U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB\A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-23038
CORRECTIONAL SERVICES CORPORATION
(FORMERLY ESMOR CORRECTIONAL SERVICES, INC.)
(Name of small business issuer in its charter)
Delaware 11-3182580 (State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1819 Main Street, Sarasota, Florida 34236
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (941) 953-9199
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
Warrants to Purchase Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [x] No [
]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
Issuer's revenues for its most recent fiscal year are $31,552,152.
The aggregate market value of the 2,339,411 shares of Common Stock held by
non-affiliates of the Company as of March 13, 1996 is $25,733,521.
The number of shares of Common Stock, par value $.01 per share, outstanding
as of March 13, 1996, is 4,922,468.
Transitional Small Business Disclosure Format. Yes [ ] No [x]
The information required by Items 9, 10, 11 and 12 of Part III of this Form
10-KSB are incorporated by reference into the Company's Proxy Statement to be
filed with the Commission on or before April 29, 1996.
<PAGE>
PART I
Item 1. Description of Business
Business Development
Correctional Services Corporation (formerly Esmor Correctional Services,
Inc.) (the "Company") was incorporated in Delaware on October 28, 1993 to
acquire all of the outstanding capital stock of a number of affiliated
corporations engaged in the operation of corrections and detention facilities.
The corporate structure of the Company consists of the Company and eleven
wholly-owned subsidiaries. All references to the Company include the Company and
all wholly- owned subsidiaries on a consolidated basis.
Business of the Company
The Company is engaged in the private management and operation of secure
and non- secure corrections and detention facilities for federal, state and
local corrections agencies. The Company's secure facilities include a detention
and processing center for illegal aliens, intermediate sanction facilities for
parole violators and a shock incarceration facility, which is a military style
"boot camp" for youthful offenders. Non-secure facilities include residential
programs such as community 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 entered the private corrections market in 1989 by securing two
federal contracts, one for a community corrections facility in New York for the
U.S. Department of Justice, Federal Bureau of Prisons ("BOP") and the other for
a detention facility in Seattle, Washington for the U.S. Immigration and
Naturalization Service ("INS"). The Company currently operates eleven
corrections or detention programs in the states of Florida, New York, Texas and
Washington with a total of 1,604 beds under contract. The Company has entered
into an agreement for the management and operation of a 400 bed DWI prison in
Phoenix, Arizona, which the Company expects to become operational at the end of
March, 1996. The Company has also entered into agreements for the management and
operation of two 350 bed facilities in the State of Florida, both of which the
Company expects to become operational during the first quarter of 1997.
Services
The Company operates three categories of secure and non-secure corrections
and detention facilities for federal, state and local correctional agencies as
follows:
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Pre-Disposition Secure Detention Facilities. These facilities provide
secure residential detention for pre-disposition individuals awaiting trial
and/or the outcome of judicial proceedings, and for aliens awaiting deportation
or the disposition of deportation hearings.
Post-Disposition Secure Incarceration Facilities. These facilities provide
secure incarceration for individuals who have been found guilty of a crime by a
court of law. The Company operates two types of post-disposition facilities:
Intermediate Sanction Facilities. These facilities provide secure
correctional services for individuals who have been found guilty of one or more
offenses but whose offense history or current offense does not warrant using a
prison bed, yet does warrant confinement in a secure correctional environment.
Offenders placed in intermediate sanction facilities are typically persons who
have committed a technical violation of their parole conditions. These
facilities offer eduction programs, employment training, drug and alcohol
treatment and offense specific treatment.
Shock Incarceration Facilities. These facilities, which are also known as
boot camps, provide intensely structured and regimented residential correctional
services which emphasize disciplined activities modeled on the training
principles of military boot camps. These facilities stress physical challenges,
fitness, discipline and personal appearance. Generally, shock incarceration
facilities limit participants to offenders between the ages of 17 and 25.
Community Corrections Facilities. The Company operates non-secure
residential and non-residential community corrections facilities.
Residential. These facilities, which are also known as half-way houses,
provide residential correctional services for offenders in need of supervision
and monitoring but not to the extent furnished in a secure environment.
Offenders in community corrections facilities are typically allowed to leave the
facility to work in the immediate community and/or participate in community
based educational and vocational training programs during the day time.
Generally, persons in this facility are serving the last six months of their
sentence.
Non-Residential. The Company provides non-residential services in which the
offender resides at home or in some other approved setting and is supervised and
monitored by the Company. Supervision may take the form of either: (i) requiring
the offender to report to a correctional facility a specified number of times
each week; or (ii) visiting the offender at his/her work site and home on a
regular basis.
The Company, to the best of its ability, operates its facilities in
accordance with guidelines and standards promulgated by the American
Correctional Association ("ACA")
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Commission on Accreditation. The ACA is an independent organization comprised of
professionals in the corrections industry which establishes guidelines and
standards by which a correctional institution may gain accreditation. The ACA
standards, which the ACA believes safeguard the life, health and safety of
offenders and personnel, are the basis of the accreditation process and define
policies and procedures for operating programs. The standards describe specific
objectives to be accomplished and cover such areas as administration, personnel
and staff training, security, medical and health care, food service, inmate
supervision and physical plant requirements. The ACA's standards are the most
widely accepted correctional standards. A facility that is accredited by the ACA
and/or operated in accordance with ACA standards should, in the Company's
judgment, be able to withstand most legal challenges by prisoners alleging
violations of their civil rights. Presently, the Company's Seattle Processing
Center and Tarrant County Community Corrections Facility are fully accredited by
the ACA. All of the Company's other facilities operate in accordance with
applicable ACA standards or under those standards specified by the governing
contracting authority. Where the Company's contracts require ACA accreditation,
the Company will seek such accreditation. Obtaining accreditation can take from
six months to more than twelve months from the date the ACA is first notified of
the Company's intention to seek accreditation. There is no assurance that ACA
accreditation, if applied for, will be received.
Operating Procedures
Pursuant to the terms of its contracts, the Company is responsible for the
overall operation of facilities under its management, including staff
recruitment, general administration of the facilities, security, supervision of
the offenders and facility maintenance. The Company, either directly or through
sub-contractors, 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, chemical dependency
programs, clothing and work and recreational programs.
The Company's contracts generally require the Company to operate each
facility in accordance with the current standards and guidelines of the ACA and
all applicable local, state and federal laws, rules and regulations. As
described above, the Company believes the benefits of operating its facilities
in accordance with ACA standards include improved management, defense against
lawsuits, a more humane environment for personnel and offenders and a measurable
criteria for upgrading programs, personnel and the physical plant on a
continuous basis.
Each of the Company's contracts require the Company to maintain certain
levels of insurance coverage for general liability, worker's compensation,
vehicle liability and property loss or damage. If the Company does not maintain
such insurance the contracting agency may terminate the contract. The Company
also is required to indemnify the contracting agencies for claims and costs
arising out of the Company's operations and in certain instances to maintain
performance bonds.
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The Company maintains general liability insurance in the amount of
$5,000,000 and an umbrella policy in the amount of $15,000,000 for itself and
each of its subsidiaries. The annual cost of such insurance is approximately
$470,000. See "Insurance."
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. Generally, occupancy rates for a facility will be low when a
particular facility first opens, however, after a facility gets beyond the
start-up period, occupancy rates tend to stabilize. The average occupancy for
all of the Company's facilities, based on rated capacity, was 97.7% during 1994
and 95.9% during 1995.
All of the Company's contracts are with governmental agencies. The
compensation to the Company under these contracts must be appropriated by the
respective governmental body. If funds are not appropriated, the contract may be
terminated by the governmental agency or the per diem rate payable to the
Company may be reduced. In addition, even if funds are appropriated, delays in
payments may occur which could negatively affect the Company's cash flow.
