<PAGE>
As filed with the Securities and Exchange Commission on February 8, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CORRECTIONAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 7389 11-3182580
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
1819 Main Street, Suite 1000
Sarasota, Florida 34236
(941) 953-9199
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
With a copy to:
SETH I. TRUWIT, ESQ. MICHAEL J. SILVER, ESQ.
Epstein Becker & Green, P.C. Hogan & Hartson L.L.P.
250 Park Avenue 111 South Calvert Street
New York, New York 10177-0077 Baltimore, Maryland 21202
(212) 351-4709 (410) 659-2741
(Name, address, including zip code, and
telephone number, including area code,
of agent for service for Registrant)
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective and upon
consummation of the merger described herein.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed Proposed
Title Of Each Amount Maximum Maximum Amount of
Class of Securities To Be Offering Price Aggregate Registration
To Be Registered Registered(1) Per Unit(2) Offering Price Fee(3)
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Common Stock........... 4,593,962 $10.1563 $46,657,656 $3,985
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(1) Based on 11,325,869 shares of common stock of Youth Services International,
Inc. outstanding on February 4, 1999 and 924,694 shares of common stock
issuable upon the exercise of outstanding options and warrants on such
date, multiplied by the exchange ratio of .375.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low sales
prices of the Common Stock on the Nasdaq National Market on February 4,
1999.
(3) Representing the registration fee of $12,971, reduced by $8986 that was
previously paid in connection with the filing of preliminary joint
proxy/prospectus materials pursuant to Section 14(g) of the Securities
Exchange Act of 1934, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Preliminary Copies
Confidential, For Use of the Securities and Exchange Commission Only
[CSC LOGO] [YSI LOGO]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Correctional Services Corporation and Youth
Services International, Inc. have unanimously approved a merger. Following the
merger, we believe that we will be the largest and most comprehensive private
provider of juvenile rehabilitative services in the U.S. We will be positioned
to take advantage of the complementary strategic fit of our businesses,
combining YSI's transitional and academy oriented programs with CSC's secure
programs.
If we complete the merger, YSI stockholders will receive .375 of a share of
CSC common stock for each share of YSI common stock they own. Based on the
number of outstanding shares of YSI common stock at the close of business on
January 27, 1999, this will result in the issuance of shares of CSC common
stock. YSI will become a wholly-owned subsidiary of CSC. CSC stockholders will
continue to hold their existing shares of common stock. Following the merger,
YSI stockholders will hold approximately 35.3% of CSC's outstanding common
stock. If we assume exercise of all CSC and YSI warrants and options
outstanding YSI stockholders will hold approximately 33.1% of CSC's outstanding
common stock.
Before the merger, CSC and YSI common stock trading symbols: Nasdaq National
Market: "CSCQ" and "YSII". January 11, 1999 closing sale prices: CSCQ $11 7/8
per share and YSII $4 1/16 per share. Following the merger, CSC common stock
trading symbol: Nasdaq National Market: "CSCQ".
The Boards of Directors of CSC and YSI have determined that the merger is in
the best interests of their stockholders, and each Board unanimously recommends
voting FOR adoption of the merger agreement.
The merger cannot be completed unless the stockholders of both companies
approve the merger. We cordially invite you to attend the special meeting of
stockholders of your company to consider and vote on the proposed merger.
Whether or not you plan to attend your company's special meeting, it is
important that your shares be voted. Please take the time to vote by completing
and mailing the enclosed proxy card to us. Alternatively, you may vote your
shares by telephone by following the directions on the enclosed proxy card. If
you sign, date and mail your proxy card or use telephonic voting without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger. If your shares are held in "street name," you must instruct your
broker in order to vote. If you fail to vote or to instruct your broker to vote
your shares, the effect will be the same as a vote against the merger.
Your vote is very important.
The date, times and places of the special meetings are as follows:
For CSC stockholders:
, , 1999, 1:00 p.m.
The Hyatt Hotel,
1000 Boulevard of the Arts,
Sarasota, FL 34236
For YSI stockholders:
, , 1999, 9:00 a.m.
Harbor Court Hotel,
550 Light Street,
Baltimore, MD 21202
This joint proxy statement/prospectus provides you with detailed information
about the proposed merger. We encourage you to read this document carefully. In
addition, you may obtain information about our companies from documents that we
have filed with the Securities and Exchange Commission.
/s/ James F. Slattery
James F. Slattery
Chairman of the Board,
Chief Executive Officer and President
Correctional Services Corporation
/s/ Timothy P. Cole
Timothy P. Cole
Chairman of the Board,
Chief Executive Officer and President
Youth Services International, Inc.
See "Risk Factors" beginning on
page 11 for a discussion of
certain factors that you should
consider before you determine how
to vote on the merger.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the CSC common stock to be issued
in the merger or passed upon the adequacy or accuracy of this joint proxy
statement/prospectus. Any representation to the contrary is a criminal
offense.
This joint proxy statement/prospectus is dated , 1999, and is first
being mailed to stockholders on or about , 1999.
<PAGE>
Preliminary Copies
Confidential, For Use of the Securities and Exchange Commission Only
[CSC LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
The special meeting of Stockholders of CSC will be held at The Hyatt Hotel,
1000 Boulevard of the Arts, Sarasota, Florida 34236, on , , 1999 at 1:00
p.m. (local time), to consider and vote upon the following:
1. to approve and adopt the agreement and plan of merger, dated as of
September 23, 1998, as amended as of January 12, 1999, among CSC,
Palm Merger Corp., which is a newly organized subsidiary of CSC, and
YSI, including the issuance of CSC common stock pursuant to the
merger of the newly organized CSC subsidiary with and into YSI in
accordance with the terms of the merger agreement; and
2. to transact such other business as may properly come before the
special meeting.
The Board of Directors has set the close of business (5:00 p.m., local time)
on January 27, 1999, as the record date for determining stockholders entitled
to notice of and to vote at the special meeting. A list of these stockholders
entitled to vote at the special meeting will be available for inspection for
ten days preceding the meeting at CSC's headquarters, at 1819 Main Street,
Suite 1000, Sarasota, Florida 34236, and will also be available for inspection
at the meeting itself.
The Board of Directors of CSC has determined that the merger and the merger
agreement including the issuance of CSC common stock to YSI stockholders are in
the best interests of the stockholders of CSC, has unanimously approved the
merger and the merger agreement including the issuance of CSC common stock to
YSI stockholders, and unanimously recommends that the CSC stockholders vote to
adopt the merger and the merger agreement including the issuance of CSC common
stock to YSI stockholders, at the special meeting.
By order of the Board of Directors,
_____________________________________
Secretary
, 1999
It is important that the enclosed proxy card be signed, dated and promptly
returned in the enclosed envelope or that you register your vote by
telephone by following the instructions on your proxy card, so that your
shares will be presented whether or not you plan to attend the special
meeting.
You should not send stock certificates with your proxy card.
<PAGE>
Preliminary Copies
Confidential, For Use of the Securities and Exchange Commission Only
[YSI LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
The special meeting of Stockholders of YSI will be held at , on ,
, 1999 at 9:00 a.m. (local time), to consider and vote upon the following:
1. to approve the merger of Palm Merger Corp., which is a newly organized
subsidiary of CSC, with and into YSI, pursuant to the agreement and plan
of merger, dated as of September 23, 1998, and as amended as of January
12, 1999, among CSC, merger subsidiary and YSI; and
2. to transact such other business as may properly come before the special
meeting.
The Board of Directors has set the close of business (5:00 p.m., local time)
on January 27, 1999, as the record date for determining stockholders entitled
to notice of and to vote at the special meeting. A list of these stockholders
will be available for inspection for ten days preceding the meeting at YSI's
headquarters at 2 Park Center Court, Suite 200, Owings Mills, Maryland 21117
and will also be available for inspection at the meeting itself.
The Board of Directors of YSI has determined that the merger and the merger
agreement are advisable and in the best interests of the stockholders of YSI,
has unanimously approved the merger and the merger agreement, and unanimously
recommends that the YSI stockholders vote to approve the merger at the special
meeting.
By order of the Board of Directors,
_____________________________________
Secretary
, 1999
It is important that the enclosed proxy card be signed, dated and promptly
returned in the enclosed envelope or that you register your vote by
telephone by following the instructions on your proxy card, so that your
shares will be presented whether or not you plan to attend the special
meeting.
You should not send stock certificates with your proxy card.
<PAGE>
TABLE OF CONTENTS
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SUMMARY................................................................... 1
The Companies........................................................... 1
Reasons for the Merger.................................................. 1
Expected Completion Date of the Merger.................................. 2
Merger Consideration.................................................... 2
Recent Comparative Market Prices for the Stock of YSI and CSC........... 2
Risks to Consider....................................................... 2
Tax Consequences of the Merger.......................................... 2
Issues That You Are Asked to Vote Upon.................................. 3
Opinions of Financial Advisors.......................................... 3
Record Date; Voting Power............................................... 3
What You Need to Do Now................................................. 3
Stock Certificates...................................................... 4
Share Ownership of Management and Certain Stockholders.................. 4
Interests of Certain Persons in the Merger.............................. 4
Directors and Executive Officers of CSC Following the Merger............ 4
Listing and Trading of CSC Common Stock................................. 5
Regulatory Approvals.................................................... 5
Other Conditions........................................................ 5
Cancellation of the Merger.............................................. 5
Termination Fee......................................................... 5
Comparative Rights of Stockholders of YSI and CSC....................... 6
YSI Stockholders Will Not Have Appraisal Rights......................... 6
COMPARATIVE PER SHARE MARKET PRICE INFORMATION............................ 7
Comparative Market Price Data........................................... 7
Historical Market Prices................................................ 7
SUMMARY FINANCIAL DATA.................................................... 8
Summary Consolidated Financial Data Of Correctional Services
Corporation............................................................ 8
Summary Consolidated Financial Data Of Youth Services International,
Inc.................................................................... 8
Summary Pro Forma Combined Financial Data Of Correctional Services
Corporation and Youth Services International, Inc. .................... 9
Summary Comparative Per Share Data...................................... 10
RISK FACTORS.............................................................. 11
YSI Stockholders Will Receive a Fixed Number of Shares of CSC Common
Stock in the Merger Despite Potential Change in YSI and CSC Common
Stock Prices........................................................... 11
Uncertainty of Obtaining Additional Financing Required to Fund Our
Construction and Operation of New Facilities........................... 11
Uncertainty of Obtaining Financing Required to Redeem YSI's 7%
Convertible Subordinated Debentures.................................... 11
Uncertainties in Integrating Business Operations and Realizing Synergies
and Business Opportunities............................................. 12
We Expect Significant Merger-Related Charges Against Earnings........... 12
Financial Risks Relating to Uncertain Occupancy Levels; Recent Poor
Operating Performance by YSI........................................... 12
Short Term Nature of Facility Management Contracts; Possibility of Early
Contract Termination or Fee Reduction.................................. 12
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i
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Financial Risks Relating to Speculative Projects........................ 13
Barriers to Our Internal Expansion...................................... 13
Risks Related to CSC's International Operations......................... 13
Uncertainty in Management of Our Growth................................. 13
Risks Relating to the Combined Company's Future Acquisitions............ 13
Public Resistance to Privatization of Correctional and Detention
Facilities............................................................. 13
Unique Governmental Regulation of Our Business.......................... 14
We Expect to Encounter Significant Competition.......................... 14
We Significantly Depend on our Senior Management........................ 14
We May Encounter Material Costs Relating to Year 2000 Issues............ 14
We May Experience Disturbances In One or More of Our Facilities......... 15
We May Encounter Potential Legal Liability Related to Management of
Correctional and Detention Facilities.................................. 15
THE MERGER................................................................ 16
General................................................................. 16
Background of the Merger................................................ 16
CSC's Reasons for the Merger; Recommendation of its Board of Directors.. 21
Opinion of the CSC Board of Directors' Financial Advisor................ 23
YSI's Reasons for the Merger; Recommendation of its Board of Directors.. 27
Opinion of the YSI Board of Directors' Financial Advisor................ 30
Form of the Merger...................................................... 33
Merger Consideration.................................................... 33
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares...................................................... 33
Effective Time.......................................................... 34
Effect on Shares Issuable Under YSI Stock Plans......................... 34
Effect on Shares Issuable Upon Exercise of YSI Warrants................. 34
Federal Income Tax Consequences of the Merger........................... 34
Tax Opinions............................................................ 35
Accounting Treatment.................................................... 36
CSC's Assumption of YSI Debentures...................................... 36
Regulatory and Third Party Approvals.................................... 37
Appraisal Rights........................................................ 37
Interests of Certain Persons in the Merger.............................. 37
Delisting and Deregistration of YSI Common Stock........................ 39
Restrictions on Resales by Affiliates................................... 40
THE STOCKHOLDERS' MEETINGS................................................ 41
Purpose, Time and Place................................................. 41
Record Date; Voting Power............................................... 41
Votes Required.......................................................... 41
Share Ownership of Management........................................... 42
Voting of Proxies....................................................... 42
Revocability of Proxies................................................. 42
Solicitation of Proxies................................................. 43
THE MERGER AGREEMENT...................................................... 44
General................................................................. 44
Closing; Effective Time................................................. 44
Articles of Incorporation of Surviving Corporation...................... 44
By-laws of Surviving Corporation........................................ 44
Board and Officers of Surviving Corporation............................. 44
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ii
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Consideration to be Received in the Merger............................. 44
Exchange of Certificates; Fractional Shares............................ 44
Representations and Warranties......................................... 45
Certain Covenants...................................................... 46
No Solicitation........................................................ 46
YSI Stock-Based Awards and YSI Warrants................................ 47
Employee Benefit Plans................................................. 47
Indemnification and Insurance.......................................... 48
Conditions to the Consummation of the Merger........................... 48
Termination............................................................ 50
Expenses............................................................... 51
Amendment, Extension and Waiver........................................ 51
SELECTED CONSOLIDATED FINANCIAL DATA OF CORRECTIONAL SERVICES
CORPORATION............................................................. 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CORRECTIONAL SERVICES CORPORATION...................... 53
SELECTED CONSOLIDATED FINANCIAL DATA OF YOUTH SERVICES INTERNATIONAL,
INC. ................................................................... 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF YOUTH SERVICES INTERNATIONAL, INC...................... 61
CORRECTIONAL SERVICES CORPORATION AND YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............. 71
INFORMATION CONCERNING CORRECTIONAL SERVICES CORPORATION................. 89
Corporate Structure.................................................... 89
Description............................................................ 89
Business Strategy...................................................... 89
Operational Divisions.................................................. 90
Marketing and Business Development..................................... 91
Contract Award Process................................................. 91
Market................................................................. 92
Competition............................................................ 92
Recent Events.......................................................... 92
Facilities............................................................. 93
Adult Division......................................................... 94
Juvenile Division...................................................... 95
Community Corrections Division......................................... 96
Facility Management Contracts.......................................... 96
Operating Procedures................................................... 96
Facility Design and Construction....................................... 97
Facilities Under Construction.......................................... 97
Employees.............................................................. 97
Employee Training...................................................... 98
Insurance.............................................................. 98
Regulation............................................................. 98
Litigation............................................................. 98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND OFFICERS
OF CSC.................................................................. 100
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iii
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INFORMATION CONCERNING YOUTH SERVICES INTERNATIONAL, INC................. 102
Description............................................................ 102
Market................................................................. 102
Business Strategy...................................................... 103
YSI Programs........................................................... 105
Consulting and Development Services.................................... 108
Personnel and Training................................................. 109
Litigation............................................................. 111
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND OFFICERS
OF YSI.................................................................. 112
WHERE YOU CAN FIND MORE INFORMATION...................................... 115
MANAGEMENT............................................................... 116
Directors and Executive Officers....................................... 116
Committees of the Board of Directors................................... 117
Directors Compensation................................................. 117
Indemnification........................................................ 118
Executive Compensation................................................. 118
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 122
DESCRIPTION OF CSC COMMON STOCK FOLLOWING THE MERGER..................... 124
CSC Common Stock....................................................... 124
Nasdaq National Market Matters......................................... 124
COMPARISON OF RIGHTS OF HOLDERS OF YSI COMMON STOCK AND CSC COMMON
STOCK................................................................... 125
Number of Directors.................................................... 125
Removal of Directors................................................... 125
Filling Vacancies on the Board of Directors............................ 125
Interested Director Transactions....................................... 126
Amendment to Certificate of Incorporation.............................. 126
Amendment of By-laws................................................... 126
Stockholder Meetings and Provisions for Notices; Proxies............... 127
Voting by Stockholders................................................. 127
Stockholder Action Without a Meeting................................... 127
Business Combinations.................................................. 128
Control Share Acquisitions............................................. 129
Appraisal Rights....................................................... 130
Dividends.............................................................. 130
Limitation of Liability and Indemnification of Directors and Officers.. 130
Authorized Capital..................................................... 131
EXPERTS.................................................................. 132
LEGAL MATTERS............................................................ 132
CORRECTIONAL SERVICES CORPORATION CONSOLIDATED FINANCIAL STATEMENTS...... F-1
YOUTH SERVICES INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS..... G-1
</TABLE>
ANNEXES
Annex A Agreement and Plan of Merger, as amended
Annex B Opinion of YSI Board of Directors' Financial Advisor
Annex C Opinion of CSC Board of Directors' Financial Advisor
iv
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SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents to which we refer you. See "Where You Can Find More
Information" (page 115).
