
DEFAULT AND TERMINATION
7.1 Notice of Default: Opportunity to Cure. The breach by either
party of any covenant, representation, or warranty shall constitute an event of
default. In such event, the injured party shall provide the defaulting party
sixty (60) days written notice of the default, and allow the defaulting party a
sixty (60) day period to proceed with reasonable efforts to cure such default,
either party shall have the option, with sixty (60) days written notice, to
terminate this Agreement.
7.2 Termination. The County and Esmor shall each have the right to
terminate this Agreement for any reason sixty (60) days after delivery of
written notice of such termination to the other party hereto. In such event
this County shall pay to Esmor on the date of such termination an amount
calculated as set forth in the second paragraph of Section 4.3 of this
Agreement.
7.3 Arbitration. This Agreement is subject to arbitration pursuant
to the provisions of the Texas General Arbitration Act, Texas Revised Civil
Statutes, Article 224 et. seq.
ARTICLE EIGHT
ADMISSION AND DISCHARGE OF JUVENILES
8.1 Admission to the Detention Center. Esmor shall accept for
admission to the Facility competent juveniles who meet the criterion set forth
by State law, standards and County policies and procedures, subject to the
following limitations:
8.1.1 Esmor shall not be required to accept juveniles
presented for admission who, in the judgement of Esmor, appear to be
11
<PAGE> 12
seriously ill, injured, or otherwise in need of immediate medical attention
and who are without documented medical clearance from a licensed medical
authority.
1.1.2 Esmor shall not be required to accept juveniles without
documentation properly authorizing their placement.
8.2 Return of Residents. Esmor shall have the right to return to the
referring county juveniles who do not conform to the juvenile profile or
juveniles whose behavior presents a threat to other juveniles, Facility staff,
or the security of the Facility. In the event that Esmor exercises its right
to return a juvenile, Esmor shall give the referring county oral and/or written
notice and the referring county shall remove the juvenile immediately upon
receipt of notice. The referring county agrees that it will at all times
indemnify and hold harmless Esmor against any and all losses caused or arising
out the referring county's negligent failure to remove a juvenile as
hereinbefore provided.
8.3 Non-delegation. In completing their obligations under this Agreement,
the parties agree that Esmor's authority shall be limited by applicable law as
well as the express limitation that this Agreement does not authorize, allow or
imply a delegation of authority by the County to Esmor of the following:
8.3.1 Determine a juvenile's release date.
8.3.2 Determining a juvenile's placement after release.
8.3.3. Granting a juvenile any form of special or temporary release
authorization.
8.4 Discharge. Esmor shall discharge juveniles only upon expressed
written direction from the county. Such direction must be received by Esmor at
least three (3) business days prior to the date the juvenile is to be released.
Juveniles will not be discharged directly into the community; they will be
accompanied by an Esmor employee or appropriate law enforcement officer and
transported to an appropriate location for discharge.
ARTICLE NINE
INSURANCE AND INDEMNITY
9.1 Insurance. Esmor will at all times keep its property and operations of
an insurable nature and of the character usually insured by companies engaged
in similar operations in amounts customarily carried, and against loss or
damage from such causes as are customarily insured against by similar
companies, in amounts not less than one (1) million dollars. All such insurance
shall be effected with responsible insurance carriers. Esmor shall obtain and
maintain an adequate plan of insurance, including insurance
12
<PAGE> 13
against civil rights violations, covering the parties, their officers,
employees and agents for all liability claims arising from the services
performed by Esmor. Said plan of insurance shall be adequate to provide
coverage to cover both parties for any and all claims arising from the services
by Esmor pursuant to the terms of this Agreement and shall name the County as
an additionally insured party.
The County shall maintain in full force during the term of this
Agreement all risk property damage insurance covering the Facility to the
extent of their full replacement value with an insurance company qualified to
do business in the State of Texas and having a Best Key Rating Guide general
policy holder's rating of A- or better and a financial rating VII or better.
If the Facility is damaged by fire or other casualty, the County shall, at its
sole cost and expense, proceed immediately to rebuild or repair the Facility to
its condition prior to such fire or other casualty.