In accordance with standard industry practice, the majority of the
Company's contracts are short term in nature, generally one to two years and not
exceeding five years, and contain multiple renewal options. Generally, only the
contracting governmental agency may exercise a renewal option and there can be
no assurance that any agency will exercise a renewal option in the future. When
a contract comes up for renewal pursuant to its terms, the Company does not
submit a new bid; however, the exercise of the renewal option by the government
agency is contingent upon, among other factors, appropriation of funds. The
Company does not anticipate that the length of these contracts will increase in
the future. 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 revenues and earnings.
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, prospective providers of corrections services must be able to detail
their readiness to and must comply with a variety of applicable state and local
regulations, including education, health care and safety regulations. The
Company's contracts frequently include extensive reporting requirements.
In addition, many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis and to subcontract to varying degrees
with businesses owned by women or minorities.
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The 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 business, financial condition and results of operations. Furthermore,
the current and future operations of the Company may be subject to additional
regulations as a result of, among other factors, 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 business, financial condition and results of
operations.
Current Facilities and Programs
The following information is provided with respect to the facilities and
programs operated by the Company as of March 13, 1996:
<TABLE>
<CAPTION>
Number of Number of
Contracted Occupied
Facility or Program Type of Facility Beds* Beds
<S> <C> <C> <C>
Seattle Processing Center................................. Secure Detention 150 141
Facility
Tarrant County Community Correctional Facility............ Intermediate 310 285
Sanction Facility
Brooklyn Community Correctional Center.................... Residential 95 108
Community
Corrections Facility
LeMarquis Community Correctional Center................... Residential 60 125
Community
Corrections Facility
New York Community Correctional Program................... Residential 150 135
Community
Corrections Facility
South Texas Intermediate Sanction Facility................ Secure Intermediate 400 350
Sanction Facility
Travis County DWI Substance Abuse Treatment 74 74
Facility.................................................. Residential
Community
Corrections Facility
Fort Worth Community Corrections Facility................. Residential 200 100
Community
Corrections Facility
Hemphill County Juvenile Detention Center................. Residential 60 83
Community
Corrections Facility
Bartow Youth Facility..................................... Residential 76 71
Community
Corrections Facility
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Johnson County Juvenile Detention Center.................. Secure Juvenile 30 15
Detention Facility
</TABLE>
- -------------------
* The number of contracted beds is not necessarily a guaranteed minimum or
maximum, but rather an estimate of the number of offenders expected to be sent
to such facility by the contracting agency. All of the Company's facilities have
adequate capacity for all offenders placed in such facilities.
Seattle Processing Center. The Company, through Esmor (Seattle), Inc.,
manages this illegal alien detention and processing facility for the INS. This
is a government owned secure detention facility located in Seattle, Washington.
The facility is the first INS owned facility to receive ACA accreditation. The
Company's original contract with the INS to operate the Seattle facility had an
initial term which expired September 30, 1989. The contract contained four
one-year renewal options all of which were exercised and the last of which
expired September 30, 1993. Upon expiration of the original contract the Company
operated this facility pursuant to the terms of a "Bridge Contract" with the
INS. The Company's current contract with the INS had an initial base period
which expired September 30, 1994 and contains four one-year renewal options. The
contract is currently in its second renewal period which expires September 30,
1996.
Tarrant County Community Correctional Facility. The Company, through Esmor
Mansfield, Inc., manages this government owned facility for the Tarrant County
Community Supervision and Correction Department. This is a secure intermediate
sanction facility located in Tarrant County, Texas. The facility's services and
populations are separated into three distinct and autonomous programs: (i) a
shock incarceration (boot camp) program; (ii) a substance abuse program; and
(iii) a short-term sanction program. Residents of all three programs consist of
non-violent offenders and probation violators who have committed technical
violations or new misdemeanor offenses or who have failed to succeed in other,
less restrictive, community-based programs. The Company previously operated this
facility under an initial contract for the period February 1992 to August 31,
1993. A new contract was implemented in September 1993 which expired August 31,
1994. Upon expiration, the contract was renewed for an additional one year
period which expired August 31, 1995. The Company is currently operating this
facility pursuant to a contract which expires August 31, 1998.
Brooklyn Community Correctional Center ("BCC"). This is a residential
community corrections facility located in Brooklyn, New York serving men and
women from the BOP. The facility is operated by Esmor (Brooklyn), Inc. pursuant
to an agreement between the BOP and Esmor, Inc. At this facility, residents are
provided with, among other things, job acquisition and retention training,
substance abuse counseling, social and survival skills training and family
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adjustment counseling. In addition, the facility operates a home confinement
program. The Company operates this facility pursuant to an agreement with the
BOP which expires January 31, 1997 and contains three one-year renewal options.
The Company previously operated this facility as a facility for men pursuant to
an agreement with the BOP the initial term of which expired December 31, 1991
and contained three one-year renewal options all of which were exercised. The
facility then operated under a temporary extension pending award of the current
contract.
LeMarquis Community Correctional Center. This is a non-secure, residential
correctional facility located in New York, New York serving men and women from
the BOP. The facility is operated by Esmor Manhattan, Inc. pursuant to an
agreement between the BOP and Esmor, Inc. The facility delivers program services
identical to those provided at BCC described above. The Company's agreement with
the BOP for operation of this facility has an initial base period expiring June
30, 1997 and contains three one-year renewal options. The Company previously
operated the LeMarquis Correctional Center under separate agreements with the
BOP for a mens' program and a women's program. In July 1995, the BOP
consolidated these programs into one contract and re-awarded the new
consolidated contract to the Company.
New York Community Correctional Program. This is a residential community
correctional program located in Brooklyn and Manhattan, New York. This program,
operated by Esmor Management, Inc. pursuant to an agreement between the New York
State Department of Corrections and Esmor, Inc., serves offenders from the New
York State Department of Corrections ("DOC"). Participants in this program are
housed at either the BCC or LeMarquis Correctional Center, each of which has
adequate bed space to house all participants. This program delivers services
similar to those provided at BCC and the LeMarquis Correctional Center, however,
it does not offer a home confinement program. The initial term of this contract
was for a one-year period expiring August 31, 1993 and contained two one-year
renewal options, both of which were exercised. The contract has been extended by
the DOC through August 31, 1996.
South Texas Intermediate Sanction Facility. This is a secure intermediate
sanction facility for technical parole violators located in Houston, Texas. The
Company, through Esmor Houston, Inc., manages this government owned facility for
the Texas Department of Criminal Justice, Pardons and Paroles Division. The
Company provides programs for detention, training, education and substance abuse
treatment and rehabilitation. The Company commenced operations at this facility
in December 1993. The initial term of this contract expired August 31, 1995.
Upon expiration of the initial term, the contract was extended until December
31, 1995 pursuant to a written agreement between the Company and the Texas
Department of Criminal Justice, Pardons and Paroles Division. A new contract for
operation of this facility became effective January 1, 1996 and expires August
31, 1997. The contract contains options to renew for consecutive two-year terms.
Travis County DWI Substance Abuse Treatment Facility. The Company manages
this non-secure residential DWI substance abuse treatment facility for the
Community Supervision
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and Corrections Department of Travis County, Texas. This is a government owned
facility located in Travis County, Texas. The contract for operation of the
facility had an initial term which expired August 31, 1995 and was extended
through September 30, 1995. On October 1, 1995, the Company and the Community
Supervision and Corrections Department of Travis County entered into a new
contract which expires August 31, 1996.