The Companies
Correctional Services Corporation
1819 Main Street
Suite 1000
Sarasota, Florida 34236
941-953-9199
Correctional Services Corporation is a leading developer and operator of
adult and juvenile correctional facilities for federal, state and local
governments. In addition, CSC believes it is one of the largest operators of
private secure juvenile correctional facilities in the United States. CSC has
recently experienced rapid growth in both its juvenile and adult divisions, all
of which has been internally generated. As of December 31, 1998, CSC had
agreements to operate 36 correctional and detention facilities in 11 states and
Puerto Rico for an aggregate of approximately 9,800 beds. This represents a
100% increase in the number of agreements and a 291% increase in the number of
beds from the same date one year ago. CSC reported revenues of $67.6 million
and net income of $3.3 million for the nine months ended September 30, 1998.
This represents an increase in revenues and net income of 59% and 73%,
respectively, over the comparable 1997 period.
In addition to providing fundamental residential services for adult and
juvenile offenders, CSC has developed a broad range of programs intended to
reduce recidivism, including basic and special education, substance abuse
treatment and counseling, vocational training, life skills training, and
behavioral modification counseling. The services offered by CSC range from
project consulting to the design, development and operation of new correctional
and detention facilities and the redesign, renovation and operation of existing
facilities.
Youth Services International, Inc.
2 Park Center Court
Suite 200
Owings Mills, MD 21117
410-356-8600
Youth Services International, Inc. is a leading national provider of private
educational, developmental and rehabilitative programs to adjudicated
juveniles. YSI's programs encompass a holistic approach to education, training
and socialization of adjudicated juveniles in order to prepare them to reenter
society as positive, contributing members of their community. YSI's programs
are designed to equip juveniles with the skills, education and behavioral norms
to enable them to be successful in the work place, in school and in the
community. YSI provides its programs primarily in residential settings and its
programs include academy, sexual offender, high impact, boot camp, female
academy, transition and detention. As of December 31, 1998, YSI operated 27
residential juvenile justice programs in 12 states serving approximately 2,300
juveniles and conducted non-residential programs serving approximately 800
additional juveniles.
Reasons for the Merger (pages 21 and 27)
Our companies are proposing the merger because we believe the combination of
our two companies will provide significant benefits to our stockholders,
clients and employees. Following the merger, we believe that we will be the
largest and most comprehensive private provider of juvenile rehabilitative
services in the U.S. We will be positioned to take advantage of the
complementary strategic fit of our businesses, combining YSI's transitional and
academy oriented programs with CSC's secure programs. We anticipate that the
combined company will be able to offer governmental agencies the broadest
spectrum of
1
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quality solutions for adjudicated juveniles in both secure and non-secure
settings, from first time offenders to the most serious habitual offenders. On
a combined basis, CSC and YSI currently have contracts to operate 44 juvenile
rehabilitative programs with over 4,900 beds in 14 states and Puerto Rico and
provide aftercare services to an additional 800 juveniles. The combined company
will have a total of 63 adult and juvenile programs with nearly 12,000 beds
plus aftercare services. To review the background and reasons for the merger in
greater detail, see pages 16 through 30.
Expected Completion Date of the Merger
We are working to complete the merger in March 1999.
Merger Consideration (page 33)
YSI common stockholders will receive .375 of a share of common stock of CSC
in exchange for each share of YSI common stock they hold. As a result of the
merger, YSI will become a wholly-owned subsidiary of CSC. After the merger, YSI
stockholders will own approximately 35.3% of the common stock of CSC. If we
assume exercise of all CSC and YSI warrants and options, YSI stockholders will
own approximately 33.1% of the common stock of CSC. CSC stockholders will not
exchange their shares in the merger. Based on the number of outstanding shares
of YSI common stock at the close of business of January 27, 1999, this will
result in the issuance of shares of CSC common stock.
We will not issue fractional shares. Instead, YSI stockholders will receive
cash for any fractional share of CSC common stock owed to them. The amount of
cash will be based on the average closing price of a share of CSC common stock
for the 20 most recent trading days ending on the last full trading day before
the merger becomes effective.
For example:
. If you currently own 1,000 shares of YSI common stock, then after the
merger you will receive 375 shares of CSC common stock.
. If you currently own 10 shares of YSI common stock, then after the
merger you will receive 3 shares of CSC common stock and cash equal to
.75 times the average closing price of a share of CSC common stock for
the 20 most recent trading days ending on the last full trading day
before the merger becomes effective.
. If you currently own 1 share of CSC common stock, then after the merger
you will continue to own 1 share of CSC common stock.
Recent Comparative Market Prices for the Stock of YSI and CSC (page 7)
September 23, 1998 was the last full trading day prior to our announcement
of the signing of the merger agreement. The closing price for YSI common stock
on this day was $3 29/32. The closing price for CSC common stock on this day
was $11 1/8. On January 11, 1999, the closing price for YSI common stock was $4
1/16 and for CSC common stock was $11 7/8. See page 7 for information
concerning comparative market price data for YSI and CSC common stock.
Risks to Consider
You should review "Risk Factors" on pages 11 through 15. You should also
review the countervailing factors considered by each company's Board of
Directors. See "The Merger--CSC's Reasons for the Merger; Recommendation of its
Board of Directors" and "The Merger--YSI's Reasons for the Merger;
Recommendation of its Board of Directors."
Tax Consequences of the Merger
We expect that the exchange of shares by YSI stockholders will be tax-free
to YSI stockholders for federal income tax purposes. However, YSI stockholders
may have to pay taxes on cash received for fractional shares. We expect that
the merger will be accounted for as a pooling-of-interests, which means that we
will treat our companies as if they had always been combined for accounting
purposes and the merger will be tax-free to CSC and merger subsidiary for
federal income tax purposes. To review the tax consequences to stockholders in
greater detail, see pages 34 through 35.
2
<PAGE>
The tax consequences of the merger to you will depend on your own situation.
You should consult your tax advisors for a full understanding of the tax
consequences of the merger to you.
Issues That You Are Asked to Vote Upon
YSI stockholders: You are being asked to approve the merger described in the
merger agreement. YSI's Board of Directors has unanimously found the merger to
be advisable and recommends that stockholders vote FOR approval of the merger.
CSC stockholders: You are being asked to approve the merger and the merger
agreement including the issuance of CSC common stock to YSI stockholders. CSC's
Board of Directors has unanimously approved the merger agreement and recommends
voting FOR approval of the merger and the merger agreement, including the
issuance of CSC common stock to YSI stockholders.
Opinions of Financial Advisors
YSI. The YSI Board of Directors has obtained an opinion dated September 23,
1998 and an updated opinion dated , 1999, from its independent financial
advisor, SunTrust Equitable Securities, to the effect that, at the respective
dates of such opinions and based upon and subject to certain matters stated
therein, the exchange ratio of .375 of a share of CSC common stock for each
share of YSI common stock is fair to the YSI stockholders from a financial
point of view. A copy of the updated written opinion from SunTrust Equitable is
attached to this joint proxy statement/prospectus as Annex B. YSI has agreed to
pay SunTrust Equitable a fee equal to $1,200,000 in connection with the merger.
Of that fee, $250,000 has been paid to date and $950,000 is payable only upon
consummation of the merger.
CSC. The CSC Board of Directors has obtained an opinion dated September 23,
1998 and an updated opinion dated , 1999, from its independent financial
advisor, J.C. Bradford & Co. LLC, to the effect that, at the respective dates
of such opinions and based upon and subject to certain matters stated therein,
the merger and the transactions contemplated thereby were fair to the CSC
stockholders (other than the former YSI stockholders who would become CSC
stockholders as a result of the merger) from a financial point of view. A copy
of the updated written opinion from J.C. Bradford is attached to this joint
proxy statement/prospectus as Annex C. CSC has agreed to pay J.C. Bradford a
fee equal to $500,000 in connection with the merger. Of that fee, $300,000 has
been paid to date and $200,000 is payable only upon consummation of the merger.
Record Date; Voting Power (page 41)
You are entitled to vote at your stockholders' meeting if you owned shares
as of the close of business on January 27, 1999, the record date for the
meetings.
On the record date, there were shares of CSC common stock entitled to
vote at the CSC special meeting. CSC stockholders will be entitled to one vote
at the special meeting for each share of CSC common stock held of record on the
record date.
On the record date, there were shares of YSI common stock entitled to
vote at the YSI special meeting. YSI stockholders will be entitled to one vote
at the special meeting for each share of YSI common stock held of record on the
record date.
Approval by CSC stockholders of the merger and the merger agreement
including the issuance of CSC common stock to YSI stockholders will require the
approval of more than 50% of the shares of CSC common stock outstanding on the
record date.
Approval by YSI stockholders of the merger will require the approval of more
than 50% of the shares of YSI common stock outstanding on the record date.
What You Need to Do Now
Just indicate on your proxy card how you want to vote, sign it and mail it
in the enclosed return envelope as soon as possible, so that your shares will
be represented at your stockholders' meeting. If you prefer, you may vote by
telephone. The toll-free number is listed on the proxy card.
3
<PAGE>
If you sign and send in your proxy (or call that number) and do not indicate
how you want to vote, your proxy will be counted as a vote in favor of the
merger. If you do not vote or you abstain, it will have the effect of a vote
against the merger.
The YSI special meeting and the CSC special meeting will take place on ,
, 1999, at 9:00 a.m. and 1:00 p.m., respectively. You may attend your
stockholders' meeting and vote your shares in person, rather than signing and
mailing your proxy card. In addition, you may withdraw your proxy up to and
including the day of your stockholders' meeting by following the directions on
page 42 and either change your vote or attend your stockholders' meeting and
vote in person.
Your broker will vote your YSI or CSC shares only if you provide
instructions on how to vote. Without instructions, your shares will not be
voted. We will count shares that you do not vote as votes against the
proposals.
Your vote is very
important.
Stock Certificates
If you are a YSI common stockholder, after the merger is completed we will
send you written instructions for exchanging your YSI common stock certificates
for CSC common stock certificates. If you are a CSC stockholder, you should
retain your stock certificates as the merger will not require surrender of CSC
stock certificates at any time. See pages 44 through 45 for further details.
Share Ownership of Management and Certain Stockholders (pages 100 and 112)
On the record date, directors and executive officers of YSI and their
affiliates may be deemed to be the beneficial owners of shares of YSI
common stock or approximately % of the YSI common stock outstanding on the
record date.
On the record date, directors and executive officers of CSC and their
affiliates may be deemed to be the beneficial owners of shares of CSC
common stock, or approximately % of the CSC common stock outstanding on the
record date.
The directors and executive officers of YSI have indicated that they intend
to vote the YSI common stock owned by them FOR the YSI proposal to approve the
merger. The directors and executive officers of CSC have indicated that they
intend to vote the CSC common stock owned by them FOR the CSC proposal to
approve the merger and the merger agreement, including the issuance of CSC
common stock to YSI stockholders.
Interests of Certain Persons in the Merger (page 37)
A number of directors and executive officers of CSC and YSI have interests
in the merger that are different from, or in addition to, yours as a
stockholder. If we complete the merger, one person who is now a director of YSI
will join the CSC Board. It is anticipated that the YSI director will be Ms.
Bobbie L. Huskey. In addition, if we complete the merger, options to purchase
YSI common stock held by YSI's directors and officers will be automatically
converted into options to acquire shares of CSC common stock, adjusted for the
exchange ratio. Also, certain indemnification arrangements and directors' and
officers' liability insurance for existing directors and officers of YSI will
be continued by CSC. Mr. Timothy Cole, YSI's Chairman, Chief Executive Officer
and President and Mr. Mark Demilio, YSI's Senior Vice President, General
Counsel and Acting Chief Financial Officer will also receive payments under
their change in control agreements with YSI and under non-competition
agreements with CSC. The Boards of Directors of YSI and CSC recognized these
interests and determined that they did not affect the benefits of the merger to
the YSI stockholders and the CSC stockholders, respectively. Please refer to
pages 37 through 39 for more information concerning these interests.
Directors and Executive Officers of CSC Following the Merger (page 116)
If we complete the merger, James F. Slattery, CSC's Chairman, Chief
Executive Officer and President will continue to serve in those capacities at
CSC following the merger and the other executive officers and directors of CSC
at the time of the merger will continue to serve in the same capacities
4
<PAGE>
for CSC following the merger. As we indicated above, Ms. Huskey or another
person who is a director of YSI will join the CSC Board following the merger.
We do not anticipate that any other director or executive officer of YSI
will continue to serve in such capacities following the merger.
Listing and Trading of CSC Common Stock (page 124)
The shares of CSC common stock to be issued to YSI stockholders in the
merger will be listed for trading on the Nasdaq National Market. YSI common
stock, however, will no longer be listed or traded on any exchange. The trading
symbol for the CSC common stock is "CSCQ."
All of the shares of CSC common stock issued in the merger will be freely
tradable (except for shares held by certain persons considered to be
"affiliates" of YSI or CSC).
Regulatory Approvals (page 37)
Other than our compliance with the notification and waiting period
requirements of federal antitrust laws, we do not believe that any other
filings with or approvals of any governmental authority are necessary to carry
out the merger. We made our required filings under applicable federal antitrust
laws on November 19, 1998 and the requisite waiting period expired on December
19, 1998.
Other Conditions (page 48)
The obligation of each of us to consummate the merger is subject to the
satisfaction or waiver of various typical conditions, including the absence at
any time after the date of the merger agreement of any material adverse change
relating to the other party. In addition, among other conditions, CSC also must
have received:
. letters from all persons identified on Exhibit A-1 of the merger
agreement and any other person who CSC reasonably believes to be an
affiliate of YSI, regarding such persons' agreement to restrict
disposition of their shares as required for pooling-of-interests
accounting treatment;
. at the closing of the merger, favorable letters regarding pooling-of-
interests accounting treatment from YSI and CSC's independent public
accountants; and
. consent from NationsBank N.A. to the merger.
Cancellation of the Merger (page 50)
We can jointly agree to call off the merger at any time before completing
the merger. Either of us can call off the merger if:
. the other party has not complied with its covenants, agreements,
warranties or representations contained in the merger agreement and has
failed to cure the noncompliance or breach following notice and an
opportunity to cure the noncompliance or breach;
. we do not complete the merger by March 31, 1999 because conditions to
the terminating party's obligation to consummate the merger have not
been satisfied by that date;
. the stockholders of either party do not approve the merger;
. there is a legal prohibition preventing the consummation of the merger;
or
. the Board of Directors of the other party has withdrawn or modified in
any manner adverse to the terminating party its approval or
recommendation of the merger.
In addition, YSI may call off the merger if its Board of Directors, in the
exercise of its fiduciary duties to YSI's stockholders, decides that such
termination is required.