9.2 Indemnity. Except as expressly provided herein to the contrary,
Esmor agrees that it will at all times indemnify and hold harmless the County
against any and all losses which occur on the premises and which are caused or
arise out of Esmor's operation of the Programs; provided, however, Esmor shall
not be obligated to indemnify the County against losses resulting from the
County's fraud, negligence, willful misconduct or theft on the part of the
County, its officers, employees or agents.
ARTICLE TEN
MISCELLANEOUS
10.1 Inspection. Esmor shall permit such employees or agents of the
County as the County may designate to visit the Programs and to examine, copy
and make extracts from Esmor's records relating to the Programs and to discuss
its affairs, operations and records with its officers, employees and agents,
all at such times and intervals and to such extent as the County may reasonably
require. Esmor shall promptly provide to the County such other information as
the County may from time to time reasonably request.
10.2 AIDS and HIV Infection. Esmor shall adopt and implement workplace
guidelines concerning persons with AIDS and HIV infection and shall also
develop and implement guidelines regarding confidentiality of AIDS and
HIV-related medical information for employees of Esmor and for juveniles served
by Esmor in accordance with the provisions found in Acts 1989, 71st Texas Leg.,
Ch. 1195, Section 5.03 and Section 5.04.
10.3 Avoidance of Illegality. In the event that this Agreement or any
portion hereof should be found, deemed or judged by a judicial or regulatory
body to be illegal or to constitute an improper delegation of the County's
authority, the parties shall
13
<PAGE> 14
use all reasonable efforts and shall cooperate to cure such illegality or
impropriety.
10.4 Amendment. This Agreement may be amended only in writing.
10.5 Survival of Representations and Warranties. All representations
and warranties contained in this Agreement shall survive the execution and
delivery of the Agreement.
10.6 Assignment: Successors. This Agreement is a continuing
obligation and shall be binding upon the parties and their respective
successors and assigns and shall inure to the benefit of their respective
successors and assigns. Esmor shall make no assignment without first obtaining
the County's written permission to do so; however, Esmor may, without obtaining
the County's consent, assign its right to receive payments under this Agreement
(but not its obligations) to any of Esmor's current or future lenders.
10.7 Notices. All notices and other communications under this
Agreement shall be in writing with first class postage prepaid, addressed as
follows:
If to Esmor: President
Esmor Correctional Services, Inc.
1819 Main Street, Suite 1000
Sarasota, Florida 34236
If to the County: County Judge
Colorado County Court
Colorado County Courthouse
Columbus, Texas 78934
or otherwise specified by notice from the appropriate party to the other.
10.8 Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws
of the State of Texas, and all obligations of the parties created hereunder are
performable in Colorado County, Texas.
10.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
10.10 Severability. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization without
14
<PAGE> 15
invalidating the remaining provision hereof or affecting the validity,
enforceability or legality of such provision in any other jurisdiction.
10.11 Telephone System. It is understood that Esmor intends to
contract with a third party provider to install the telephone system in the
Facility. Esmor may be paid royalties or fees for the use of the telephone
system by juveniles at the Facility and Esmor agrees to use such royalties and
fees first to offset the cost of installing the telephone system used in
connection with the administration of the Facility and thereafter, for the
purpose of providing program services for juveniles at the Facility.
In Witness Whereof, the Parties hereto have executed this Agreement as
of the date first above written.
ESMOR CORRECTIONAL SERVICES, INC., a
Delaware corporation ("Esmor")
By: /s/ James Slattery,
---------------------------------
James Slattery, President and
Chief Executive Officer
COLORADO COUNTY
("County")
By: /s/ Vince Slominski
--------------------------------
Judge Vince Slominski
15
<PAGE> 16
EXHIBIT "A"
-----------
The Site
<PAGE> 17
EXHIBIT "B"
-----------
Services to be provided by City of Eagle Lake
1. Obtain Phase I Environmental Site Assessment for the Site
2. Bring all necessary water and sanitary sewer facilities to the
Facility and waive all tap or connection costs for work and
sewer services for the Facility.
3. Purchase the Site from its current owner for $50,000.00 and
convey the Site to the County or lease the Site to the County
for a term of at least twenty (20) years after the Commencement
Date.