Fort Worth Community Corrections Facility. The Company, through Esmor Forth
Worth, Inc., operates this residential community correctional facility located
in Forth Worth, Texas for the Texas Department of Criminal Justice, Pardons and
Paroles Division. At this facility, residents are provided with, among other
things, job acquisition and retention training, substance abuse counseling and
life skills counseling. The Company's contract, which commenced May 1, 1994,
expires August 31, 1996 and contains two one-year renewal options.
Hemphill County Juvenile Detention Center. The Company, through Esmor
Canadian, Inc., owns and operates this facility in Hemphill County, Texas for
the Board of Trustees for the Hemphill County Juvenile Detention Center (the
"Board"). This facility contains a shock incarceration (boot camp) program and a
detention center. Residents consist of non-violent offenders and probation
violators who have committed technical violations or new misdemeanor offenses or
who have failed to succeed in other, less restrictive, programs. The Company was
awarded this contract in December 1994 and began operations at this facility in
April 1995. The term of the contract runs for a period of twenty (20) years with
the Company's compensation thereunder subject to annual renegotiation between
the Company and the Board. In the event the Company and the Board fail to reach
agreement on compensation, the Agreement will terminate.
In October 1995, the Board entered into an agreement with the Texas Youth
Commission ("TYC") pursuant to which the Board has agreed to make the facility
available to the TYC through August 30, 1997. As of March 13, 1996, there were
36 juveniles placed by the TYC at this facility. In addition, the Board has
entered into agreements with certain counties in the state of Texas pursuant to
which the Board has agreed to make the facility available to these counties.
Bartow (Florida) Youth Facility. In June 1995, the State of Florida,
Department of Juvenile Justice, selected the Company to assume operation of
three existing state owned juvenile residential programs in Polk County,
Florida. The facilities services and populations are separated into the
following three programs: (i) a halfway house program for male adolescents, 14
through 18 years of age; (ii) an intensive halfway house program for male
adolescents, 14 through 18 years of age; and (iii) a serious habitual offender
program for male adolescents, 14 through 21 years of age. Operation of these
programs began July 1, 1995. The initial period of this contract is for two
years, expiring June 30, 1997.
Johnson County Juvenile Detention Center. The Company manages this facility
for Johnson County, Texas. This is a secure detention center housing juveniles
awaiting sentencing.
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Operations at this facility began at the end of January, 1996. The initial
period of this contract is for six months expiring at the end of July, 1996.
As indicated above, Esmor, Inc. is a party to certain of the above
contracts, including the contracts for the LeMarquis Correctional Center, the
Brooklyn Correctional Center and the New York Community Correctional Program,
the obligations under which contracts have been and will continue to be
fulfilled by various of the Company's subsidiaries. Although these contracts
require the contracting agency's consent to the assignment thereof, Esmor, Inc.
has neither sought nor received formal consent from the contracting agency to
the assignment of such contracts. The failure to obtain such consent could
result in termination of such contracts, which would have a material adverse
effect on the Company, and could result in possible vicarious liability under
these contracts to the Company. The Company, however, believes that the loss of
any such contract is unlikely because the contracting agencies are aware that
the obligations under these contracts are being fulfilled by certain of the
Company's subsidiaries in that such contracting agencies have, since the
inception of each such contract, been making payment under these contracts
directly to the respective subsidiaries. The Company does not presently expect
Esmor, Inc. to enter into additional contracts in the future.
Future Facilities and Programs
Arizona DWI Prison. In June 1995, the State of Arizona, Department of
Corrections, awarded the Company a contract for the operation of a 400 bed
secure DWI prison for the treatment of committed adult male inmates who have
demonstrated a need for substance or alcohol abuse intervention. The initial
term of this contract is three years from the date the Company receives the
first inmate which is expected to occur at the end of March, 1996.
Polk City (Florida) and Pahokee (Florida) Youth Facilities. In October
1995, the Company entered into two agreements with the State of Florida,
Correctional Privatization Commission, for the operation of two 350 bed medium
security facilities for youthful offenders to be located in Polk City and
Pahokee, Florida. The initial term of each agreement is three years from the
date the first youthful offender is assigned to a facility. The Company expects
to begin operations at each facility during the first quarter of 1997.
Additional Facilities
In certain instances, the Company is responsible for the design and
construction of new correctional and detention facilities and the redesign and
renovation of older facilities which it operates. Pursuant to the Company's
construction and design contracts, it is responsible for overall project
development and completion. When a contract requires construction of a new
facility, the Company's success depends, in part, upon its ability to obtain
necessary financing to purchase or lease real property for its facilities on
desirable terms and at satisfactory locations. The Company has typically in the
past and, anticipates in the future, financing these costs through cash flows
from operations, working capital and, to the extent available, bank lines of
credit. However, there can be no assurances that any of these sources of
financing will be
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available on acceptable terms, or at all. In addition, various methods of
construction financing may be used by contracting governmental agency,
including, but not limited to the following: (i) one-time general revenue
appropriation by the government agency for the cost of the new facility; (ii)
general obligation bonds; or (iii) lease revenue bonds or certificates of
participation.
Management also expects that many such locations will be in or near
populous areas and therefore anticipates legal action and other forms of
opposition from residents in areas surrounding each proposed site. In the
future, the Company may incur expenses in responding to such opposition. While
the Company can not estimate such expenses, it does not expect such expenses to
have a material adverse effect on the Company's operations. There can be no
assurance that the Company will successfully recoup such expenses. The Company
has not experienced community opposition to its facilities outside the state of
New York. In 1990, an action was filed alleging that the building currently used
for the LeMarquis Correctional Center was not zoned for use as a correctional
facility. This action was dismissed in favor of the Company and no further
action has been commenced. As a result of recent local opposition to the
Company's plan to use more space in the building for the LeMarquis Correctional
Center and the New York Community Correctional Program, future expanded use of
this building by the Company may not be possible or may be limited.
Employees
At March 13, 1996, the Company employed 639 persons all of whom are
full-time employees. The Company employs clerical and administrative personnel,
security personnel, food service personnel and facility administrators. The
Company believes that its relationships with its employees are good.
Each of the Company's facilities is managed as a separate entity by an
experienced facility administrator (the equivalent of a warden). The Company has
experienced no difficulty in securing employees with appropriate experience for
positions as facility administrators. Other personnel include administrative,
security, medical, food service, counseling, classification and educational and
vocational training personnel. Some of the services rendered at certain
facilities, such as medical services and education or training, are provided by
third-party contractors. The Company conducts background screening checks on all
potential employees.
All jurisdictions require corrections officers to complete a minimum amount
of training prior to employment. The Company meets or exceeds all applicable
training requirements. In most cases, employees must undergo at least 160 hours
of training by the Company before being allowed to work in a position that will
bring them in contact with offenders or detainees. This training is comprised of
approximately 40 hours learning Company policies, operational procedures and
management philosophy. An additional 120 hours of training covers legal issues,
rights of offenders and detainees, techniques of communication and supervision,
improvement of interpersonal skills and job training relating to the particular
position to be held are provided. Each Company employee who has contact with
offenders receives a minimum of 40 hours of
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additional training each year and each management employee of the Company
receives at least 24 hours of training each year.
Procurement Process
Most governmental procurement and purchasing activities are controlled by
procurement regulations which take the form of Requests for Proposals ("RFPs").