Termination Fee (page 51)
If either of us terminates the merger agreement under certain circumstances
and YSI accepts a proposal to be acquired by another party, YSI must pay CSC
all reasonable costs and expenses in connection with the merger agreement, up
to $500,000, and a termination fee in the amount of $1,500,000.
5
<PAGE>
Comparative Rights of Stockholders of YSI and CSC (page 125)
CSC is incorporated under the laws of the State of Delaware and YSI is
incorporated under the laws of the State of Maryland. YSI stockholders will,
upon consummation of the merger, become stockholders of CSC and their rights
will be governed by Delaware law, the certificate of incorporation of CSC and
the by-laws of CSC. The Delaware corporate law differs in some respects from
Maryland corporate law. In Maryland, for instance, there is a statute that
defines the standards to which a board of directors is held, while in Delaware
these standards are defined by a large body of case law. Also, in Maryland,
persons who acquire more than 20% of a public company's stock may have
restrictions on the voting rights of their shares; Delaware has no comparable
statutory provision.
YSI Stockholders Will Not Have Appraisal Rights (page 130)
Under Maryland law, YSI stockholders have no right to an appraisal of the
fair value of their shares in connection with the merger.
If you would like additional copies of this joint proxy
statement/prospectus, or if you have questions about the merger, you should
contact:
YSI Stockholders:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072
CSC Stockholders:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, NJ 07072
6
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Comparative Market Price Data
The following table presents information for YSI and CSC common stock on the
Nasdaq National Market on September 23, 1998, and January 11, 1999. September
23, 1998 was the last full trading day prior to our announcement of the signing
of the merger agreement. January 11, 1999 was the latest practicable trading
day for which information was available prior to the date of this joint proxy
statement/prospectus.
The third column represents the approximate market value of the stock which
YSI stockholders will receive for each share of YSI stock after the merger
based on the trading prices for the dates provided.
<TABLE>
<CAPTION>
CSC Common Stock
CSC Common Stock YSI Common Stock Price x .375
(dollars per share) (dollars per share) (dollars per share)
--------------------------- ------------------------------- ----------------------
High Low Close High Low Close High Low Close
------ ------ ------- ------ ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 23, 1998.......... $ 12 $ 11 1/8 $ 11 1/8 $ 4 1/8 $ 3 7/8 $ 3 29/32 $4 1/2 $4.172 $4.172
January 11, 1999........ $ 12 1/4 $ 11 7/8 $ 11 7/8 $ 4 3/16 $ 3 15/16 $4 1/16 $4.593 $4.453 $4.453
</TABLE>
On the record date, there were holders of record of YSI common stock,
and holders of record of CSC common stock.
Historical Market Prices
The common stock of each of CSC and YSI is traded on the Nasdaq National
Market. The following table sets forth, for the calendar quarters indicated,
the high and low sale prices per share on the Nasdaq National Market, based on
published financial sources.
<TABLE>
<CAPTION>
CSC Common YSI Common
Stock Stock
-------------- --------------
Sale Price Sale Price
-------------- --------------
High Low High Low
------ ------- ------- ------
<S> <C> <C> <C> <C>
1997
First Quarter.................................. 15 9 3/4 18 1/4 12 1/2
Second Quarter................................. 13 5/8 9 1/4 15 3/8 9
Third Quarter.................................. 15 1/4 10 3/4 18 5/8 12 1/8
Fourth Quarter................................. 15 1/2 9 1/8 20 1/8 12 1/4
1998
First Quarter.................................. 15 3/4 10 3/16 18 1/2 14 3/8
Second Quarter................................. 16 7/8 12 1/2 20 3/8 6
Third Quarter.................................. 15 1/2 8 7/8 10 7/8 2 5/8
Fourth Quarter................................. 14 1/4 6 3/4 4 19/32 2
1999
First Quarter (through January 11, 1999)....... 12 1/2 11 7/8 4 3/16 3 23/32
</TABLE>
Neither CSC nor YSI has paid cash dividends during the periods described
above.
Post-Merger Dividend Policy. CSC does not anticipate the payment of
dividends following the merger in the foreseeable future because CSC intends to
retain all earnings, if any, for use in the expansion of its business. In
addition, CSC has certain restrictions on the payment of dividends under its
credit agreement with NationsBank, N.A.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF
CORRECTIONAL SERVICES CORPORATION
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended
-------------------------- December 31,
1998 1997 1997
---- ---- ------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $67,577 $42,520 $59,936
Income from operations.................. 5,907 2,977 4,605
Net earnings............................ 3,296 1,902 3,026
Net earnings per share:
Basic.................................. $ 0.43 $ 0.25 $ 0.39
Diluted................................ $ 0.40 $ 0.23 $ 0.37
<CAPTION>
As of
September 30, 1998
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital......................... $ 9,441
Total assets............................ 76,652
Long-term debt, net of current por-
tion.................................. 10,062
Shareholders' equity.................... 47,235
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF
YOUTH SERVICES INTERNATIONAL, INC
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
Nine Months Ended December 31,
September 30, 1997
--------------------------- ------------
1998 1997
---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues............................ $67,365 $ 90,685 $116,102
College Station Closure costs....... 2,327 -- --
Loss on sale of behavioral health
business........................... -- 27,000 20,898
Income from operations (loss)....... (3,877) (24,477) (17,232)
Net loss............................ (4,099) (21,213) (17,077)
Net loss per common share:
Basic and Diluted................... $ (0.36) $ (1.96) $ (1.57)
<CAPTION>
As of
September 30, 1998
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital..................... $18,478
Total assets........................ 63,520
Long-term debt, net of current
portion............................ 33,897
Shareholders' equity................ 20,541
</TABLE>
8
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA OF
CORRECTIONAL SERVICES CORPORATION AND
YOUTH SERVICES INTERNATIONAL, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30 Year Ended
--------------------------- December 31,
1998 1997 1997
------------------ -------- ------------
<S> <C> <C> <C>
Statement of Operations Data
Revenues............................. $132,356 $102,252 $141,305
Income from operations............... 4,124 4,851 8,272
Net earnings (loss).................. 1,377 1,299 3,191
Net earnings (loss) per share
Basic................................ $ 0.12 $ 0.11 $ 0.27
Diluted.............................. 0.11 0.10 0.26
<CAPTION>
As of
September 30, 1998
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital...................... $ 13,142
Total assets......................... 143,258
Long term debt, net of current
portion............................. 42,336
Shareholders' equity................. 56,502
</TABLE>
9
<PAGE>
SUMMARY COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1997 September 30, 1998
----------------- ------------------
<S> <C> <C>
CSC--HISTORICAL
Net Income (loss)
Diluted................................ $0.37 $0.40
Basic.................................. 0.39 0.43
Cash Dividends declared per common
share................................... -- --
Book value per basic common share........ 5.63 6.09
YSI--HISTORICAL ADJUSTED (1)
Earnings (loss) per common share
Net Income (loss)
Diluted................................ 0.03 (0.17)
Basic.................................. 0.04 (0.17)
Cash dividends declared per common share
(2)..................................... -- --
Book value per basic common share........ 2.14 1.83
PRO FORMA COMBINED (3)(4)
Net Income (loss)
Diluted................................ 0.26 0.11
Basic.................................. 0.27 0.12
Cash dividends declared per common
share................................... -- --
Book value per common share.............. 4.70 4.72
EQUIVALENT PRO FORMA COMBINED PER YSI
SHARE (1)
Net Income (loss)
Diluted................................ 0.10 0.04
Basic.................................. 0.10 0.05
Cash dividends declared per basic common
share................................... -- --
Book value per common share.............. 1.76 1.77
</TABLE>
- --------
(1) Includes the results of operations and accounts of Community Corrections,
Inc. (CCI), and excludes the results of operations of the Behavioral Health
business for all periods presented.
(2) Excludes S corporation cash dividends declared for the payment of income
taxes by CCI prior to consummation of its merger with YSI. Such dividends
totaled approximately $129,000 and $59,000 for the year ended December 31,
1997 and the nine months ended September 30, 1998 respectively.
(3) Assumes an exchange ratio of .375 of a CSC share for each share of YSI.
(4) Pro Forma Combined and Equivalent Pro Forma Combined Book Value per share
is adjusted to reflect estimated transaction costs to be incurred
subsequent to September 30, 1998 totaling $13,200,000 net of applicable
income taxes.
10
<PAGE>
RISK FACTORS
Before determining whether to approve the merger, you should be aware that
there are various risks, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this joint proxy statement/prospectus.
YSI Stockholders Will Receive a Fixed Number of Shares of CSC Common Stock in
the Merger Despite Potential Change in YSI and CSC Common Stock Prices
In the merger, each share of YSI common stock will be converted into the
right to receive .375 of a share of CSC common stock. This is a fixed exchange
ratio and will not be adjusted in the event of an increase or decrease in the
price of either YSI or CSC common stock. At the time you vote on the merger,
you will not know the exact value of the CSC common stock you will receive in
the merger and the number of shares of CSC common stock that you will receive
will not change even if the YSI common stock and CSC common stock trade at
prices that materially differ from those on the date of the special meetings.
The prices of our common stock when the merger takes place may vary from their
prices at the date of this joint proxy statement/prospectus and at the date of
the special meetings of our stockholders. For example, during the twelve month
period ended on January 11, 1999, the closing price of YSI common stock varied
from a low of $2 to a high of $20 3/8 and ended that period at $4 1/16, and the
closing price of CSC common stock varied from a low of $6 3/4 to a high of $16
7/8 and ended that period at $11 7/8. Variations in the relative values of the
shares of CSC and YSI common stock may be the result of changes in the
business, operations or prospects of YSI, CSC or the combined companies, market
assessments of the likelihood that the merger will be consummated and the
timing thereof, regulatory considerations, general market and economic
conditions and other factors.
You are urged to obtain current market quotations for YSI and CSC common
stock.
Uncertainty of Obtaining Additional Financing Required to Fund Our Construction
and Operation of New Facilities
In October 1998, CSC amended its credit facility to increase its available
borrowing base by $17.5 million. The increase will terminate on April 16, 1999.
If CSC is unable to
. extend the temporary increase;
. amend the credit facility to provide an increased borrowing base; or
. obtain alternative financing,
then, CSC may have to curtail its growth relating to the construction and
operation of potential new facilities. In addition, CSC would be obligated to
repay any balance outstanding at the time of termination of the increased
credit facility and its failure to do so could have a material adverse effect
on the financial condition and results of operations. Even if we obtain any
such financing, we may not be able to do so on favorable terms or in amounts
sufficient to fund our growth capital requirements. See "Management's
Disclosure and Analysis of Financial Condition and Results of Operations of
CSC."
Uncertainty of Obtaining Financing Required to Redeem YSI's 7% Convertible
Subordinated Debentures
We will need to obtain additional debt or equity financing to fund the
redemption of up to $32.2 million of YSI's 7% Convertible Subordinated
Debentures due 2006 within one year after the merger. The holders of
approximately $2 million of the debentures are entitled to redemption of their
debentures within 90 days after the merger and the holders of the debentures
representing approximately $30 million balance have agreed to extend the
redemption date for their redemptions until one year after the merger. We
cannot assure that we will be able to obtain financing to fund the redemption
obligations or, if able, that we will do so on favorable terms. If we cannot
fund this redemption obligation through new financing, our financial viability
may be impaired. See "CSC's Assumption of YSI Debentures."
11
<PAGE>
Uncertainties in Integrating Business Operations and Realizing Synergies and
Business Opportunities
The merger involves the integration of two companies that have different
business operations and corporate cultures and that have previously operated
independently. We may not be able to integrate our operations without
encountering difficulties. In addition, we may not be able to achieve the
synergies and enhanced business opportunities we anticipate from the merger.
YSI operates juvenile programs while CSC operates both adult and juvenile
programs. YSI's juvenile facilities typically rely on staff to provide security
and CSC's facilities typically rely more on walls, fences, gates and other
hardware security measures. In addition, for the most part, our operations are
in different states. The acquisition and integration of YSI will require
substantial resources of the CSC management team at a time when CSC's business
is experiencing rapid growth through new facility openings and new contracts.
The difficulties we might encounter in integration could include the loss of
key employees and clients, the disruption of our ongoing businesses or possible
inconsistencies in standards, controls, procedures and policies.
We Expect Significant Merger-Related Charges Against Earnings
We estimate that we will incur charges of approximately $14.8 million
primarily in connection with the merger, related mainly to the buy-out of
certain contractual obligations, personnel severance costs, financial advisory
fees, legal and accounting services, facility closure costs and other
integration costs. Some of these nonrecurring costs will be charged to
operations in the fiscal quarter in which the merger is consummated while
others will be expensed as incurred during the post-merger integration period.
The Unaudited Pro Forma Combined Condensed Balance Sheet reflects these
estimated transaction costs, net of related taxes of $4,100,000, as if such
costs were incurred as of September 30, 1998, but the effects of these costs
are not reflected in the Unaudited Pro Forma Combined Condensed Statements of
Operations. We could also incur other additional unanticipated merger costs.
Financial Risks Relating to Uncertain Occupancy Levels; Recent Poor Operating
Performance by YSI
While the cost structures of the facilities we operate are relatively fixed,
a substantial portion of our revenues are generated under facility management
contracts with government agencies that specify a net rate per day per inmate
("per diem rate"), with no minimum guaranteed occupancy levels. Under this per
diem rate structure, a decrease in occupancy levels may have a material adverse
effect on our financial condition, results of operations and liquidity. We are
each dependent upon the governmental agencies with which we have management
contracts to provide inmates for, and maintain the occupancy level of, our
managed facilities. We cannot control those occupancy levels. In addition, our
ability to estimate and control our costs with respect to all of these
contracts is critical to our profitability.
During 1998, YSI experienced a significant decline in the occupancy levels
of certain of its facilities, which has caused its profitability to decline.
Occupancy levels may decline at YSI's or CSC's facilities in the future and new
facilities might not reach occupancy levels required to produce profitability.
Short Term Nature of Facility Management Contracts; Possibility of Early
Contract Termination or Fee Reduction
As is typical in our industry, our facility management contracts are short-
term, generally ranging from one to three years, with renewal or extension
options in favor of the contracting governmental agency. Many YSI contracts
renew annually. These contracts may not be renewed or our customers may
terminate such contracts in accordance with their right to do so. The non-
renewal or termination of any of these contracts could materially adversely
affect our financial condition, results of operations and liquidity. Of the YSI
multi-year contracts in place as of December 31, 1998, four contracts
representing approximately 590 beds are up for renewal in 1999. The contracts
up for renewal in 1999 include the five year contract for the operation of the
Charles H. Hickey, Jr. School in Maryland for 330 beds for which YSI was
selected the successful bidder in February 1999. Of the CSC multi-year
contracts in place as of December 31, 1998, CSC has fourteen contracts for a
total of 2,137 beds subject to renewal in 1999.
12
<PAGE>
A contracting governmental agency often has a right to terminate a facility
contract without cause by giving us adequate notice. If a governmental agency
does not receive necessary appropriations, it could terminate its contract or
reduce the management fee payable to us. Even if funds are appropriated, delays
in payments may occur which could have a material adverse effect on our
financial condition, results of operations and liquidity. We currently lease
many of the facilities that we manage. If a management contract for a leased
facility were terminated, we would continue to be obligated to make lease
payments until the lease expires.
Financial Risks Relating to Speculative Projects
In some cases, we may decide to construct and own a facility without a
contract award when we believe there is a need for the facility and a strong
likelihood we will be awarded a contract. However, we take the risk that a
contract may not be awarded. If contracts do not materialize, the initial
outlays may be lost.
Barriers to Our Internal Expansion
Our growth is generally dependent upon our ability to obtain new contracts
to develop and manage new correctional and detention facilities. This depends
on a number of factors we cannot control, including crime rates and sentencing
patterns in various jurisdictions and acceptance of privatization. Certain
jurisdictions recently have required successful bidders to make a significant
capital investment in connection with the financing of a particular project, a
trend which will require the combined company to have sufficient capital
resources to compete effectively. We may not be able to obtain these capital
resources when needed.