4. Solicit community participation in vocational training
opportunities, religious services and ministries and health
care services.
<PAGE> 1
EXHIBIT 10.47
ARIZONA DEPARTMENT OF CORRECTIONS [LETTERHEAD]
[SEAL] [SEAL]
FIFE SYMINGTON TERRY L. STEWART
GOVERNOR DIRECTOR
August 6, 1996
James Slattery, President
Correctional Services Corporation
1819 Main Street, Suite 1000
Sarasota, Florida 34236
RE: Request for Sealed Proposals (RFP) No. 6702
Privatization of 200 RTC and 400 DWI Prison Beds
Dear Mr. Slattery:
This is to advise you of the intent of the Department of Corrections to award
the contract for the referenced services to Correctional Services Corporation
(CSC), formerly Esmor Correctional Services, Inc.
The award is contingent upon the successful negotiation and execution of a
contract between CSC and the Department of Corrections as well as approval by
the State Risk Management Office of the CSC plan of insurance.
Please forward documentation to reflect the intent as well as the plan to be
used by CSC to provide the insurance required by the Department as stated in
Attachment #7 of RFP 6702. The documentation should also indicate the name,
address and telephone number of your insurance broker and is requested to be
provided by August 26, 1996.
Be advised that in order to verify coverages in the submitted plan, executed
certificates of insurance shall be required to be provided to this office and to
Risk Management no later than forty-five (45) days prior to execution of the
Contract between the Department and CSC. Risk Management must also receive
certified copies of insurance policies. A current financial statement
indicating that CSC is financially capable of providing any self-insured
retention or deductible must also be provided with the insurance certificates
and policies.
If you have questions or concerns regarding this correspondence, you may
contact me at (602) 542-3245.
Sincerely,
/s/ Mary I. Laverdue
Mary I. Laverdue
Contracts Administrator
cc: Carl Nink, Assistant Director, Community Corrections
Michael Smarik, Assistant Director, Administrative Services
Judith Kilgus, Administrator, Bureau of business and Finance
John Kohl, Deputy Warden, Privatization Unit, Contracts
RFP File #6702
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
ESMOR CORRECTIONAL SERVICES, INC.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED MARCH 31,
-------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average shares outstanding . . . . . . . . . . . . 3,281,250 4,306,709 4,552,707 4,407,828 4,974,752
Net effect of dilutive stock options
and warrants based on the treasury
stock method using average market
prices . . . . . . . . . . . . . . . . . . . . -- 88,025 --(1) --(1) --(1)
---------- ---------- ---------- ---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . 3,281,250 4,394,734 4,552,707 4,407,828 4,974,752
Net earning (loss) per financial statements . . . $1,104,395 $1,542,683 $ (959,391) $ (296,571) $ (13,525)
Per share amount . . . . . . . . . . . . . . . . . $ .34 $ .35 $ (.21) (.07) $ 0.00
========== ========== ========== ========== ==========
</TABLE>
- -----------------------------
(1) Common stock equivalents were not included for the year ended December
31, 1995, as their effect would be anti-dilutive as a result of the
Company's net loss for year then ended.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF ESMOR CORRECTIONAL SERVICES, INC. FOR THE YEAR ENDED DECEMBER
31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,506,748
<SECURITIES> 0
<RECEIVABLES> 3,374,229
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,296,283
<PP&E> 7,881,703
<DEPRECIATION> 655,380
<TOTAL-ASSETS> 23,340,527
<CURRENT-LIABILITIES> 4,756,187
<BONDS> 10,583,317
0
0
<COMMON> 49,117
<OTHER-SE> 9,172,928
<TOTAL-LIABILITY-AND-EQUITY> 23,340,527
<SALES> 30,482,683
<TOTAL-REVENUES> 31,552,152
<CGS> 0
<TOTAL-COSTS> 19,731,797
<OTHER-EXPENSES> 9,938,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 761,702
<INCOME-PRETAX> (2,789,391)
<INCOME-TAX> (1,050,000)
<INCOME-CONTINUING> (959,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (959,391)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