Most of the Company's activities in the area of securing new business are in the
form of responding to the RFPs. Interested parties, including the Company and
often one or more of its competitors, will submit a proposal in response to an
RFP. Generally, RFPs require a written proposal within a time period of 15 to
120 days from the time the RFP is first issued by the governmental agency. A
typical RFP requires bidders to provide the following information: the services
to be provided by the bidder, its experience and qualifications, and the price
at which the bidder is willing to provide the services, which may include the
renovation, improvement or expansion of an existing facility or the planning,
design and construction of a new facility. The Company competes primarily on the
basis of the quality of services provided, its experience in managing facilities
and the reputation of its personnel, and its ability to design, finance and
construct new facilities if appropriate. The Company estimates that it spends
between $50,000 to $100,000 responding to an RFP. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company has
in the past, and intends to in the future, engage independent consultants to
assist it in responding to RFPs.
In some instances, the Company is notified in advance that an RFP is
scheduled for issue to enable the Company to be among the bidders. Additionally,
the Company has been asked to assist governmental agencies in the development of
their RFPs. The Company's experience has been that a period of approximately 6
to 18 months is generally required from the issuance of the RFP to the granting
of a contract.
Before responding to an RFP, the Company carefully researches and
evaluates, among others, the following factors: (i) the current size and growth
projections for the detention or correctional population to be served; (ii)
whether or not the RFP provides for a minimum guaranteed capacity level; (iii)
willingness and flexibility of the contracting authority to allow the Company to
house, for other governmental agencies, populations of similar classification
within the proposed facility; and (iv) willingness and flexibility of the
contracting authority to allow the Company to make adjustments in operating
activities, such as work force reductions, in the event actual capacity is less
than proposed capacity. The Company's decision to bid on a project comes only
after its research of the above factors has established a satisfactory comfort
level that the project will support a revenue level necessary to operate at an
acceptable level of profitability. Since inception, the Company believes there
has been a continual increase in the number of RFPs being announced.
In addition to issuing formal RFPs, local jurisdictions may make use of a
procedure known as Purchase of Services or Requests for Qualification ("RFQ").
In the case of an RFQ, the requesting agency selects a firm believed to be most
qualified to provide the requested
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services and then negotiates the terms of the contract with that firm, including
the price at which the services are to be provided. The federal governmental
uses a procurement procedure similar to the RFQ, called a Letter Contract. The
federal government in some instances uses Letter Contracts to bridge gaps in
service during the time required to issue an RFP and evaluate responses.
Insurance
The Company maintains general liability insurance in the amount of
$5,000,000 and an umbrella policy in the amount of $15,000,000 for itself and
each of its subsidiaries. The annual cost of such insurance is approximately
$470,000. Certain of the Company's contracts require maintenance of certain
minimum levels of insurance. The Company believes it is in compliance in all
material respects with these requirements. 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. 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.
Competition
The Company competes directly with other entities some of which have
available greater capital resources than the Company. In addition, the business
in which the Company engages is one which other entities may easily enter,
thereby creating further competition.
The Company competes primarily on the basis of the quality of services
provided, its experience in managing facilities and the reputation of its
personnel, and its ability to design, finance and construct new facilities if
appropriate. The Company also attempts to achieve a competitive advantage by
securing additional contracts from governmental agencies with which it has
existing contractual relationships and by identifying and marketing its services
to correctional agencies that may need to begin contracting with the private
sector for correction and detention facilities.
Item 2. Description of Property
The following provides the location and general description, as of March
13, 1996, of each facility operated by or to be operated by the Company. The
Company believes that all of its properties are well maintained and in good
repair. The condition of the properties is adequate for the purpose for which
they are maintained.
13
<PAGE>
<TABLE>
<CAPTION>
Location Governmental Leased
Agency Description or Managed
<S> <C> <C> <C>
Seattle, INS 28,000 sq. ft. building Managed-
Washington Government
Owned
Mansfield, Texas County 60,000 sq. ft. building Managed-
(Tarrant County) Government
Owned
Brooklyn, BOP and 24,700 sq. ft. building Leased
New York DOC
Manhattan, BOP and 67,000 sq. ft. building Leased
New York DOC
Elizabeth, INS 94,000 sq. ft. building Leased
New Jersey
Houston, State 64,000 sq. ft. building Managed-
Texas Government
Owned
Canadian, State/ 19,340 sq. ft. building Owned
Texas County
Travis County, County 21,500 sq. ft. building Managed-
Texas Government
Owned
Fort Worth, State 27,401 sq. ft. building Leased
Texas
Bartow, State 3 buildings - Managed-
Florida 8,800 sq. ft. Government
4,000 sq. ft. Owned
3,700 sq. ft. - TOTAL
16,500 sq. ft.
Phoenix, State 96,000 sq. ft. secure Owned
Arizona DWI prison
Johnson County, County 5,800 sq. ft. building Managed-
Texas Government
Owned
</TABLE>
14
<PAGE>
Brooklyn, New York Lease
The Company leases this 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 the building. MAFC is a
corporation owned by Esther Horn (27.5%), James F. Slattery (8%) and Aaron
Speisman (27.5%), directors, officers (Mr. Slattery and Ms. Horn) and
significant stockholders of the Company. The terms of the lease were not
negotiated at arms length due to their relationship with both the Company and
MAFC.
Manhattan, New York Lease
The Company subleases this building, located at 12-16 East 31st Street, New
York, New York from LeMarquis Operating Corp. ("LMOC"). The Company currently
utilizes approximately fifty percent of the building for the LeMarquis
Correctional Center and a portion of the New York Community Correctional
Program. LMOC is a corporation owned 25% by Mrs. Horn and 8% by Mr. Slattery.
LMOC leases this building from an unaffiliated party at a current base monthly
rental of approximately $15,456 (the "Base Rent"), plus taxes and other charges
in the approximate current amount of $17,346 for a total monthly rental of
approximately $32,802. 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.
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. The Company
will not receive any credit, in terms of a reduction in rent or otherwise, for
these improvements. The initial term of the Company's sublease expired April 30,
1995 and is in its first renewal period which expires April 30, 2000. The
sublease contains two additional 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 $26,000 per month during the third renewal term beginning May 1,
2005. In 1994, the Company paid $40,000 to LMOC for the renewal options. This
option payment was separately negotiated between the Board of Directors of the
Company and LMOC. Mr. Slattery participated in such negotiations.
15
<PAGE>
Elizabeth, New Jersey Lease
The Company leases this facility, located at 625 Evans Street, Elizabeth,
New Jersey from an unaffiliated party at an approximate current monthly rental
of $25,700 until June 30, 1999. In addition, the Company pays taxes, insurance,
repairs and maintenance on this building.
Due to a disturbance at the Company's New Jersey Processing Center on June
18, 1995, the facility was closed and all detainees located therein were moved
by the INS to other facilities. The INS has not exercised its renewal option for
its contract which expired August 3, 1995 and the Company is currently pursuing
an alternative for the use and operation of this facility. If no alternative use
for the facility is found, management believes that the minimum rental
commitment for the facility will approximate $1,080,000.
Fort Worth, Texas Lease
The Company leases the facility located at 600 North Henderson Street, Fort
Worth, Texas from an unaffiliated party at a monthly rental of $10,200 for the
period May 16, 1994 through May 15, 1996; $10,400 for the period May 16, 1996
through May 15, 1997; $10,815.20 for the period May 16, 1997 through May 15,
1998; and $11,252.97 for the period May 16, 1998 through April 15, 1999. The
lease for these premises commenced May 16, 1994 and expires April 15, 1999. The
lease contains three renewal options. The term of the first renewal option is
for three years and the second and third renewal options are for two years. The
Company's rent is to increase four percent per annum during each year of the
renewal term.
Executive Office Leases
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 $8,278.29 for the period October 1, 1995 through
September 30, 1996; $8,812.38 for the period October 1, 1996 through September
30, 1997; $9,346.46 for the period October 1, 1997 through September 30, 1998;
$9,880.54 for the period October 1, 1998 through September 30, 1999; $10,414.63
for the period October 1, 1999 through September 30, 2000. The lease does not
contain any renewal options.