Risks Related to CSC's International Operations
Our business plan includes the possible expansion of our operations into
markets outside of the United States and its territories. We may not succeed in
entering any of these markets, and if we are successful, we will be subject to
the risks of international operations. These risks include various new and
unfamiliar regulatory requirements, issues relating to currency exchange,
political and economic changes and disruptions, tariffs or other barriers, and
difficulties in staffing and managing foreign operations.
Uncertainty in Management of Our Growth
CSC has experienced significant growth and expects that the combined company
will also continue to grow. Successful growth depends on our ability to obtain
and train qualified personnel to handle the increasing number of juveniles and
adults in our care, to develop and operate the information technology systems
and financial controls necessary to manage expanded operations, to manage our
resources over a larger base of programs and activities, and to integrate
efficiently and effectively the business and financial functions of any newly
developed programs. We may not be able to achieve the growth anticipated or, if
achieved, we may not be able to effectively manage it.
Risks Relating to the Combined Company's Future Acquisitions
The combined company also intends to grow through selective acquisitions of
companies and individual facilities although there are no current plans or
agreements to acquire any other companies. We may not be able to identify or
acquire any new company or facility and we may not be able to profitably manage
acquired operations. Acquisitions involve a number of special risks, including
possible adverse short-term effects on our operating results, diversion of
management's attention from existing business, dependence on retaining, hiring
and training key personnel, risks associated with unanticipated liabilities,
and the costs of amortization of acquired intangible assets, any of which could
have a material adverse effect on our financial condition, results of
operations and liquidity.
Public Resistance to Privatization of Correctional and Detention Facilities
The operation of correctional and detention facilities by private entities
is a relatively new concept and has not achieved complete acceptance by either
governments or the public. The movement toward privatization of correctional
and detention facilities has also encountered resistance from certain groups,
such as labor unions and others that believe that correctional and detention
facility operations should only be conducted by
13
<PAGE>
governmental agencies. Politial changes or changes in attitudes toward private
correctional and detention facilities management in any market in which we will
operate could result in significant changes to the previous acceptance of
privatization in such market and the subsequent loss of facility management
contracts. Further, some sectors of the federal government and some state and
local governments are not legally permitted to delegate their traditional
operating responsibilities for correctional and detention facilities to private
companies.
Unique Governmental Regulation of Our Business
The industry in which we operate is subject to extensive federal, state and
local regulations, including education, health care and safety regulations,
which are administered by many regulatory authorities. Some of the regulations
are unique to our industry, and the combination of regulations we face is
unique. We may not always successfully comply with these regulations, and
failure to comply can result in material penalties. Our contracts typically
include extensive reporting requirements, and supervision and on-site
monitoring by representatives of the contracting governmental agencies.
Corrections officers and youth care workers are customarily required to meet
certain training standards and, in some instances, facility personnel are
required to be licensed and subject to background investigation. Certain
jurisdictions also require us to award subcontracts on a competitive basis or
to subcontract with businesses owned by members of minority groups. Our
businesses also are subject to operational and financial audits by the
governmental agencies with which we have contracts. The outcomes of these
audits could have a material adverse effect on our business, financial
condition or results of operations.
We Expect to Encounter Significant Competition
Competition in our industry is intense, and we may not be successful in
meeting it. We compete on the basis of cost, quality and range of services
offered, our experience in operating facilities, the reputation of our
personnel and our ability to design, finance and construct new facilities.
While our industry is highly fragmented, some of our competitors have greater
resources than us. There are few barriers for companies seeking to enter into
the operation of correctional or detention facilities. We also compete in some
markets with local companies, including not-for-profit organizations, that may
have a better understanding of local conditions and a better ability to gain
political and public acceptance. To some extent, we also face competition from
governmental bodies that historically operated correctional and detention
facilities.
We Significantly Depend on our Senior Management
The success of our operations will depend upon the continued services of
CSC's executive management, including James F. Slattery, Chairman, Chief
Executive Officer and President, Michael Garretson, Executive Vice President,
and Ira Cotler, Executive Vice President and Chief Financial Officer. The loss
of any of these executive officers could have a material adverse effect on the
combined company.
We May Encounter Material Costs Relating to Year 2000 Issues
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. CSC management
has completed a corporate program, which we believe has prepared all CSC's
computer systems and applications for the year 2000. CSC expects no material
incremental infrastructure costs to be incurred as a result of these
enhancements. YSI expects to implement the systems and programming changes
necessary to address year 2000 issues with respect to its internal systems
without significant expense. In the event the merger is completed, management
anticipates that CSC's computer systems would be utilized for both companies.
Although YSI believes it will be year 2000 compliant and that the cost will not
have a material adverse effect, YSI may not in fact be year 2000 compliant by
year 2000, whether or not the merger is completed, and the cost of year 2000
remediation may have a material adverse effect on YSI's business, financial
condition and results of operations. We also rely, directly and indirectly, on
external systems of business enterprises such as strategic partners, suppliers,
financial organizations, research facilities and governmental entities, both
domestic and international, for accurate exchange of data. Even if our internal
systems are not materially affected by the year 2000 computer programming
issue, we could be affected by disruptions in the operation of the enterprises
with which we interact.
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We May Experience Disturbances In One or More of Our Facilities
An escape, riot or other disturbance at one of our facilities could have a
material adverse effect on our financial condition, results of operations and
liquidity. Among other things, the adverse publicity generated as a result any
such event could have a material adverse effect on our ability to retain an
existing contract or obtain future ones. In addition, if such an event occurs,
there is a possibility that the facility where the event occurred may be shut
down by the relevant governmental entity. A closure of any of our facilities
could have a material adverse effect on our financial condition, results of
operations and liquidity.
We May Encounter Potential Legal Liability Related to Management of
Correctional and Detention Facilities
Our management of correctional and detention facilities exposes us to
potential third-party claims or litigation by prisoners or other persons for
personal injury or other damages, including damages resulting from contact with
our facilities, programs, personnel or students (including students who leave
our facilities without our authorization and cause bodily injury or property
damage). Currently, we are subject to actions initiated by former employees,
inmates and detainees alleging assault, sexual harassment, personal injury,
property damage, and other injuries. In addition, our management contracts
generally require us to indemnify the governmental agency against any damages
to which the governmental agency may be subject in connection with such claims
or litigation. We maintain insurance programs that provide coverage for certain
liability risks faced by us, including personal injury, bodily injury, death or
property damage to a third party where we are found to be negligent. There is
no assurance, however, that our insurance will be adequate to cover potential
third-party claims. In addition, we are unable to secure insurance for some
unique business risks including riot and civil commotion or the acts of an
escaped offender.
Committed offenders often seek redress in federal courts pursuant to federal
civil rights statutes for alleged violations of their constitutional rights
caused by the overall condition of their confinement or by specific conditions
or incidents. We may be subject to liability if any such claim or proceeding is
made or instituted against us or the state with which we contract or
subcontract.
We have each made forward-looking statements in this document that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of the respective company's management, and on information
currently available to such management. Forward-looking statements include the
information concerning possible or assumed future results of our operations set
forth above "Summary," "The Merger--Background of the Merger," "--CSC's Reasons
for the Merger; Recommendation of its Board of Directors," "--Opinion of CSC
Board of Directors' Financial Advisor,"--"YSI's Reasons for the Merger;
Recommendation of its Board of Directors," "--Opinion of YSI Board of
Directors' Financial Advisor" and "CSC and YSI Unaudited Pro Forma Condensed
Combined Financial Statements," and statements preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of the combined company following the merger may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results and values are beyond our ability to control or
predict. Stockholders are cautioned not to put undue reliance on any forward-
looking statements. In addition, we do not have any intention or obligation to
update forward-looking statements after we distribute this joint proxy
statement/prospectus, even if new information, future events or other
circumstances have made them incorrect or misleading. For those statements, we
are relying on the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the preceding important factors could affect the
future results of the combined company following the merger, and could cause
results to differ materially from those expressed in such forward-looking
statements.
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THE MERGER
The discussion in this joint proxy statement/prospectus of the merger and
the principal terms of the merger agreement is subject to, and qualified in its
entirety by reference to, the merger agreement as amended, a copy of which is
attached to this joint proxy statement/prospectus as Annex A.
General
We are furnishing this joint proxy statement/prospectus to holders of shares
of common stock of CSC and common stock of YSI, in connection with the
solicitation of proxies by the respective Boards of Directors of CSC and YSI
for use at their special meetings of stockholders to be held on , 1999 and
at any adjournments or postponements of the meetings.
At their special meeting, theYSI Board of Directors will ask the holders of
YSI common stock to vote upon a proposal to approve the merger. At their
special meeting, the CSC Board of Directors will ask the stockholders of CSC to
vote upon a proposal to approve and adopt the merger and the merger agreement
including the issuance of CSC common stock to YSI stockholders.
This joint proxy statement/prospectus also constitutes a prospectus of CSC,
which is a part of the registration statement on Form S-4 filed by CSC with the
Securities and Exchange Commission under the Securities Act of 1933, in order
to register the shares of CSC common stock to be issued to YSI stockholders in
the merger.
In the merger, each share of YSI common stock issued and outstanding
immediately prior to the effective time of the merger will automatically be
converted in the merger into the right to receive .375 of a share of CSC common
stock, with cash being paid in lieu of fractional shares of CSC common stock.
Background of the Merger
In March 1997, James F. Slattery, Chairman, Chief Executive Officer and
President of CSC, contacted Timothy J. Cole, Chairman, Chief Executive Officer
and President of YSI, to discuss a possible strategic combination between the
two companies. At that time, YSI's Board of Directors was not considering
strategic alternatives for YSI. Mr. Slattery and Mr. Cole, as well as several
other members of YSI and CSC management, met in March and April, 1997. During
the meetings, these individuals discussed the potential value and efficiencies
of a combination of CSC and YSI. These meetings did not lead to a formal offer.
The discussions between the two companies terminated in April, 1997. There were
no further discussions between the two companies until June 1998, as described
below.
From time to time from March 1997 through April 1998, YSI management also
had informal discussions with three other companies in its industry regarding
the potential for strategic combinations. None of these discussions progressed
to the point of formal negotiations.
On May 28, 1998, YSI issued a press release announcing that it expected
earnings for the second quarter to be substantially less than anticipated and
that it expected the second quarter results to be weakened by a number of
factors, including occupancy problems at two Midwest projects, the timing of
the opening of two new projects, the timing of the expansion of one existing
project and additional development and marketing costs. YSI also announced that
it anticipated that the remaining quarters and full year 1998 revenues and
earnings would fall substantially below expectations. Following the issuance of
the press release, the price of YSI common stock lost more than half of its
value, closing at $7 25/32 per share on May 28, 1998 from the previous closing
sale price of $17 per share.
In the weeks following the issuance of the May 28, 1998 press release,
several YSI competitors called YSI to inquire whether YSI would entertain
offers of a business combination. YSI stockholders and securities analysts also
called YSI and expressed the view that YSI should consider alternatives that
would involve a merger or sale of YSI.
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On June 10, 1998, the Executive Committee of the Board of Directors of YSI
met to consider the consequences of the May 28, 1998 release, the trading
levels of YSI's stock and the views expressed by stockholders and securities
analysts. During this meeting, the Executive Committee discussed formally
engaging SunTrust Equitable to assist the Board in considering strategic
alternatives. During the previous two years, SunTrust Equitable had provided
certain financial and advisory services to YSI, including services as its
financial advisor in connection with the sale of YSI's behavioral health
businesses in October 1997.
On June 18, 1998, the full YSI Board of Directors met to consider the
engagement of SunTrust Equitable. The Board resolved that SunTrust Equitable
should be engaged to evaluate financial and strategic alternatives to enhance
stockholder value, including joint ventures, mergers, acquisitions and
strategic alliances. On June 19, 1998, YSI issued a press release announcing
its decision to evaluate strategic alternatives and its engagement of SunTrust
Equitable. YSI believed that opportunities in the juvenile justice industry
were strong and that YSI's expectations of its long-term future financial
performance were not adequately reflected in the market price of its common
stock.
In late June of 1998, YSI and SunTrust Equitable developed and implemented a
strategy for soliciting and responding to potential strategic offers. SunTrust
Equitable received telephone calls from a number of entities expressing
interest in participating in the process, including a June 23, 1998 inquiry
from Mr. Slattery on behalf of CSC. During the period from June 19, 1998 to
July 8, 1998, SunTrust Equitable identified and engaged in discussions with a
total of 33 entities. All three of the companies with whom YSI management had
informal discussions in March 1997 through April 1998 were included in the 33
entities that had contacts with SunTrust Equitable. Of this group, 26 entities
executed confidentiality agreements with SunTrust Equitable and received a
preliminary confidential information package, including CSC, which executed a
confidentiality agreement with YSI on June 30, 1998. Invitations were extended
to each of the 26 companies to submit a preliminary proposal for a strategic
transaction on or before July 8, 1998.
The YSI Board met on June 29, 1998. A representative of Hogan & Hartson
L.L.P., outside counsel to YSI, participated in the meeting. Management briefed
the Board of Directors regarding the progress of SunTrust Equitable in
investigating strategic alternatives and the timeline for receipt of
preliminary indications of interest. Mr. Demilio, YSI's Senior Vice President,
General Counsel and Acting Chief Financial Officer, and the representative from
Hogan & Hartson L.L.P. reviewed the Board's fiduciary duties and other legal
responsibilities relating to the process.
YSI received preliminary indications of interest from eight companies,
including an initial indication of interest from CSC. On July 9, 1998, the YSI
Board met, together with representatives of SunTrust Equitable and Hogan &
Hartson L.L.P. At the meeting, representatives of SunTrust Equitable provided
the Board with a summary of the preliminary indications of interest and the
possible strategic advantages that each partner offered at this early stage of
discussions. The Board resolved to continue the process with the assistance of
SunTrust Equitable.
The YSI Board of Directors met on July 13, 1998, together with
representatives of SunTrust Equitable and Hogan & Hartson L.L.P. SunTrust
Equitable provided the Board with an update regarding the current list of
companies submitting indications of interest. The Board approved the selection
of four companies to advance to the next stage of the process, which would
involve YSI management presentations. Based on the indications of interest and
the input from YSI's Board, YSI and SunTrust Equitable invited (with the
Board's later consent to add the fifth company) five of the eight companies to
participate in management presentations. Of the three companies not invited to
continue, one ("Company A") was excluded based primarily on its indication of
merger consideration, which was not competitive with the other five companies;
one ("Company B") was excluded based on a structure and consideration that was
deemed inadequate by the Board; and one was excluded based on both the
conditions set forth in its indication of interest and other factors that
rendered a transaction with that company impossible to conclude on a timely
basis and the Board's belief that such transaction was unlikely to be
consummated in any event. As set forth below, both Company A and Company B
reentered the process later. YSI conducted management presentations during the
week of July 13, 1998,
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including a management presentation by telephone conference call on July 16,
1998 with representatives of CSC. Following the presentations, YSI provided
each of the remaining five companies a form of merger agreement and invited
them to submit a revised indication of interest on or before July 24, 1998
together with proposed changes to the form of merger agreement.
Following YSI's June 19, 1998 announcement of its determination to review
strategic alternatives, YSI's stock price reached a high of $10 7/8 per share
on July 17, 1998. However, from mid-July 1998 through September 23, 1998, the
date the parties entered into the merger agreement, the YSI stock price
declined to below $4 per share.
CSC and one other of the five remaining companies ("Company C") submitted
revised indications of interest. On July 24, 1998, Company A, which had
submitted a preliminary indication of interest but had not been invited to
attend a management presentation, contacted SunTrust Equitable and requested
the opportunity to re-engage in the process and to participate in a
presentation.
On July 27, 1998, the YSI Board met with representatives of SunTrust
Equitable. At the meeting, representatives of SunTrust Equitable provided an
update regarding the two revised indications of interest which had been
submitted. The indication of interest submitted by Company C contemplated an
all-cash transaction, and the indication of interest submitted by CSC
contemplated a stock-for-stock merger. The Board discussed the revised
indications of interest and determined that both Company C and CSC should be
invited to participate in the next phase of the process, which would involve
visiting selected facilities of YSI, reviewing due diligence materials
assembled in a controlled "data room" and conducting additional management
interviews. SunTrust Equitable informed the Board that Company A had expressed
interest in re-engaging in the process. The Board directed SunTrust Equitable
to renew discussions with Company A to encourage a revised indication of
interest.