The Company also leases an office at 9603 Gayton Road, Richmond, Virginia
from an unaffiliated party at a current base monthly rental of $1,661. The lease
for these premises, which commenced June 10, 1995, expires May 31, 1998. The
base monthly rent payable by the Company under this lease is to increase five
(5%) percent per year during the term of the lease.
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. The lease for these
premises, which commenced November 1, 1993, expires October 31, 1998.
16
<PAGE>
Item 3. Legal Proceedings
In May 1993, an action entitled Richard Moore v. Esmor Management, Inc.,
John Ramos and Chris Jackson, was filed in the United States District Court,
Southern District of New York. Moore, a former employee, claims that he was
intentionally assaulted by employees of Esmor Management, Inc. Moore 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 Moore's claims to be without
merit and is vigorously defending this action.
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
damages sought by plaintiff amount to $4,000,000.00 plus attorney fees. The
Company believes 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.
Under the rules of the Securities and Exchange Commission the Company is
obligated to disclose lawsuits which involve a claim for damages in excess of
10% of its current assets notwithstanding the Company's belief as to the merits
of the lawsuit or whether the Company believes that it has adequate insurance
coverage therefor. On March 6, 1996, an action entitled Samson Brown, et al. v.
Esmor Correctional Services, Inc., et al, was filed in the Supreme Court of the
State of New York, County of Bronx. Plaintiffs alleging on behalf of plaintiffs
themselves and others similarly situated, personal injuries and property damage
purportedly caused by negligence and intentional acts of the Company. The
lawsuit claims $500 million each for compensatory and punitive damages. The
Company intends to vigorously defend itself against all claims. The Company has
notified its insurance carrier and has requested indemnity and defense.
In addition, in the ordinary course of its business, the Company is a party
to various legal actions which the Company believes are routine in nature and
incidental to the operation of its business. The Company believes that the
outcome of all proceedings to which it is currently a party will not have a
material effect upon its operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) The Company's Common Stock, par value $.01 per share (the "Common
Stock"), trades on the NASDAQ Stock Market under the symbol ESMR. The closing
high and low bid prices for the Common Stock for the period February 2, 1994,
the date of the Company's initial public offering, through December 31, 1995, as
reported by the NASDAQ Stock Market, are as follows: <TABLE>
<CAPTION>
Fiscal 1994 Bid Prices
High Low
<S> <C> <C>
Quarter ending March 31, 1994............................. 10 1/4............................ 6 1/2
Quarter ending June 30, 1994.............................. 10 1/2............................ 7 1/2
Quarter ending September 30, 1994......................... 10 1/4............................ 8 3/8
Quarter ending December 31, 1994.......................... 10 3/4............................ 9 3/8
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1995
<S> <C> <C>
Quarter ending March 31, 1995............................. 20 1/4............................ 9 7/8
Quarter ending June 30, 1995.............................. 22 1/2............................ 10 1/2
Quarter ending September 30, 1995......................... 15 1/2............................ 7
Quarter ending December 31, 1995.......................... 13 3/4............................ 7 1/4
</TABLE>
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) The number of recordholders of the Common Stock as of March 13, 1996 is
109. The Company believes that there are a substantially greater number of
beneficial owners of shares of its Common Stock.
(c) The Company intends to retain earnings for use in operations and
expansion of its business and therefore does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The future payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, the financial condition of the Company and applicable law.
18
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
General
Revenues earned under federal and state government agency contracts for the
management of correctional facilities are the Company's principal source of
income. Billings to governmental agencies are in accordance with each contract's
terms and are based on a fixed per diem rate per offender. Certain contracts
provide that monthly revenues are dependent on the number of offenders assigned
to the facility each day by the governmental agency. Other contracts provide
that monthly revenues are fixed.
The Company pays all costs of operating 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 and resident expenses. Payroll includes salaries and
wages of all employees, payroll taxes and fringe benefits. Resident expenses
consist of 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 usually incurs costs in responding to governmental agency
Requests for Proposals ("RFP"), which may range from $50,000 to $100,000. The
development costs associated with responding to an RFP include planning and
developing each project and preparing the bid proposal submitted to the
governmental agency. These costs include travel, legal, incentive compensation
for administrative employees, and other costs directly related to a project's
initial development. If management believes the recoverability of such costs is
probable, they are deferred until the anticipated contract has been awarded. At
the time the contract is awarded to the Company, the deferred development costs
are amortized on a straight- line basis over the term of the contract (including
option periods). Development costs of unsuc- cessful or abandoned bids are
expended when management believes their recovery is not considered probable. The
time period from incurring initial development costs on a project to the
commencement of operations can range from six to eighteen months.
After a contract has been awarded, the Company incurs start-up costs from
the date of award until commencement of operations. Start-up costs relative to
opening a facility include recruitment, training and travel of personnel and
certain legal costs. Start-up costs are capitalized from the date of award until
the operations commence, at which time they are amortized on a straight-line
basis over the term of the contract (including option periods).
From the inception date of operations for each new facility, the Company
fully staffs the facility in accordance with the terms of its contracts with the
governmental agency. During this initial period of operations (usually one to
four months), the governmental agency assigns, on an incremental basis,
residents to the facility. During this period, an operating loss may be
sustained while the facility is taking in residents. Thus, revenues generated
during this initial period for per diem type contracts increase as the resident
population increases.
19
<PAGE>
The following table sets forth the number of existing and new contracts for
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Contracts at beginning of period: 3 5 6 8 11
New contracts awarded and in operation during period: 1 1 1 2 1
Contract expiration (New Jersey-INS) and combination of - - - - (2)
two contracts into one (New York-BOP)
New contracts awarded and not in operation during period: 1 - 1 1 3
Contracts at end of period 5 6 8 11 13
</TABLE>
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Years Ended
December 31,
1994 1995
<S> <C> <C>
Revenues:
Resident Fees 97.5% 96.6%
Other Income 2.5 3.4
Total Revenues 100.0 100.0
Expenses:
Operating 61.4 62.5
General and Administrative 27.6 31.5
Interest .5 2.4
New Jersey Facility Closure Costs - 12.4
Total Expenses 89.5 108.8
Earnings (Loss) Before Income Tax Provision (Benefit) 10.5 (8.8)
Income Tax Provision (Benefit) 4.1 (3.3)
Net Income (Loss) 6.4% (5.5)%
</TABLE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues increased 30.0% from $24,272,989 in 1994 to $31,552,152 in 1995.
The revenue increase in 1995 was principally attributable to the revenues
produced from the Company's INS facility in Elizabeth, New Jersey, the Ft.
Worth, Texas facility and the Travis County, Texas facility, whose operations
commenced in September and October 1994. In
20
<PAGE>
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 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. Payroll expenses increased $3,862,117, or 36.2%, and resident expenses
increased $970,487, or 22.9%, for 1995 as compared to 1994. 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 46.0% and 43.9% of total
revenues for the years ended December 31, 1995 and 1994, respectively. As a
percentage of revenues, operating expenses were 62.5% and 61.4%, respectively in
each of the years ended December 31, 1994 and 1995.
General and administrative expenses for the years December 31, 1994 and
1995 were $6,695,599 and $9,938,344, respectively, an increase of $3,242,745 or
48.4% attributable to expenses associated with operations of the 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 the years ended December
31, 1994 and 1995, respectively.
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 lease for the New Jersey facility was assigned to the
Buyers. 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 represents the present value
of the consideration to be received through August 1999 of $3,207,882
($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
21
<PAGE>
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 value of
the related assets discussed above.
The Company has revised the present value of the $6,223,000 purchaser 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>
Interest expense increased $628,586 from $133,315 in 1994 to $761,901 in
1995, as a result of additional borrowings in 1995.
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.
The Company has adopted SFAS 121, "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of," which is
effective for fiscal years beginning after December 15, 1995. The Company is not
required to adopt Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting For Stock-Based Compensation ("SFAS 123").
Liquidity and Capital Resources
The Company has historically financed its operations through investments by
stockholders, cash generated from operations and bank loans.
22
<PAGE>
The Company's working capital at December 31, 1994 was $1,356,204 and was
$4,540,096 at December 31, 1995. The Company's current ratio was 1.31 to 1 at
December 31, 1994 compared to 1.95 to 1 at December 31, 1995.
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 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 cost additions during the year ended December 31, 1995.
Such costs principally related to the Phoenix, Arizona facility (scheduled to
begin operations at the end of March 1996) and to the Pahokee and Polk County,
Florida contract awards.
Net cash of $8,684,961 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.
On March 8, 1995, the Board of Directors authorized a five-for-four stock
split, payable in the form of a twenty-five (25%) percent stock dividend,
payable on April 5, 1995 to stockholders of record on March 23, 1995.
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,
NationsBank will make revolving credit loans to the Company, from time to time,
in amounts not to exceed, in the aggregate, the lesser of $6,000,000 or the
Borrowing Base (defined in the Loan Agreement to be eighty-five (85%) percent of
the Company's and its subsidiaries' eligible accounts receivables). Proceeds of
revolving credit loans are to be used for working capital purposes (including,
without limitation, deferred development and start-up costs in connection with
the Company's new or existing facilities). Interest on the revolving credit
loans is computed at the Company's option, at either NationsBank prime plus
0.75% or the London International Bank Rate plus 3.35%. As part of the Loan
Agreement, NationsBank also made a term loan to the Company in the principal
amount of $5,000,000. Proceeds of the term loan were used to repay the Company's
existing indebtedness to Marine Midland Bank, N.A. ($5,002,689 at December 31,
1995, which amount was repaid to Marine Midland Bank on such date). The Term
Loan
23
<PAGE>
bears interest at a fixed rate of 8.92% and is repayable in monthly installments
of $83,333 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 charged under the revolving credit and the term loan will be
based on the Company's financial performance as set forth in the Loan Agreement.
The Company may prepay any borrowings without interest or penalty. The Company's
subsidiaries have guaranteed the Company's obligations under the Loan Agreement
and 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 to be used for its Arizona DWI prison. The Company is required to pay
NationsBank one-quarter of one percent of the average unused portion of the
facility.
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
(10%) percent subordinated promissory note duly 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 included herein. Also during such quarter, the Company completed the
private placement of 496,807 shares of common stock at $7.75 per share,
receiving gross proceeds of $3,850,254.
A substantial portion of the gross proceeds of $9,526,854 from the unit and
the common stock offerings were used to finance the purchase of land and a
building in Phoenix, Arizona to be used as a 400 bed secure DWI prison and to
fund the associated renovation of the building and the start-up costs of the
facility, the total cost of which is projected to be approximately $8,500,000.
Inflation
The modest levels of inflation since the Company began business in 1989
have not effected the Company's results of operations. 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). Negotiations on contracts subject to renewal each year or for
each two year period take into account increases for payroll and other expenses.
Item 7. Financial Statements
The information is contained on Pages F-1 through F-21 hereof.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24
<PAGE>
Part III
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
* 2.1 Stock Transfer Agreements between the Company and the stockholders of
each of Esmor Management, Inc., Esmor (Brooklyn), Inc., Esmor Manhattan, Inc.,
Esmor (Seattle), Inc., Esmor New Jersey, Inc., Esmor Texas, Inc. and Esmor
Houston, Inc.
* 3.1 Certificate of Incorporation dated October 28, 1993
* 3.2 By-Laws
* 4.2 Form of Underwriter's Warrant between the Company and Janney
Montgomery Scott Inc.
*10.1 Stock Option Plan
*10.5 Employment Agreement between the Company and James F. Slattery
*10.6 Employment Agreement between the Company and Aaron Speisman
*10.7 Contract between the Company and the U.S. Department of Justice,
Federal Bureau of Prisons for operation of a facility in New York, New York for
men, dated February 1, 1991
*10.7.1 Exercise of third option year of the contract for operation of a
facility in New York, New York for men
#10.7.2 Extension of contract for operation of a facility in New York, New
York for men through March 31, 1995
*10.8 Contract between the Company and the U.S. Department of Justice,
Federal Bureau of Prisons for operation of a facility in New York, New York for
women, dated February 1, 1991
*10.8.1 Letter dated September 23, 1993 from the U.S. Department of
Justice, Federal Bureau of Prisons expressing its intent to exercise the second
option year of the contract
*10.8.2 Exercise of second option year of the contract for operation of a
facility in New York, New York for women
25
<PAGE>
#10.8.3 Exercise of third option of the contract for operation of a
facility in New York, New York for women through June 30, 1995
*10.9 Contract between the Company and the U.S. Department of Justice,
Federal Bureau of Prisons for operation of a facility in Brooklyn, New York,
dated November 13, 1990
*10.9.1 Letter dated September 23, 1993 from the U.S. Department of
Justice, Federal Bureau of Prisons expressing its intent to exercise the third
option year of the contract
*10.9.2 Exercise of third option year of the contract for operation of a
facility in Brooklyn, New York
#10.9.3 Extension of contract for operation of a facility in Brooklyn, New
York through March 31, 1995
*10.10 Bridge Contract between the Company and the U.S. Department of
Justice, Immigration and Naturalization Service for operation of the Seattle
Processing Center, dated September 28, 1993
*10.11 Contract between the Company and the Judicial District Community
Supervision and Corrections Department of Tarrant County, dated September 1,
1993
#10.11.1 Renewal and Amendment of Agreement between the Company and the
Judicial District Community Supervision and Corrections Department of Tarrant
County, dated October 5, 1994
**10.11.2 Contract between the Company and the Judicial District Community
Supervision and Corrections Department of Tarrant County, dated September 26,
1995 for the operation of the Tarrant County Community Corrections Facility
*10.12 Contract between the Company and the New York State Department of
Corrections, dated July 17, 1992
**10.12.1 Extension of Contract between the Company and the New York State
Department of Corrections
*10.13 Contract between the Company and the Texas Department of Criminal
Justice, Pardons and Paroles Division
#10.13.1 Extension to the contract between the Company and the Texas
Department of Criminal Justice, Pardons and Paroles Division for operation of
the South Texas Intermediate Sanction Facility
26
<PAGE>
** 10.13.2 Contract between the Company and the Texas Department of
Criminal Justice for operation of the South Texas Intermediate Sanction Facility
*10.14 Contract between the Company and the U.S. Immigration and
Naturalization Service for operation of the New Jersey Processing Center, dated
August 13, 1993
**10.14.1 Contract between the Company and the U.S. Immigration and
Naturalization Service extending the period which the INS has to exercise its
renewal option under its contract for the operation of the New Jersey Processing
Center
*10.15 Agreement between the Company and William Banks, dated October 31,
1989
*10.15.1 Letter dated December 9, 1993 from William Banks to the Company
*10.16 Form of Sub-Lease between the Company and LeMarquis Operating Corp.
*10.17 Form of Lease between the Company and Myrtle Avenue Family Center,
Inc.