Representatives of Company A participated in a management presentation on
July 31, 1998. After further evaluation and discussions with SunTrust Equitable
relating to price expectations and transaction structure, Company A notified
SunTrust Equitable that it did not intend to proceed further at that time.
On August 5 and August 6, 1998, representatives of Company C and its legal
counsel reviewed confidential information made available to them at a "data
room" at Hogan & Hartson L.L.P.'s offices in Baltimore, Maryland. On August 7,
August 8 and August 9, 1998, representatives of Company C also visited selected
YSI facilities throughout the United States. On August 7, 1998, YSI executed a
Nondisclosure Agreement with CSC and representatives from YSI and SunTrust
Equitable visited CSC's principal executive offices in Sarasota, Florida to
attend a CSC management presentation and to conduct initial due diligence on
CSC. On August 12, 1998, Hogan & Hartson L.L.P. forwarded a revised acquisition
agreement draft, contemplating an all-cash transaction, to Company C and its
legal counsel. On August 17, 1998, Hogan & Hartson L.L.P. forwarded a revised
acquisition agreement draft, contemplating a stock-for-stock transaction, to
CSC and its legal counsel. On August 20, 1998, Messrs. Cole, Demilio, Slattery
and Ira M. Cotler, CSC's Chief Financial Officer, and representatives of
SunTrust Equitable, met for dinner in Baltimore, Maryland to discuss CSC's
indication of interest. During the dinner, the parties present discussed CSC's
intentions with respect to its offer, the compatibility of the two companies'
operations, philosophies and missions and CSC's strategy for integration, among
other matters.
During the two weeks following Company C's site visits, Company C requested
additional data relating to YSI. YSI responded to Company C's requests, with
final information being exchanged between YSI and Company C on August 19, 1998.
On August 24, 1998, CSC provided YSI with further financial information
regarding CSC. On August 24, August 25 and August 26, 1998, representatives of
CSC visited the YSI "data room." On August 26, 1998, representatives of YSI and
CSC met to review financial information and to answer questions arising from
document review. CSC requested additional information from YSI, which was
provided to CSC for the period up to September 2, 1998.
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On August 28, 1998, Company C wrote to YSI and withdrew from the process.
Company B, which had submitted an initial indication of interest on July 7,
1998, but had not been invited to participate in management presentations, had
reconfirmed its interest throughout the process. In late August 1998, Company B
was permitted to reenter the bid process and met with YSI and SunTrust
Equitable on August 28, 1998. The decision to allow Company B to reenter the
process was done in light of the decisions of Company A and Company C to
decline to participate further.
On September 2, 1998, both CSC and Company B submitted their latest
indications of interest. Due to further information and analysis following due
diligence, CSC's revised indication of interest reflected a lower exchange
ratio than had originally been discussed. On September 3, 1998, the Board of
Directors met to review the indications of interest from Company B and CSC.
During the September 3 meeting, the Board authorized the creation of a special
committee consisting of James A. Flick, Jr. and Alan J. Andreini to oversee the
remainder of the negotiation process. On September 4, 1998, Hogan & Hartson
L.L.P. forwarded a form of acquisition agreement, contemplating a stock-for-
stock transaction, to Company B. On that same day, YSI, representatives of
SunTrust Equitable and CSC engaged in extended negotiations concerning the
possible exchange ratio. Later that day, the special committee was told that
CSC had communicated that, in order to continue the process, it required YSI to
negotiate with CSC on an exclusive basis for one week. In light of the Board's
views that CSC represented probably the strongest candidate for a strategic
combination then in discussions with YSI, in the late afternoon of September 4,
1998, the special committee determined that YSI should grant CSC the
exclusivity period. On September 6 and September 7, 1998, Mr. Demilio and a
representative from SunTrust Equitable and Messrs. Slattery and Cotler
discussed and scheduled by telephone additional due diligence reviews, meetings
and site visits.
During the period from September 6, 1998 through September 22, 1998, Hogan &
Hartson L.L.P. and Epstein Becker & Green, P.C., CSC's outside legal counsel,
requested and received additional legal due diligence materials relating to CSC
and YSI. During that period, YSI's stock price continued to decline, from a
closing sale price of $5 9/16 per share on September 1, 1998 to $3 29/32 per
share on September 23, 1998. During the week of September 7, 1998, extensive
due diligence was conducted by both parties and by their representatives.
Representatives of CSC and of Epstein Becker & Green, P.C. visited and reviewed
documents in the YSI "data room" and reviewed additional documents provided by
YSI, and representatives of CSC and of J.C. Bradford visited YSI's offices in
Owings Mills, Maryland to review additional financial and accounting
information. Representatives of YSI, SunTrust Equitable, CSC and J.C. Bradford
conducted site visits of YSI's and CSC's facilities. Representatives of Arthur
Andersen LLP, YSI's independent accountants, and of Grant Thornton LLP, CSC's
independent accountants, reviewed tax returns and audit workpapers of CSC and
YSI. Representatives of Hogan & Hartson L.L.P. visited CSC's principal
executive offices to conduct legal due diligence on behalf of YSI and
representatives of SunTrust Equitable visited CSC's offices to review
additional financial information. Representatives of Hogan & Hartson L.L.P. and
of Epstein Becker & Green, P.C. commenced negotiations toward a definitive
merger agreement.
On September 10, 11 and 12, 1998, Mr. Demilio and a representative from
SunTrust Equitable updated the special committee on the progress of
negotiations with CSC and of YSI's projected financial performance. Mr. Demilio
also updated each other member of the YSI Board as to the status of
negotiations. On September 12, 1998, Mr. Demilio and a representative from
SunTrust Equitable discussed with each member of the special committee the
status of the CSC negotiations, as well as the status of offers from other
parties. As a result of valuation issues arising from CSC's continuing
financial and legal due diligence review of YSI, CSC's indication of interest
was lowered again from earlier discussions. On September 16, 1998, Mr. Demilio
and a representative from SunTrust Equitable again updated the special
committee on the status of negotiations and the special committee considered
the latest CSC indication of interest, in connection with potential
alternatives. The special committee decided that YSI should meet with
representatives of CSC and J.C. Bradford to continue negotiations and because
the exclusivity period with CSC had expired, should also attempt to re-initiate
discussions with Company B and also to contact Company A and any other parties
who may have an interest in
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re-entering the process with YSI. On September 17, 1998, Mr. Demilio and a
representative of SunTrust Equitable met with representatives of CSC.
On September 17 and September 18, 1998, representatives of Company B visited
the YSI "data room". On September 18, 1998, representatives of Company B met
with Mr. Demilio to discuss financial due diligence issues. During this period,
negotiations continued between YSI and CSC regarding due diligence, the
exchange ratio and a definitive merger agreement. Also during this period,
representatives of SunTrust Equitable contacted Company A to discuss the
possibility of Company A's re-engaging in the process. On September 18, 1998,
Hogan & Hartson L.L.P. forwarded a revised version of the merger agreement,
contemplating a stock-for-stock transaction, to Company A and its legal
representatives. YSI did not request Company B to submit an additional
indication of interest in light of YSI's belief that Company B would not be in
a position to offer consideration and a transaction structure comparable to
CSC's or Company A's. On September 19, 1998, Mr. Demilio and a representative
from SunTrust Equitable updated the special committee on the status of
negotiations with CSC. On September 21, 1998, CSC forwarded a final offer
proposal to YSI. The final CSC offer proposed a lower exchange ratio than the
exchange ratio contemplated by CSC's latest revised indication of interest. On
that same day, Mr. Demilio spoke with Messrs. Slattery and Cotler by telephone
with respect to CSC's final offer and discussed the basis for CSC's valuation.
Company A did not submit a final offer. Also on September 21, 1998, Mr. Demilio
and a representative from SunTrust Equitable informed the special committee of
CSC's final offer and the special committee determined that consideration of
the CSC offer should be elevated to the full YSI Board. The special committee
believed that the strategic desirability of a combination with CSC, the
prolonged and thorough evaluation process undertaken with a number of potential
partners and the current status of indications of interest resulting therefrom,
warranted taking definitive action on CSC's offer. Between September 21, 1998
and September 23, 1998, YSI and Hogan & Hartson L.L.P. and CSC and Epstein
Becker & Green, P.C. continued negotiations towards a definitive merger
agreement.
On the afternoon of September 23, 1998, the Board of Directors of CSC and
its advisors discussed the terms of the draft merger agreement and various
other issues relating to the proposed merger, including the structure of the
transaction, tax and accounting issues and required regulatory approvals. CSC's
legal advisors discussed with the Board their fiduciary duties with respect to
the proposed merger and then reviewed in detail the terms of the proposed
merger, including the proposed exchange ratio, the representations, warranties
and covenants to be made by each party, the conditions to closing (such as the
approval of the transaction by the stockholders of YSI and CSC) and the events
of termination. The legal advisors stated that the proposed merger should
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986. The accountants stated that, based on their review to
date, the transaction could be effected as a pooling-of-interests. J.C.
Bradford presented the Board with their written opinion that the merger and the
transactions contemplated thereby were fair to the CSC stockholders (other than
the former YSI stockholders who would become CSC stockholders as a result of
the merger) from a financial point of view. Following these discussions, the
Board unanimously voted to approve the proposed transaction.
Also on the afternoon of September 23, 1998, YSI's Board met to review and
consider the status of discussions with CSC and others. Representatives of
SunTrust Equitable reviewed with the Board the process that had culminated in
CSC's offer and noted that the process had permitted participation and
encouraged offers from all potential interested parties. Representatives of
SunTrust Equitable summarized their activities to date and stated that SunTrust
Equitable would deliver a written opinion that CSC's final offer of an exchange
ratio of .375 of a share of CSC common stock for each share of YSI common stock
was fair, from a financial point of view, to the YSI stockholders. The Board
also discussed the realistic alternatives to such a combination, which,
following the extensive evaluation process commenced in June 1998, effectively
were limited to continuing as a stand-alone company. The Board considered the
significant decline in YSI's market value, the financial prospects of YSI as a
stand-alone enterprise, and whether further negotiations or the further
extension of the solicitation process would attract offers that could
realistically provide greater stockholder value. The Board discussed the
strategic advantages of a combination with CSC, including the strength of CSC's
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management, its position and credibility in the juvenile services industry and
the other factors described herein. Mr. Demilio, together with representatives
of Hogan & Hartson L.L.P., reported on the substantial completion of
negotiations on the merger agreement, provided the Board with a summary of the
extensive legal, financial and operational due diligence conducted with respect
to CSC and reminded the Board of the fiduciary duties associated with entering
into a strategic merger. Following discussion, YSI's Board of Directors voted
unanimously to declare the merger advisable and approve the merger and the
merger agreement, authorized management to execute the merger agreement subject
to further changes deemed appropriate by management and recommended approval of
the merger by the holders of YSI common stock.
Following the meetings, final negotiations regarding the merger agreement
were completed. On the evening of September 23, 1998, CSC and YSI executed the
merger agreement. On September 24, 1998, CSC and YSI issued a joint press
release announcing the merger and conducted a conference call to answer
questions regarding the release.
CSC's Reasons for the Merger; Recommendation of its Board of Directors
The CSC Board has unanimously approved the merger and merger agreement and
recommends that CSC's stockholders approve the merger and merger agreement
including the issuance of CSC common stock to YSI stockholders. The CSC Board
believes that the consideration to be paid by CSC to YSI stockholders in the
merger is fair from a financial point of view and the merger is in the best
interests of CSC and its stockholders. The CSC Board considered the advice of
its management, legal counsel and financial advisor, and also considered the
following potential benefits of the merger to CSC and its stockholders:
. The combined company would be one of the largest and most comprehensive
providers of juvenile rehabilitative services in a highly fragmented
market. On a combined basis, CSC and YSI currently operate 43 juvenile
rehabilitative programs with over 4,200 beds in 13 states and Puerto
Rico, and provide aftercare services to an additional 800 juveniles.
This will give the combined company a total of 63 adult and juvenile
programs with nearly 12,000 beds;
. CSC would stand well positioned to take advantage of the complementary
strategic fit of the CSC and YSI businesses, including the ability to:
. offer a full spectrum of juvenile rehabilitative programs through
YSI's staff-secure to CSC's facility-secure facilities, ranging from
services for pre-adjudicated, at-risk juveniles to first-time and
multiple offenders to juvenile aftercare;
. offer effective programs to meet the particular needs of specialized
populations, such as programs for sex offenders, drug abusers or
habitually violent offenders;
. develop significant marketing and competitive benefits from the
increased exposure to additional states (with overlap between CSC
and YSI in only two of the 20 states) as well as cross-selling
opportunities between CSC and YSI programs;
. draw upon the extensive experience and knowledge of the combined
company's operating personnel and philosophies; and
. operate the combined company's facilities more efficiently and
profitably by leveraging the skills and experience of CSC's senior
management;
. The combined company would enjoy the relatively unique ability to
compile data from a wide range of programs, undertake innovative
approaches in specific programs and utilize, throughout its programs
those approaches and innovations found to be most effective;
. Potential efficiencies and cost savings would result from the
consolidation of administrative and support functions, including the
elimination of certain duplicative expenses such as public reporting and
investor relations expenses, combination of sales force capabilities and
increased leverage of the
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combined company's executive management team, and the possibility of
increased volume purchasing discounts from vendors, particularly with
regard to food and supply expenses;
. The market capitalization of the combined company would be larger than
the market capitalization of either YSI or CSC, which might create the
opportunity for increased research coverage by financial analysts and
increased institutional ownership as well as a larger trading "float"
that could provide increased liquidity for stockholders. As a result,
the combined company would likely have greater access to debt and equity
financing;
. The financial terms of the merger agreement, including an exchange ratio
that provides certainty about the number of shares of CSC common stock
that will be issued in the merger, and the belief that the transaction
would be accretive to earnings per share for the twelve-month period
following the merger;
. The other terms and conditions of the merger agreement, including (i)
the structure of the transaction as a tax-free reorganization for
federal income tax purposes; (ii) the pooling-of-interests accounting
treatment of the merger; and (iii) the nature of the consideration to be
paid in the merger to YSI's stockholders;
. The presentations and financial analysis of J.C. Bradford's opinion on
September 23, 1998, that, as of the date of the opinion and based upon
and subject to certain matters, the merger and the transactions
contemplated thereby were fair, from a financial point of view, to the
CSC stockholders (other than the former YSI stockholders who would
become CSC stockholders as a result of the merger, as to which no
opinion by J.C. Bradford was expressed); and
. The impact of the merger on the general long-term interests, prospects
and objectives of CSC, and the legal, social, economic and other effects
of the merger on CSC's clients and employees and the societies and
communities in which CSC operates.
In reaching its conclusions, CSC's Board considered, among other things,
(i) information concerning the financial performance and condition, business
operations, earnings and prospects of each of CSC and YSI and the projected
future financial performance of each company for the next two years and (ii)
the impact of the merger on CSC's clients.
CSC's Board also considered certain countervailing factors in its
deliberations concerning the merger, including:
. Possible difficulties integrating the two companies' management and
corporate cultures;
. The possible distraction of CSC's management from day-to-day operations
as a result of the YSI acquisition, particularly at a time when CSC's
business is experiencing rapid growth in new facilities and new
contracts;
. Uncertainty regarding stockholders', clients' and employees' perceptions
of the merger;
. The fact that the merger agreement does not provide for adjustment of
the exchange ratio, and gives YSI stockholders the benefit of any
increase in the price of CSC's common stock after the date of the merger
agreement;
. The anticipated earnings per share accretion is dependent upon
management's ability to integrate the acquisition successfully and
recognize substantial cost savings;
. The decrease in occupancy rates at certain of YSI's facilities during
the first half of 1998 and the corresponding decrease in YSI's
profitability and YSI's stock price;
. The funds required to satisfy any obligation to redeem YSI's 7%
Convertible Subordinated Debentures and to fund the combined company's
anticipated growth;
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. Over half of YSI's facility contracts are renewable on an annual basis.