*10.18 Lease between the Company and T. NY (USA)
#10.19 Contract by and between Esmor Canadian, Inc. and the Board of
Trustees for the Hemphill County Juvenile Detention Center for operation of the
Hemphill County Juvenile Detention Center
#10.20 Contract between Esmor Fort Worth, Inc. and the Texas Department of
Criminal Justice, Pardons and Paroles Division for the Fort Worth Community
Corrections Facility
#10.21 Contract dated September 1, 1994 by the Community Supervision and
Corrections Department of Travis County, Texas for the Travis County Substance
Abuse Treatment Facility
**10.21.1 Contract dated October 1, 1995 by the Community Supervision and
Corrections Department of Travis County, Texas for the Travis County Substance
Abuse Treatment Facility
#10.22 Contract between the Company and the U.S. Department of Justice,
Immigration and Naturalization Service for operation of the Seattle Processing
Center, effective August 1, 1994
**10.22.1 Exercise of second option of the contract for operation of the
Seattle Processing Center
#10.23 Lease between Esmor Fort Worth, Inc. and Region Enterprises, Inc.
27
<PAGE>
#10.24 Revolving Credit and Term Loan Agreement with Marine Midland Bank
dated as of July 28, 1994
**10.25 1994 Non-Employee Director Stock Option Plan
**10.26 Loan and Security Agreement with NationsBank, N.A. (South) dated as
of December 31, 1995.
**10.27 Lease between the Company and Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership dated as of June 30, 1995
**10.28 Lease between the Company and Gayton Crossing dated as of May 26,
1995
**10.29 Contract between the Company and the State of Florida, Correctional
Privatization Commission dated October 6, 1995 for operation of the Pahokee
Youth Facility
**10.30 Contract between the Company and the State of Florida, Correctional
Privatization Commission dated October 6, 1995 for operation of the Polk City
Youth Facility
**10.31 Contract between the Company and the State of Arizona, Department
of Corrections for operation of the Arizona DWI Facility
**10.32 Contract between the Company and the State of Florida, Department
of Juvenile Justice for operation of the Bartow Youth Facility
**10.33 Contract, effective as of December 22, 1995, between the Company
and Johnson County, Texas for the Johnson County Juvenile Detention Center
**10.34 Asset Purchase Agreement dated as of December 15, 1995 between the
Company and Corrections Corporation of America
**10.35 Construction Contract dated as of December 28, 1995 between the
Company and Bison Industries, Inc. for construction of the Pahokee (Florida)
Youth Facility
**10.36 Design and Construction Contract dated as of December 1, 1995 by
and between the Company, the Florida Correctional Finance Corporation and the
State of Florida, Correctional Privatization Commission for the design and
construction of the Polk City (Florida) Youth Facility
**10.37 Contract dated July 1, 1995, between the Company and the U.S.
Department of Justice, Federal Bureau of Prisons for operation of a facility in
New York, New York
28
<PAGE>
**10.38 Contract between the Company and the U.S. Department of Justice,
Federal Bureau of Prisons for operation of a facility in Brooklyn, New York
**22.1 List of Significant Subsidiaries
**23.1 Consent of Grant Thornton LLP
---------------
*Incorporated by reference to the Company's Registration
Statement on Form SB-2 (File No. 33-71314-NY).
#Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1994
**Incorporated by reference to the initial filing of the Company's Annual
Report on Form 10- KSB for the year ended December 31, 1995.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K for its last quarter in
Fiscal 1995.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORRECTIONAL SERVICES CORPORATION
Registrant
By: \s\ James F. Slattery
James F. Slattery, President
Dated: September 11, 1996
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
\s\ James F. Slattery President (Principal Executive September 11, 1996
James. F. Slattery Officer) and Director
\s\ Esther Horn Director September 11, 1996
Esther Horn
\s\ Aaron Speisman Vice President, Secretary and September 11, 1996
Aaron Speisman Director
\s\ Lee Levinson Chief Financial Officer (Principal September 11, 1996
Lee Levinson Financial Officer)
\s\ Raymond S. Evans Director September 11, 1996
Raymond S. Evans
\s\ William J. Barrett Director September 11, 1996
William J. Barrett
\s\ Stuart Gerson Director September 11, 1996
Stuart Gerson
\s\ Melvin Stith Director September 11, 1996
Melvin Stith
\s\ Diane McClure Vice President and Director September 11, 1996
Diane McClure
\s\ Richard Staley Vice President and Director September 11, 1996
Richard Staley
</TABLE>
30
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Independent Certified Public Accountants 1
Consolidated Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7
</TABLE>
F-1
<PAGE>
Report Of Independent Certified Public Accountants
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, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended 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>
Correctional Services Corporation and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
CONSOLIDATED BALANCE SHEETS December 31,
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,756,748 $ 308,446
Restricted cash 750,000 -
Accounts receivable 3,374,229 4,804,014
Prepaid expenses and other 1,415,306 640,643
Total current assets 9,296,283 5,753,103
BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -
AT COST, NET 7,226,323 7,518,001
RECEIVABLE FROM SALE OF EQUIPMENT AND LEASEHOLD
IMPROVEMENTS 3,207,882 -
OTHER ASSETS
Deferred development and start-up costs, net 1,729,270 1,061,671
Deferred income taxes 1,120,000 -
Other 760,769 185,562
$23,340,527 $14,518,337
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 3,535,165 $ 2,639,515
Current portion of long-term debt 1,221,022 1,757,384
Total current liabilities 4,756,187 4,396,899
LONG-TERM DEBT 4,000,000 3,028,020
SUBORDINATED PROMISSORY NOTES 5,362,295 -
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,
4,911,688 and 4,407,828 shares issued and outstanding
as of 1995 and 1994, respectively. 49,117 44,079
Additional paid-in capital 9,479,436 5,616,456
Retained earnings (306,508) 1,432,883
9,222,045 7,093,418
$23,340,527 $14,518,337
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
<S> <C> <C>
Revenues
Resident fees $30,482,683 $23,655,226
Other income 1,069,469 617,763
31,552,152 24,272,989
Expenses
Operating 19,731,797 14,899,192
General and administrative 9,938,344 6,695,599
Interest 761,702 133,315
New Jersey facility closure costs 3,909,700 -
34,341,543 21,728,106
(Loss) earnings before income tax (benefit) provision (2,789,391) 2,544,883
Income tax (benefit) provision (1,050,000) 1,002,000
NET (LOSS) EARNINGS $ (1,739,391) $ 1,542,883
Net (loss) earnings per common share $(.38) $.35
Weighted average shares outstanding 4,552,707 4,394,734
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Common Capital paid-in Retained
stock stock capital earnings Total
<S> <C> <C> <C> <C> <C>
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 $49,117 $ - $9,479,436 $ (306,508) $9,222,045
31, 1995
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings $(1,739,391) $1,542,883
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 1,168,850 776,255
Amortization of subordinated promissory note discount 50,695 -
New Jersey facility asset impairment 2,771,424 -
New Jersey deferred development costs writedown 416,201 -
Amortization of deferred loan costs 127,568 111,854
Deferred income tax benefit (1,120,000) -
Changes in operating assets and liabilities
Accounts receivable 1,429,785 (3,148,806)
Prepaid expenses and other (774,644) (269,641)
Accounts payable and accrued liabilities 895,650 785,258
Net cash provided by (used in) operating activities 3,226,138 (202,197)
Cash flows from investing activities:
Capital expenditures (6,110,693) (7,693,761)
Development and start-up costs (1,824,268) (401,772)
Increase in unexpended construction funds (750,000) -
Net cash used in investing activities (8,684,961) (8,095,533)
Cash flows from financing activities:
Proceeds from issuance of common stock 3,469,698 4,105,020
Proceeds from long-term borrowing 1,500,000 4,078,261
Payments on long-term borrowings (1,282,715) (242,857)
Proceeds (payments) on short-term debt 218,333 (15,198)
Issuance of subordinated promissory notes and warrants 5,676,600 -
Debt issuance costs (652,101) -
Proceeds from exercise of stock options 33,320 -
Other assets (56,010) 469,924
Distributions to stockholders - (480,000)
Net cash provided by financing activities 8,907,125 7,915,150
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH $3,448,302 $(382,580)
EQUIVALENTS
Cash and cash equivalents at beginning of year 308,446 691,026
Cash and cash equivalents at end of year $3,756,748 $308,446
Supplemental disclosures of cash flows information:
Cash paid during the year for
Interest $602,700 $179,500
Income taxes $789,500 $927,800
</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-7
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Correctional Services Corporation and Subsidiaries (formerly Esmor
Correctional Services, Inc.) 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 Correctional
Services Corporation 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 applicable lease term (ranging from five
to ten years).
F-8
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 contract. These costs, which are required under
the contract, to the extent recoverable, are capitalized from the date of award
until revenue commences, 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.
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.
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.
F-9
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Included in cash and cash equivalents is restricted cash of $750,000. This
amount represents final payment 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. In addition, certain amounts have been reclassified from
deferred development and start-up costs to buildings, equipment and leasehold
improvements as of December 31, 1995.
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
The Company has 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-10
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
11. Accounting Pronouncements Not Yet Adopted
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," is required to be adopted in 1996 and
allows for a choice of the method of accounting used for stock-based
compensation. Entities may use the "intrinsic value" method currently based on
APB 25 or the new "fair value" method contained in SFAS No. 123. The Company
intends to implement SFAS No. 123 in 1996 by continuing to account for
stock-based compensation under APB 25. As required by SFAS No. 123, the pro
forma effects on net income and earnings per share will be determined as if the
fair value based method had been applied and will be disclosed in the notes to
the 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 March 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.
F-11
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
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.
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>
Year Ended December 31,
1995 1994
Carrying Fair Carrying Fair
Amount Amount Amount Amount
<S> <C> <C> <C> <C>
Cash and cash equivalents $3,757,000 $3,757,000 $308,000 $308,000
Long-term debt $5,221,000 $5,221,000 $4,785,000 $4,785,000
Subordinated promissory notes $5,362,000 $5,362,000 - -
</TABLE>
3. Receivable from Sale of Equipment and Leasehold Improvements
The carrying value of the Receivable from Sale of Equipment and Leasehold
Improvements at December 31, 1995 is $3,207,892. 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).
F-12
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Prepaid insurance $ 190,754 $393,605
Prepaid real estate taxes 122,473 126,174
Prepaid and refundable income taxes 665,878 -
Other 436,201 120,864
$1,415,306 $640,643
</TABLE>
NOTE E - BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Building, equipment and leasehold improvements, at cost, consist of the
following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Building $5,742,749 $ -
Equipment 1,138,276 3,477,778
Leasehold improvements 1,000,678 4,962,912
7,881,703 8,440,690
Less accumulated depreciation (655,380) (922,689)
$7,226,323 $7,518,001
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1994 was
approximately $1,040,000 and $639,000.
F-13
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE F - OTHER ASSETS
Deferred development and start-up costs are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Development costs $1,663,804 $ 874,286
Start-up costs 354,880 425,043
2,018,684 1,299,329
Less accumulated amortization (289,414) (237,658)
$1,729,270 $1,061,671
</TABLE>
The December 31, 1995 balance of $2,266,409 includes development costs of
$48,500 related to unawarded contracts.
Other assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred refinancing costs $587,424 $ 43,946
Deposits 125,773 -
Deferred lease option costs 34,664 40,000
Other 12,908 101,616
$760,769 $185,562
</TABLE>
Amortization expense of deferred development and start-up costs for the
years ended December 31, 1995 and 1994 was approximately $202,000 and $137,000,
respectively.
NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Accounts payable $1,324,963 $1,289,334
Accrued expenses 1,722,848 509,812
Payroll and related taxes 284,633 357,956
Construction costs 120,120 349,683
Income taxes 82,601 132,730
$3,535,165 $2,639,515
</TABLE>
F-14
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
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 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 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 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.
F-15
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE H - DEBT - (Continued)
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 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>
1995 1994
<S> <C> <C>
Term loans $5,000,000 $4,785,404
Revolving line of credit 221,022 -
5,221,022 4,785,404
Less
Current maturities 1,221,022 1,757,384
$4,000,000 $3,028,020
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $1,221,022
1997 1,000,000
1998 3,000,000
$5,221,022
</TABLE>
F-16
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE I - RENTAL AGREEMENTS
Minimum rental commitments under non-cancelable leases as of December 31,
1995, are as follows:
<TABLE>
<CAPTION>
Related
Total companies
<S> <C> <C>
Year ending December 31,
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, 1995 and 1994 aggregated
$1,510,000 and $1,428,000, respectively, and is included in general and
administrative expenses. Rent expense to related companies aggregated $1,038,000
and $966,000 for the years ended December 31, 1995 and 1994, respectively.
NOTE J - INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current:
Federal $ (42,000) $800,000
State and local 112,000 202,000
Deferred
Federal, state and local (1,120,000) -
$(1,050,000) $1,002,000
</TABLE>
F-17
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE J - INCOME TAXES - (Continued)
The following is a reconciliation of the statutory federal income tax rate and
the effective tax rate as a percentage of pre-tax income:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Statutory federal rate (34.0)% 34.0%
State taxes, net of federal tax benefit 5.0 4.0
Non-deductible items 1.2 1.4
Other (9.8) -
(37.6)% 39.4%
</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>
1995 1994
<S> <C> <C>
Depreciation $986,000 $27,000
Vacation accrual 52,000 42,000
Development costs 42,000 -
Accrued expenses 70,000 -
Other (30,000) -
1,120,000 69,000
Valuation allowance (69,000)
$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.
F-18
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
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 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
December 31, 1995, all of these 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 shares 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
December 31, 1995, all of these warrants remain outstanding.
In connection with the 1995 Private Placement, warrants issued with units
totaled 874,198 which are exercisable at $7.75 per share. At December 31, 1995
all of these warrants remain outstanding.
F-19
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
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 represents the present value
of the consideration to be received through August 1999, of $3,207,882
($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 value
of the related assets discussed above.
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:
F-20
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)
<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, a 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 Esmor Management, Inc. 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 amounts to $4,000,000 plus attorney fees. The Company
believes 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 to the consolidated financial
statements.
<PAGE>
F-21
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)
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.
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 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 a five-year
employment agreement 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.
F-22
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE L - COMMITMENTS AND CONTINGENCIES - (Continued)
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.
5. Other
Approximately 96.6% and 97.5% of the Company's revenues for the years ended
December 31, 1995 and 1994, 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, the Company has incurred approximately $604,000 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 for the final payment of the renovation costs of
this facility.
F-23
<PAGE>
Correctional Services Corporation
and Subsidiaries
(formerly Esmor Correctional Services, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995 and 1994
NOTE M - STOCK OPTION PLAN
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
Option Plan Option Plan
<S> <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
Option prices per share
Granted $4.76 - $20.63 $7.05 - $18.75
Exercised $4.76
</TABLE>
At December 31, 1995, stock options for 225,314 shares ($4.76-$8.00 a
share) were exercisable under the stock option plans.
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Schedule contains summary financial information extracted from the
Financial Statements of Esmor Correctional Correctional Services, Inc. for the
year ended December 31, 1995, and is qualified in its entirety by reference gto
such financial statements.
</LEGEND>
<CIK> 0000914670
<NAME> Correctional Services Corporation
<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> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