Of the multi-year facility contracts in place as of December 31, 1998,
four contracts (representing approximately 590 beds, including 330 beds
at the Charles H. Hickey, Jr. School in Maryland) are up for renewal in
1999;
. The estimated direct and indirect costs of approximately $16.4 million
in connection with the merger, related mainly to the buy-out of certain
contractual obligations, personnel severance costs, financial advisory
fees, legal and accounting services, facility closure costs and other
integration costs; and
. The other factors described herein under "Risk Factors."
CSC's Board directed management to address the foregoing countervailing
considerations. In respect of the first two countervailing factors identified
above, the companies have established joint transition teams to foster mutual
cooperation and communication, and to minimize unnecessary management
distractions in order to achieve an orderly transition. In respect of the third
countervailing factor identified above, the companies have implemented a joint
communication strategy directed towards addressing the concerns of the
referenced constituencies. In respect of the fourth countervailing factor
identified above, CSC's Board recognized that the merger is expected to provide
long-term strategic benefits that would counterbalance any short-term
divergence in financial performance of either company. Additionally, in respect
of the anticipated financing requirements following the merger, CSC management
has held discussions with CSC's and YSI's lending institutions to explore the
availability of financing to redeem any of the YSI debentures and to fund the
anticipated growth of the combined company.
The foregoing discussion of the factors considered by CSC's Board is not
intended to be exhaustive, but is believed to include all material factors
considered by CSC's Board. In reaching its decision to approve the merger,
CSC's Board did not quantify or assign any relative weights to the factors
considered, and individual directors may have given different weights to
different factors.
CSC's Board determined that the perceived benefits of the merger far
outweigh the perceived countervailing factors.
The CSC Board unanimously found the merger and merger agreement including
the issuance of CSC common stock to YSI stockholders to be in the best
interests of the CSC stockholders and recommends that the CSC stockholders
vote "for" approval of the merger and merger agreement including the
issuance of CSC common stock to YSI stockholders.
Opinion of the CSC Board of Directors' Financial Advisor
J.C. Bradford & Co. was retained by the Board of Directors of CSC to assist
the Board of Directors in evaluating the proposed merger and to render an
opinion as to the fairness from a financial point of view to the stockholders
of CSC (other than the former YSI stockholders who would become CSC
stockholders as a result of the merger) of the merger and related transactions.
J.C. Bradford is a nationally recognized investment banking firm that regularly
engages in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate, and other purposes. J.C. Bradford was
selected as the Board of Directors' financial advisor based upon such
expertise.
On September 23, 1998, J.C. Bradford delivered its written opinion to the
Board of Directors that the merger and related transactions were fair to the
CSC stockholders (other than the former YSI stockholders who would become CSC
stockholders as a result of the merger) from a financial point of view. J.C.
Bradford's opinion is directed only to the fairness from a financial point of
view of the merger and does not constitute a recommendation to any stockholder
of CSC to vote in favor of the merger. Although J.C. Bradford evaluated the
consideration to be paid by CSC in the merger, J.C. Bradford was not asked to
and did not recommend a specific exchange ratio to be paid by CSC in the
merger. J.C. Bradford did not make an independent valuation or appraisal of the
assets and liabilities of CSC or YSI or any of their subsidiaries or affiliates
and was not
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provided with any such valuation or appraisal. J.C. Bradford assumed that the
merger would be recorded as a pooling-of-interests under generally accepted
accounting principles and would qualify as a tax-free reorganization for United
States federal income tax purposes. The full text of J.C. Bradford's written
opinion, which sets forth the assumptions made, procedures followed, matters
considered, and limits of its review undertaken in connection with the opinion,
is included as Annex C and is incorporated by reference. All stockholders of
CSC are urged to and should read the opinion in its entirety.
In conducting its analysis and delivering its opinion, J.C. Bradford
considered such financial and other factors as it deemed appropriate and
feasible under the circumstances including, among other things,
. the proposed form of merger agreement;
. the historical and current financial position and results of operations
of CSC and YSI set forth in their respective periodic reports and proxy
materials filed with the Securities and Exchange Commission, including
their Annual Reports on Form 10-K for fiscal years 1995, 1996 and 1997
and Quarterly Reports on Form 10-Q for the six months ended June 30,
1998;
. the Indenture, dated as of October 15, 1996, relating to YSI's 7%
Convertible Subordinated Debentures Due 2006;
. certain internal operating data and financial analyses and forecasts of
CSC and YSI for the fiscal years beginning January 1, 1999 and ending
December 31, 2002, prepared by their respective senior managements;
. certain internal pro forma financial analyses and forecasts of the
combined companies for the fiscal years beginning January 1, 1998 and
ending December 31, 2002, prepared by CSC's senior management;
. historical and current stock price and trading data for the common stock
of CSC and YSI and trading data for YSI's Debentures;
. certain financial and securities data of certain other companies, the
securities of which are publicly traded and that J.C. Bradford believed
to be generally comparable to CSC and YSI;
. the financial terms of certain other transactions that J.C. Bradford
believed to be relevant; and
. such other financial studies, analyses and investigations as J.C.
Bradford deemed appropriate for purposes of its opinion.
J.C. Bradford also held discussions with members of the respective senior
management groups of CSC and YSI regarding the past and current business
operations, financial condition, and future prospects of their respective
companies. With the permission of the Board of Directors of CSC, J.C. Bradford
assumed that the financing necessary to satisfy any obligations as a result of
the exercise of the Debenture Put Rights would be on the terms provided to J.C.
Bradford by CSC's management, that any open audits on CSC and YSI contracts
would be resolved without a material adverse effect on the financial condition
or results of operations of CSC or YSI, that cash available to YSI at the
closing date would be sufficient to fund all transaction expenses, and that the
merger agreement had been executed and delivered by the parties on terms
substantially similar to those contained in the most recent draft supplied to
and reviewed by J.C. Bradford as of the date of its opinion. In addition, J.C.
Bradford took into account its assessment of general economic, market, and
financial conditions and its experience in other transactions as well as its
experience in securities valuation and its knowledge of private corrections
industry generally.
J.C. Bradford's opinion is based upon general economic, market, financial
and other conditions and the information made available to J.C. Bradford as of
the date of the opinion. For purposes of the opinion, J.C. Bradford relied upon
and assumed the accuracy and completeness of the financial and other
information made available to it (including forecasts of estimated cost savings
and economic synergies as a result of the merger) and did not assume
responsibility for independent verification of this information. J.C. Bradford
also relied upon the representations of CSC's management group that they were
not aware of any information or fact that
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would make the information provided to J.C. Bradford incomplete or misleading.
No limitations were imposed by the Board of Directors on the scope of J.C.
Bradford's investigation or the procedures to be followed in rendering its
opinion. Events occurring after the date of the opinion could materially affect
the assumptions used in preparing the opinion and J.C. Bradford has no duty or
obligation to update or amend its opinion or otherwise advise the Board of
Directors or any other party or person of the occurrence of these events.
In preparing its report to the Board of Directors, J.C. Bradford performed a
variety of financial and comparative analyses and considered a variety of
factors, including
. pro forma merger analysis;
. discounted cash flow analysis for YSI;
. comparable company analysis for YSI;
. exchange ratio analysis;
. premiums analysis;
. comparable transaction analysis; and
. stock trading analysis.
The summary of J.C. Bradford's analyses set forth below is not a complete
description of the analyses underlying J.C. Bradford's opinion. The preparation
of a fairness opinion is a complex process involving subjective judgments and
is not necessarily susceptible to partial analysis or summary description. In
arriving at its opinion, J.C. Bradford did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, J.C. Bradford believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. In
the comparable company analyses summarized below, no company is identical to
CSC or YSI and the analyses involves complex considerations and judgments
concerning the differences in financial and operating characteristics of the
companies and other factors that could affect the acquisition or public trading
values of these companies. In performing its analyses, J.C. Bradford made
numerous assumptions about industry performance, general business, economic,
market, and financial conditions, and other matters. The analyses performed by
J.C. Bradford are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable. Because such
analyses are subject to uncertainty, neither CSC nor J.C. Bradford or any other
person assumes responsibility if future results are materially different from
those forecast.
The following is a summary of the report presented by J.C. Bradford to the
Board of Directors on September 23, 1998:
(a) Pro Forma Merger Analysis. Using pro forma merger analysis, based on
information obtained from the senior management of CSC, J.C. Bradford
compared the projected earnings per share both before and after the
proposed transaction through fiscal year 2000. J.C. Bradford noted that the
pro forma fiscal 1999 earnings per share after the transaction was
projected to be $0.91 compared to CSC's stand-alone earnings per share of
$0.87 and the existing "consensus estimate" (the average of earnings per
share estimates, by research analysts covering CSC) of $0.82. J.C. Bradford
assumed and relied solely upon CSC management's estimates of YSI's
projected operating performance, including lower program contributions than
those forecasted by YSI management and certain savings related to general
and administrative expenses expected to be eliminated as a result of the
merger. J.C. Bradford also reviewed the financial contribution of CSC and
YSI to the combined company on a pro forma projected basis. J.C. Bradford
noted that, on a pro forma basis, stockholders of CSC will own
approximately 65.9% of the outstanding common stock of the combined company
following the merger. Using projected results supplied by management of CSC
for both CSC and YSI for the year ending December 31, 1999, J.C. Bradford
calculated that CSC would contribute approximately 58.7% of the revenue of
the combined
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company, approximately 57.4% of EBITDA and approximately 63.3% of net
income. In each case, J.C. Bradford noted that stockholders of CSC will own
a greater percentage of the equity of the combined company in the merger
than would be implied by the pro forma contribution of revenue, EBITDA, and
net income of CSC to the combined company.
(b) Discounted Cash Flow Analysis for YSI. Using discounted cash flow
analysis, based on information obtained from the senior management of YSI
and modified by the senior management of CSC to take into account lower
program contributions than those forecasted by YSI management and certain
savings related to general and administrative expenses expected to be
eliminated as a result of the merger, J.C. Bradford discounted to present
value the future cash flows that YSI is projected to generate through 2002,
under various circumstances. J.C. Bradford calculated terminal values for
YSI (i.e., the values at the 2002 fiscal year-end) by applying multiples of
EBITDA and net income in fiscal year 2002. The cash flow streams and
terminal values were then discounted to present values using different
discount rates chosen to reflect different assumptions regarding YSI's cost
of capital. Based on the above described analysis, the implied value per
share of YSI common stock ranged from $4.33 to $6.33 as compared to the
implied transaction value per share on September 18, 1998 of $4.50 and the
YSI closing stock price on September 18, 1998 of $3.63.
(c) Comparable Company Analysis for YSI. Using publicly available
information, J.C. Bradford reviewed certain financial and operating data
for several publicly traded companies engaged in businesses with
characteristics similar to YSI's. This group included Children's
Comprehensive Services, Inc., Cornell Corrections, Inc., Correctional
Services Corporation, Corrections Corporation of America, Res-Care, Inc.,
and Wackenhut Corrections Corp. The table below compares the ranges of
multiples at which the comparable companies were trading on the date of the
opinion to the multiples implied by the transaction value.
<TABLE>
<CAPTION>
Multiple Comparable Companies Merger
-------- -------------------- ------
<S> <C> <C>
1999 P/E....................................... 10.3x-20.0x 12.2x
2000 P/E....................................... 8.5x-14.1x 11.0x
Book Value..................................... 1.0x- 4.2x 2.2x
Second Quarter Annualized EBITDA............... 6.1x-14.3x 8.0x
1999 EBITDA.................................... 6.0x-11.7x 8.0x
LTM EBITDA..................................... 7.3x-15.9x 9.9x
Second Quarter Annualized Revenue.............. 0.8x- 2.5x 0.8x
LTM Revenue.................................... 0.9x- 2.8x 0.8x
</TABLE>
(d) Exchange Ratio Analysis. Using exchange ratio analysis, J.C.
Bradford noted that the ratio of YSI common stock price to CSC common stock
price had been greater than .375 on 176 of the 181 trading days since
December 31, 1997 and on 59 of the 64 trading days since YSI announced the
possible sale of YSI on June 19, 1998. J.C. Bradford also noted that since
December 31, 1997 and June 19, 1998, the average ratio of YSI common stock
price to CSC common stock price had been .696 and .568, respectively.
(e) Premiums Analysis. J.C. Bradford prepared an analysis of the
premiums paid in acquisition transactions in which 100% of the equity
consideration was paid in shares of stock. J.C. Bradford considered, among
other factors, the type of consideration used in the acquisition and the
premiums paid based on the closing price of the target's shares at one day,
one week, and four weeks prior to the announcement of the transaction. J.C.
Bradford noted that the range of average premiums of such transactions of
between 21.1% and 39.4% compared favorably to the 24.1% premium to be paid
to the YSI stockholders in the proposed transaction based on the common
stock prices of CSC and YSI on September 18, 1998. Based on this analysis,
the implied value per share for YSI common stock in the transaction ranged
from approximately $4.40 to $5.06 as compared to the implied per share
price of $4.50 in the proposed transaction as of September 18, 1998.
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(f) Comparable Transaction Analysis. Using comparable transaction
analysis, J.C. Bradford calculated the multiples paid in acquisitions of
private corrections companies since January 1, 1995. J.C. Bradford
calculated the aggregate equity consideration paid for each acquired
company as a multiple of the LTM EBITDA, which ranged from 5.8x to 11.4x
with an adjusted average multiple of 8.4x. Based on this analysis, J.C.
Bradford noted the multiple implied per share price for YSI common stock
was $4.90 as compared to the implied transaction price on September 18,
1998 of $4.50 and the closing stock price on September 18, 1998 of $3.63.
(g) Stock Trading Analysis. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which the CSC common stock and the
YSI common stock have traded since December 31, 1997 as compared to the
historical trading volume and prices for the YSI Comparable Company Group.
J.C. Bradford also reviewed and analyzed the historical trading volume and
prices at which the CSC common stock and the YSI common stock have traded
since December 31, 1997 and since June 19, 1998, respectively, as compared
to the historical trading prices for the Dow Jones Industrial Average, the
Nasdaq Composite, and the Russell 2000. J.C. Bradford noted that the
closing price on 175 of the 181 trading days since December 31, 1997 and on
58 of the 64 trading days since YSI announced the possible sale of YSI on
June 19, 1998 had been greater than the implied transaction price of $4.50
on September 18, 1998.
J.C. Bradford was engaged by the Board of Directors to render its opinion as
to the fairness from a financial point of view to the stockholders of CSC of
the merger and the related transactions in connection with the Board of
Directors' discharge of its fiduciary obligations. The engagement letter, dated
September 14, 1998, between CSC and J.C. Bradford provides, and J.C. Bradford
has advised the Board of Directors, that J.C. Bradford does not believe that
any person (including any stockholder of CSC) other than the Board of Directors
has the legal right to rely upon J.C. Bradford's opinion for any claim arising
under state law and that, should any such claim be brought against J.C.
Bradford, this assertion will be raised as a defense. In the absence of
governing authority, this assertion will be resolved by the final adjudication
of such issue by a court of competent jurisdiction. Resolution of this matter
under state law, however, will have no effect on the rights and
responsibilities of any person under the federal securities laws or on the
rights and responsibilities of CSC's Board of Directors under applicable state
law.
Pursuant to the terms of an engagement letter dated September 14, 1998, CSC
agreed to pay J.C. Bradford for acting as financial advisor to the Board of
Directors in connection with the merger a fee as follows:
. a fee of $200,000 payable in cash upon delivery of the opinion,
. a fee of $100,000 payable in cash upon the opinion being updated by J.C.
Bradford for the definitive proxy material that is mailed to
stockholders of CSC, and
. an additional fee of $200,000 payable in cash upon the closing of the
transaction.
In addition, CSC has agreed to reimburse Bradford for its reasonable out-of-
pocket expenses incurred in connection with Bradford's activity under its
engagement, and to indemnify J.C. Bradford and certain related persons against
certain liabilities relating to or arising out of its engagement, including
certain liabilities under the federal securities laws. In the ordinary course
of its business, J.C. Bradford has traded, and may in the future trade,
securities of CSC and YSI for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. J.C. Bradford acted as a managing underwriter in the September
12, 1996 common stock offering of CSC and provided financial advisory services
to CSC in the past and may continue to do so and has received, and may receive
in the future, customary fees for the rendering of such services.
YSI's Reasons for the Merger; Recommendation of its Board of Directors
The YSI Board unanimously found the merger to be advisable and recommends
that YSI's stockholders approve it. The YSI Board believes that the
consideration to be received by YSI stockholders in the merger is fair from a
financial point of view and the merger is in the best interests of YSI and its
stockholders. The YSI
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Board considered the advice of its management, legal counsel and financial
advisor, and also considered the following potential benefits of the merger to
YSI and its stockholders:
. The strategic fit of a business combination between YSI and CSC and the
complementary nature of their businesses, including:
. the marketing and competitive benefits available to the combined
company from increased exposure to additional states (with overlap
between CSC and YSI in only two states) and cross-selling
opportunities;
. CSC's corrections-oriented juvenile programs would complement YSI's
rehabilitative, education-oriented programs;
. expansion opportunities which would follow from the diversity and
broader spectrum of program offerings that comes from the merger of
the two companies;
. the enhanced position in the corrections industry market which would
be enjoyed by the combined company; and
. the complementary customer bases of the two companies, which would
result in lowered risks to the combined company with respect to
business concentrated in a small number of programs, limited type of
programs or limited geographic areas;
. CSC's merger proposal was judged by the Board to be the best alternative
resulting from a process involving a market canvass of 33 potential
partners and an ensuing solicitation process;
. The Board's belief that the merger presented a better alternative to
continuation of YSI as an autonomous publicly held company based upon
the following:
. Potential operating efficiencies and cost savings of the combined
company, including possible savings from consolidation of
administrative and support functions and the possibility of
decreased general and administrative expenses, including the
elimination of certain duplicative expenses such as public reporting
and investor relations expenses, combination of sales force
capabilities, increased leverage of the combined company's executive
management team, and the possibility of increased volume purchasing
discounts from vendors, particularly with regard to food and supply
expenses;
. The ability of the combined company to more readily access capital
and other financing that will be critical to the growth of the
business;
. The merger offers YSI stockholders an opportunity to own shares in a
company with a stronger ability to grow in size and profitability,
while allowing them to continue to participate in the long-term
growth and appreciation of YSI's business through an ownership
interest in CSC; and
. The management depth and structure of CSC and its ability to absorb
and manage, effectively and efficiently, the YSI programs and the
combined operations;
. The belief that the merger would be accretive to CSC's earnings per
share in 1999;
. The terms and conditions of the merger agreement, including:
. the structure of the transaction as a tax-free reorganization for
federal income tax purposes;
. the pooling-of-interests accounting treatment of the merger;
. the nature, adequacy and fairness of the consideration to be
received in the merger by YSI's stockholders;
. the ability of YSI to terminate the merger if a more attractive
alternative offer is made, subject to the payment to CSC of a
termination fee of $1,500,000 and reimbursement of expenses up to
$500,000; and
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. the benefit of a fixed exchange ratio which enables YSI stockholders
to benefit from any increase in the price of CSC common stock prior
to the closing of the merger;
. The presentations and financial analysis of SunTrust Equitable and
SunTrust Equitable's oral opinion on September 23, 1998 (which has been
confirmed in its written opinion dated that day) that, as of the date of
the opinion and based upon and subject to certain matters, the exchange
ratio is fair to YSI's stockholders from a financial point of view;
. The historical market prices of YSI common stock and CSC common stock,
recent reports of financial analysts regarding YSI and the recent
trading price of YSI common stock;
. The market capitalization of the combined company would be larger than
the market capitalization of either YSI or CSC, which may create the
opportunity for increased research coverage by financial analysts and
increased institutional ownership as well as larger trading "float" that
could provide increased liquidity for stockholders; and
. The impact of the merger on the general long-term interests, prospects
and objectives of YSI, and the legal, social, economic and other effects
of the merger on YSI's customers and employees and the societies and
communities in which YSI operates.
The YSI Board also considered various negative factors relating to the
merger. The negative factors considered by the YSI Board were the following:
. The combined company's senior debt capacity would be restricted, which
could inhibit its ability to access capital or financing that is
critical to the growth of the business;
. The possibility that the financing for the repayment of the debentures
will be more costly than projected;
. The possibility that the YSI stockholders may not achieve the long-term
value anticipated by the merger because of the additional costs involved
with:
. the integration and centralization of certain administrative
functions;
. the implementation of information systems;
. the integration of the YSI business under the management of CSC's
juvenile division; and
. the closing and/or integration of certain programs and facilities in
overlapping markets;
. The possibility of a decrease in the price of CSC common stock prior to
the merger. Any such decrease could result in a lower value being
received by YSI stockholders at the effective date of the merger than
the value at the date of the merger agreement and could also effect the
likelihood of stockholder approval of the merger;
. The risk that the management of CSC will not be able to effectively
manage a company with the number of programs or the size that the
combined company will encompass, or to properly manage and grow the YSI
rehabilitative, non-secure programs, or that the market will not have
the confidence in CSC management to overcome such management issues;
. The risks to YSI stockholders of potential delays in the consummation of
the merger due to factors within and beyond the control of the parties;
and
. The other factors described herein under "Risk Factors."
YSI management addressed for the Board the foregoing countervailing
considerations. In respect of the first two countervailing factors identified
above, the YSI Board recognized that, despite CSC's current debt levels, the
larger, combined company would have a greater ability than either of the two
individual companies to obtain financing. The Board also considered the current
CSC credit facilities and the discussions CSC had with banking institutions
regarding the sufficiency of debt and equity financing that will likely be
available to CSC and the combined company.
In respect of the third countervailing factor identified above, the
companies had conducted discussions regarding establishing joint transition
teams to implement a strategy to effect an efficient transition and to
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<PAGE>
minimize, to the extent possible, transition costs and distractions to
management which could detract from an efficient transition. The Board
recognized that the merger agreement contemplates retention bonuses to YSI
personnel to ensure for the orderly transition, and management was otherwise
satisfied, based on management's discussions with CSC, that CSC appreciated the
tasks and issues involved with transition, was developing a rational, orderly
approach to the transition, and desired to coordinate the effort with YSI
personnel.
In respect of the fourth countervailing factor identified above, YSI's Board
recognized that the merger is expected to provide long-term strategic benefits
for YSI stockholders that would counterbalance any short-term divergence in
financial performance of either company. In respect of the fifth countervailing
factor set forth above, YSI's Board believed that the depth and structure of
CSC's management indicated that CSC would be capable of managing the combined
company effectively, and that CSC had added certain personnel with prior
experience in the rehabilitative non-secure juvenile industry.
The foregoing discussion of information and factors considered by the YSI
Board is not exhaustive, but includes the most material factors considered. In
light of the wide variety of factors considered, the YSI Board did not assign
relative weight to the specific factors considered, and individual directors
may have given different weights to different factors.
YSI's Board determined that the perceived benefits of the merger far
outweigh the perceived countervailing factors.
The YSI board unanimously found the merger to be advisable and
recommends that the YSI Stockholders vote "FOR" approval of the merger.
Opinion of the YSI Board of Directors' Financial Advisor
YSI retained SunTrust Equitable to act as financial advisor in connection
with the merger. On September 23, 1998, SunTrust Equitable delivered an oral
opinion to the YSI Board, which was later confirmed in writing, that, based
upon and subject to factors and assumptions set forth in the opinion, and, as
of the date of such opinion, the exchange ratio is fair to the YSI stockholders
from a financial point of view. SunTrust Equitable has subsequently confirmed
this opinion to the YSI Board by letter dated as of the date of this document.
The full text of the SunTrust Equitable opinion, which sets forth
assumptions made, procedures followed, matters considered and limits on the
review undertaken, is attached to this document as Annex B. The SunTrust
Equitable opinion is not a recommendation to any YSI stockholder as to how to
vote on the merger nor did the SunTrust Equitable opinion address the
prospective price of trading range at which shares of CSC common stock will
trade following the merger. The summary of the SunTrust Equitable opinion is
qualified in its entirety by reference to the full text of the SunTrust
Equitable opinion.
In arriving at its opinion, SunTrust Equitable considered certain publicly-
available information as well as other information concerning YSI and CSC
provided to SunTrust Equitable by the respective companies. The information
considered included:
. the merger agreement;
. financial reports and forecasts provided by YSI and CSC;
. the financial terms of recently-completed transactions involving
corrections companies;
. the financial position and operating results of other companies in the
corrections industry, such as BI Incorporated, Children's Comprehensive
Services, Inc., Cornell Corrections, Inc., Res-Care, Inc., and Wackenhut
Corrections Corproation; and
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. the anticipated pro forma financial effects of the merger to CSC.
SunTrust Equitable also held discussions with the managements and
representatives of YSI and CSC concerning the historical and current
operations of YSI and CSC, their respective financial condition and prospects
and the anticipated benefits of the merger. Furthermore, SunTrust Equitable
conducted such additional financial analyses and reviewed such other factors
as it deemed appropriate.
In rendering its opinion, SunTrust Equitable relied upon, without
independent verification, the accuracy and completeness of the information
reviewed. SunTrust Equitable assumed that the financial projections provided
by the management of each YSI and CSC were reasonably prepared and reflected
the best currently available estimates and judgments concerning the future
performance of their respective companies. SunTrust Equitable has not made any
independent evaluation or appraisal of the assets or liabilities of YSI or
CSC, nor has SunTrust Equitable been furnished with such appraisals.
SunTrust Equitable further assumed that:
. the merger would qualify for pooling-of-interests accounting, and would
be a tax-free reorganization,
. in connection with the merger, $32.2 million of 7% Convertible
Subordinated Debentures of YSI would be retired; and
. all material liabilities of CSC are as set forth in the financial
statements of CSC or were disclosed by CSC to SunTrust Equitable.
The SunTrust Equitable opinion is based upon economic, market and other
conditions existing as of the date of such opinion and does not address the
fairness of the exchange ratio to the YSI stockholders as of any other date.
Furthermore, forecasts of future income prepared by YSI and CSC and relied on
by SunTrust Equitable may not be indicative of future results because such
analyses contain assumptions as to industry performance, general business and
economic conditions and other matters beyond the control of YSI and CSC.
In preparing its opinion, Sun Trust Equitable performed a variety of
analyses, which are described below. In arriving at its opinion, SunTrust
Equitable considered the results of all such analyses as a whole and did not
attribute any particular weight to any specific analysis or factor. As such,
consideration of only a portion of the analyses could create an incomplete
view of the processes underlying the SunTrust Equitable opinion.
The following paragraphs summarize the material quantitative analyses
performed by SunTrust Equitable in arriving at the opinion delivered to the
YSI Board.
Contribution Analysis. SunTrust Equitable analyzed the percentage of
revenues, operating income and net income that each of YSI and CSC would
contribute to the total of the combined entity. SunTrust Equitable noted that,
at the exchange ratio, the percentage ownership of YSI stockholders was within
the range of the implied contribution for the 1999 fiscal year.
<TABLE>
<CAPTION>
Contribution of: YSI CSC YSI/CSC
---------------- --- --- -------
<S> <C> <C> <C>
Revenues 37.9% 62.1% 100.0%
Operating income 10.7% 89.3% 100.0%
Net income 30.5% 69.5% 100.0%
Implied Ownership 35.3% 64.7% 100.0%
</TABLE>
Pro Forma Merger Analysis. SunTrust Equitable analyzed certain pro forma
effects resulting from the merger. SunTrust Equitable reviewed the operating
synergies contemplated to result from the merger by combining the operations
of YSI and CSC as projected by the management of YSI. SunTrust Equitable
analyzed the pro forma effect of such operating synergies on analysts' net
income and earnings per share for CSC. The analysis indicated that the pro
forma earnings per share ("EPS") of CSC on a fully taxed basis would be higher
than comparable projections for CSC on a stand-alone basis during the same
periods.
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Analysis of Recent Acquisition Transactions. Using publicly-available
information, SunTrust Equitable reviewed the purchase prices and multiples paid
in selected merger and acquisition transactions involving corrections
companies. SunTrust Equitable examined 29 transactions since February 1, 1993
and reviewed the relationship between the aggregate transaction value and the
acquired company's revenues, gross profit and EBITDA for the twelve months
preceding acquisition.
<TABLE>
<CAPTION>
Low High YSI
Aggregate Transaction Value to: ----------- ----------- -----------
<S> <C> <C> <C>
Trailing 12 months revenues......... 0.2x 3.6x 0.8x
Trailing 12 months gross profit..... 0.5x 11.5x 5.1x
Trailing 12 months EBITDA........... 1.8x 21.0x 9.2x
Analysis of Certain Publicly-Traded Companies. Using publicly-available
information, SunTrust Equitable reviewed the stock prices, market multiples,
profitability and certain other characteristics for certain companies in the
corrections industry. The companies included in this analysis were BI
Incorporated, Children's' Comprehensive Services, Inc., Cornell Corrections,
Inc., Corrections Corporation of America, Correctional Services Corporation,
Res-Care, Inc., and Wackenhut Corrections Corporation. SunTrust Equitable noted
that, based upon CSC's stock price on September 21, 1998, the value of YSI
implied by the exchange ratio was generally within or above the range of
multiples for the other publicly-traded companies.
<CAPTION>
Low High YSI
Market Multiple of: ----------- ----------- -----------
<S> <C> <C> <C>
Trailing 12 months revenues......... 1.2x 2.7x 0.8x
Trailing 12 months EBITDA........... 6.2x 15.1x 9.2x
Trailing 12 months EBIT............. 11.4x 21.6x 16.8x
1998E net income.................... 12.9x 27.9x 133.3x
1999E net income.................... 10.0x 20.0x 15.4x
Discounted Cash Flow Analysis. SunTrust Equitable also performed a
discounted cash flow analysis. Using the information provided by YSI, SunTrust
Equitable performed a stand-alone discounted cash flow analysis for YSI. Based
upon this analysis, SunTrust Equitable noted that, at the price of CSC common
stock on September 21, 1998, the equity value implied by the exchange ratio was
within the range of the values calculated by this analysis.
<CAPTION>
Low High YSI
----------- ----------- -----------
<S> <C> <C> <C>
Implied equity value................ $47 million $99 million $51 million
Leveraged Transaction Analysis. SunTrust Equitable also utilized the
information provided by YSI projection scenarios to calculate the value of YSI
in a leveraged transaction. The capital structure and return levels were
selected based upon SunTrust Equitable's judgment of the returns expected by
investors in transactions of this type. SunTrust Equitable noted that, at the
CSC common stock price as of September 21, 1998, the equity value implied by
the exchange ratio was above the implied value produced from this analysis.
<CAPTION>
Average YSI
----------- -----------
<S> <C> <C> <C>
Implied equity value............................ $34 million $51 million
</TABLE>
SunTrust Equitable, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. In the past, SunTrust Equitable has performed
investment banking and financial advisory services for YSI from time to time
for which it has received compensation. In the ordinary course of business,
SunTrust Equitable trades the equity securities of YSI and CSC for its own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in these securities. During the past two years,
SunTrust Equitable has provided certain financial and advisory services to YSI,
including serving as financial advisor to YSI regarding the divestiture of
YSI's behavioral health operations in October 1997, and, in connection with
such services, SunTrust Equitable received compensation in the amount of
$540,000.
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<PAGE>
Pursuant to the engagement letter between YSI and SunTrust Equitable, YSI
has agreed to pay SunTrust Equitable a fee of $1,200,000. Of that fee, $250,000
has been paid to date and the balance is payable only upon consummation of the
merger. YSI has also agreed to reimburse SunTrust Equitable for the expenses
reasonably incurred by it in connection with its engagement (including
reasonable counsel fees) and to indemnify SunTrust Equitable and its officers,
directors, employees, agents and controlling persons against certain expenses,
losses, claims, damages or liabilities in connection with its services,
including those arising under federal securities laws.
Form of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with the Maryland General Corporation Law, at the effective time,
merger subsidiary will be merged with YSI and YSI will survive as a wholly-
owned subsidiary of CSC. As the surviving corporation, YSI will continue its
corporate existence under Maryland law. The merger subsidiary articles of
incorporation, as amended, will be adopted as the articles of incorporation of
the surviving corporation in the merger and the merger subsidiary by-laws will
be adopted as the by-laws of the surviving corporation.
Merger Consideration
At the effective time, each outstanding share of YSI common stock will be
converted into the right to receive .375 of a fully paid and nonassessable
share of CSC common stock (except that cash will be paid in lieu of fractional
shares). As of the effective time, the shares of YSI common stock will no
longer be outstanding and will automatically be cancelled and cease to exist
and each holder of shares of YSI common stock will cease to have any rights in
respect of those shares, except the right to receive the consideration set
forth in the immediately preceding sentence. See "--Conversion of Shares;
Procedures for Exchange of Certificates; Fractional Shares." The exchange ratio
was determined through arm's-length negotiations between YSI and CSC.
Conversion of Shares; Procedures for Exchange of Certificates; Fractional
Shares
The conversion of YSI common stock into CSC common stock will occur
automatically at the effective time. Promptly after the effective time,
American Stock Transfer and Trust Company, in its capacity as exchange agent,
will send a transmittal letter to each holder of YSI common stock. The
transmittal letter will contain instructions with respect to obtaining shares
of CSC common stock in exchange for shares of YSI common stock.
YSI stockholders and CSC stockholders should not return stock
certificates with the enclosed proxy card.
Holders of certificates previously representing YSI common stock will not be
paid dividends or distributions on the CSC common stock into which such shares
have been converted with a record date after the effective time until such
certificates are surrendered to the exchange agent for exchange. When such
certificates are surrendered, any unpaid dividends or distributions will be
paid without interest.
In the event of a transfer of ownership of YSI common stock which is not
registered in the records of YSI's transfer agent, a certificate representing
the proper number of shares of CSC common stock may be issued and any cash or
other dividends or distributions to be paid upon surrender of the certificate
may be paid to a person other than the person in whose name the certificate so
surrendered is registered if the certificate is presented to the exchange
agent, accompanied by all documents required to evidence the transfer and the
person requesting such issuance pays any transfer or other taxes required for
the issuance of shares to a person other than the registered holder of such
certificate or establishes to the satisfaction of CSC that such tax has been
paid or is not applicable.
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All shares of CSC common stock issued upon conversion of shares of YSI
common stock (including any cash paid in lieu of any fractional shares of CSC
common stock), will be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of YSI common stock, subject, however, to
CSC's obligation to pay any dividends or make any other distributions with a
record date prior to the effective time that may have been declared by YSI on
such shares of YSI common stock and which remain unpaid at the effective time.
No fraction of a share of CSC common stock will be issued to any YSI
stockholder upon surrender of certificates previously representing YSI common
stock. For the fractional share that would otherwise be issued, the exchange
agent will remit to such stockholders an amount in cash equal to the product
obtained by multiplying the fractional share interest to which such holder
would otherwise be entitled by the average closing price for a share of CSC
common stock on the Nasdaq National Market on the 20 trading days ending on the
last full trading day prior to the effective time.
Effective Time
The effective time will be the time of the filing of the articles of merger
with the Maryland State Department of Assessments and Taxation or such later
time as is agreed upon by YSI and CSC and specified in the articles of merger.
The filing of the articles of merger will occur as soon as practicable
following the closing of the merger. The closing will occur no later than the
first business day after satisfaction or waiver of the conditions to the
consummation of the merger set forth in the merger agreement unless another
date is agreed to in writing by YSI and CSC.
Effect on Shares Issuable Under YSI Stock Plans
At the effective time, each share subject to issuance under YSI's Stock
Option Plan, 1995 Employee Stock Option Plan, 1996 Employee Stock Plan, 1997
Employee Stock Option Plan, 1995 Director Stock Option Plan and 1998 Director
Stock Option Plan, whether vested or unvested, without any action on the part
of the holder, will be assumed by CSC and will be converted into an option to
acquire, upon the same terms and conditions that were applicable to the option
immediately prior to the effective time, the number of shares of CSC common
stock equal to the number of shares of YSI common stock subject to such option
immediately prior to the effective time multiplied by the exchange ratio, at a
price per share equal to the exercise price for each such share of YSI common
stock subject to such option divided by the exchange ratio. As of December 31,
1998, options to purchase approximately 971,187 shares of YSI common stock were
outstanding under the YSI Stock Plans at an average exercise price of $12.91
per share. After the merger, such options will be converted to options to
acquire approximately 364,195 shares of CSC common stock at an average exercise
price of $34.43 per share.
Effect on Shares Issuable Upon Exercise of YSI Warrants
At the effective time, each share subject to issuance under outstanding YSI
warrants, without any action on the part of the holder, will be assumed by CSC
and will be converted into a warrant to acquire, upon the same terms and
conditions that were applicable to the warrant immediately prior to the
effective time, the number of shares of CSC common stock equal to the number of
shares of YSI common stock subject to such warrant immediately prior to the
effective time multiplied by the exchange ratio, at a price per share equal to
the exercise price for each such share of YSI common stock subject to the
warrant divided by the exchange ratio. As of December 31, 1998, warrants to
purchase approximately 28,857 shares of YSI common stock were outstanding at an
exercise price of $3.233 per share. After the merger, these warrants will be
converted to warrants to acquire 10,821 shares of CSC common stock at an
exercise price of $8.62 per share.
Federal Income Tax Consequences of the Merger
The following discussion is a summary of the material U.S. federal income
tax consequences of the merger to a stockholder of YSI that holds shares of YSI
common stock as a capital asset at the effective time. The discussion is based
on laws, regulations, rulings and decisions in effect on the date hereof, all
of which are
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<PAGE>
subject to change (possibly with retroactive effect) and to differing
interpretations. This discussion does not address all aspects of federal
taxation that may be relevant to particular YSI stockholders in light of their
personal circumstances or to YSI stockholders subject to special treatment
under the Internal Revenue Code of 1986, including, without limitation, banks,
tax-exempt organizations, insurance companies, dealers in securities or foreign
currency, YSI stockholders who received their YSI common stock through the
exercise of employee stock options or otherwise as compensation, YSI
stockholders who are not U.S. persons (as defined in Section 7701(a)(30) of the
Internal Revenue Code) and YSI stockholders who hold YSI common stock as part
of a hedge, straddle or conversion transaction. In addition, the discussion
does not address any state, local or foreign tax consequences of the merger.
Each holder of YSI common stock is urged to consult its tax advisor with
respect to the particular tax consequences of the merger to such holder.
Tax Opinions
As of the date of this joint proxy statement/prospectus, Epstein Becker &
Green, P.C. has, subject to the assumptions, limitations, qualifications and
other considerations described herein, advised CSC that in its opinion:
. the merger will qualify as a reorganization pursuant to Section 368(a)
of the Internal Revenue Code,
. CSC, merger subsidiary and YSI will each be a party to such
"reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code, and
. no gain or loss will be recognized by CSC or merger subsidiary as a
result of the merger.
As of the date of this joint proxy statement/prospectus, Hogan & Hartson
L.L.P. has, subject to the assumptions, limitations, qualifications and other
considerations described herein, advised YSI that in its opinion:
. the merger will qualify as a reorganization pursuant to Section 368(a)
of the Internal Revenue Code,
. CSC, merger subsidiary and YSI will each be a party to such
"reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code,
. no gain or loss will be recognized by YSI as a result of the merger, and
. no gain or loss will be recognized by a holder of YSI common stock upon
the exchange of its shares solely for shares of CSC common stock
pursuant to the merger, except with respect to cash, if any, received by
a holder of YSI common stock in lieu of a fractional share of CSC common
stock.
The opinion of Hogan & Hartson L.L.P. and the opinion of Epstein Becker &
Green, P.C., described above, are referred to collectively herein as the "tax
opinions." Provided that the merger constitutes a tax-free reorganization:
. the aggregate tax basis of the shares of CSC common stock received
solely in exchange for shares of YSI common stock pursuant to the merger
(including a fractional share of CSC common stock for which cash is
received) will be the same as the aggregate tax basis of the shares of
YSI common stock surrendered in exchange therefor;
. the holding period for shares of CSC common stock received in exchange
for shares of YSI common stock pursuant to the merger will include the
holding period of the shares of YSI common stock surrendered in exchange
therefor, provided such shares of YSI common stock were held as capital
assets by the holder at the effective time; and
. cash received by a holder of YSI common stock in lieu of a fractional
share of CSC common stock will be treated as received in exchange for
such fractional share and capital gain or loss will be recognized in an
amount equal to the difference between the amount of cash received and
the portion of the tax basis of the share of YSI common stock allocable
to such fractional interest.
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Consummation of the merger is conditioned upon counsel to both CSC and YSI
delivering at the effective time, closing tax opinions to the same effect and
subject to substantially the same assumptions, limitations, qualifications and
considerations as the tax opinions referred to previously. In the event that
CSC or YSI is unable to obtain the closing tax opinions, each of CSC and YSI is
permitted under the merger agreement to waive the receipt of the closing tax
opinions as a condition to such party's obligation to consummate the merger. As
of the date of this joint proxy statement/prospectus, neither CSC nor YSI
intends to waive the receipt of the closing tax opinions as a condition to the
consummation of the merger. In the event of such a failure to obtain the
closing tax opinions and either CSC's or YSI's determination to waive such
condition to the consummation of the merger, YSI and CSC will resolicit the
vote of their respective stockholders to approve the merger.
Considerations with Respect to Opinions. The tax opinions and the foregoing
summary of the U.S. federal income tax consequences of the merger are, and will
be, subject to certain assumptions, limitations and qualifications and based on
current law and, among other things, certain representations of YSI and CSC,
including representations made by the respective managements of YSI and CSC.
Reference is made to the full text of the tax opinions which set forth the
assumptions made and matters considered in connection therewith, copies of
which have been filed as exhibits to the registration statement of which this
joint proxy statement/prospectus forms a part. Opinions are not binding on the
Internal Revenue Service and do not preclude the IRS from adopting a contrary
position. In addition, if any of such representations or assumptions are
inconsistent with the actual facts, the U.S. federal income tax consequences of
the merger could be adversely affected.
Accounting Treatment
The merger is expected to qualify as a pooling-of-interests for accounting
and financial reporting purposes. Accordingly, the recorded assets, liabilities
and stockholders' equity of YSI will be combined with the corresponding balance
sheet categories of CSC and carried forward to the combined company, subject to
any adjustments required to conform the accounting policies and financial
statement classifications of the two companies. In future financial statements,
the results of operations of the combined company will include the results of
both CSC and YSI for the entire fiscal year in which the merger occurs and all
prior fiscal periods presented therein. Certain expenses incurred to effect the
merger must be treated by the combined company as current charges against
income rather than adjustments to its balance sheet.
The unaudited pro forma financial information contained in this joint proxy
statement/prospectus has been prepared using the pooling-of-interests
accounting method to account for the merger.
Accounting Treatment Opinions. Consummation of the merger is conditioned
upon receipt by us, in form and substance reasonably satisfactory to us, from
Arthur Andersen LLP, a favorable letter, dated as of the closing date,
confirming that no conditions exist with respect to YSI that would preclude
accounting for the merger as a pooling-of-interests and from Grant Thornton
LLP, a favorable letter, dated as of the closing date, regarding the
appropriateness of pooling-of-interests accounting treatment for the merger. In
the event that either of us is unable to obtain the pooling letters, each of us
is permitted under the merger agreement to waive the receipt of the pooling
letters as a condition to such party's obligation to consummate the merger. As
of the date of this joint proxy statement/prospectus, neither CSC nor YSI
intends to waive the receipt of the pooling letters as a condition to the
consummation of the merger. In the event of such a failure to obtain the
pooling letters and CSC's and YSI's determination to waive such condition to
the consummation of the merger, YSI and CSC will resolicit the vote of their
respective stockholders to approve the merger agreement.
CSC's Assumption of YSI Debentures
Under the merger agreement, CSC will assume YSI's obligations under its 7%
Convertible Subordinated Debentures, including the obligation to issue its
common stock to holders electing to convert such debentures. Each debenture
holder has the right to require the redemption of such debenture in whole but
not in part, for a
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<PAGE>
cash amount equal to 100% of the principal amount of the debenture plus accrued
interest, upon the occurrence of certain designated events. One designated
event is the consummation of a purchase, merger, acquisition, transfer or
transaction or series of transactions involving a change of control, as defined
in the debenture documents. A change of control is deemed to have occurred upon
a consolidation or merger of YSI with or into any other entity, whether or not
affiliated with YSI, in which YSI is not the sole surviving corporation or
pursuant to which the shares of YSI common stock are converted into cash,
securities or other property, other than a consolidation or merger in which the
holders of shares of YSI common stock receive (i) 75% or more of the common
stock of the sole surviving corporation outstanding immediately following the
transaction and (ii) securities representing 75% or more of the combined voting
power of the voting stock of the sole surviving corporation outstanding
immediately following the transaction.
YSI and CSC believe that the merger constitutes a designated event referred
to in the documents defining the rights of the debenture holders. Accordingly,
CSC will be obligated to give notice of the designated event to the debenture
holders within 30 days of the event, stating the redemption price, the date
fixed for redemption and the place of payment of the debentures. The redemption
date is required to be a date between 30 and 60 days after the notice of
occurrence of a designated event is given. Debenture holders retain the right
to convert the debentures prior to the date fixed for redemption.
In November 1998, YSI obtained agreements from six holders of debentures,
holding approximately $30 million of the outstanding principal of the
debentures in the aggregate, by which the holders agreed not to redeem their
debentures on the redemption date, and YSI agreed to repurchase the debentures,
at par, on the first anniversary of the closing date. Each of those holders
agreed that from the date of such agreement until the redemption date of such
holder's debenture, it would not sell, or otherwise dispose of any debenture,
unless the transferee agrees to be bound by the foregoing agreement. The
remaining debenture holders, who hold an aggregate of approximately $1.7
million of debentures will be entitled to require YSI to redeem the debentures,
for a cash amount equal to 100% of the principal amount plus accrued interest
as described above, on the redemption date.
Regulatory and Third Party Approvals
Other than compliance with the notification and waiting period requirements
under federal antitrust laws, and approval of the Nasdaq National Market of the
shares of CSC common stock to be issued in the merger, we do not believe that
any other filings with or approvals of any governmental authority are necessary
in connection with the consummation of the merger. We made our required filings
under federal antitrust laws on November 19, 1998.
Third-Party Approvals. Each of CSC and YSI is a party to certain credit
facilities, indentures and other similar agreements. Consummation of the merger
may require the consent of, or waiver from, the other parties to some of these
agreements. CSC and YSI do not believe that the failure to obtain such
consents, approvals or waivers would have a material adverse effect on CSC.
Appraisal Rights
Under the Maryland General Corportion Law, holders of YSI common stock are
not entitled to dissenters' appraisal rights which would give them the right to
obtain the payment of cash in exchange for their securities as a result of the
merger, because the shares such holders own on the record date are listed on
the Nasdaq National Market and the consideration such holders will receive in
the merger will consist solely of shares of CSC listed on the Nasdaq National
Market and cash in lieu of fractional shares.
Interests of Certain Persons in the Merger
In considering the respective recommendations of the CSC Board and the YSI
Board with respect to the merger, stockholders of YSI and CSC should be aware
that, as described below, certain members of CSC's and YSI's managements and
Boards of Directors may have interests in the merger that are different from,
or in addition to, the interests of stockholders of YSI and CSC, and that may
create potential conflicts of interest.
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<PAGE>
Two executive officers of CSC are members of the six-person CSC Board that
approved the merger. One executive officer of YSI is a member of the five-
person YSI Board that approved the merger.
Except as described below, such persons have, to the knowledge of CSC and
YSI, no material interest in the merger other than those of stockholders of YSI
and CSC generally.
Directors and Executive Officers of CSC Following the Merger. Upon
completion of the merger, the Board of Directors of CSC will consist of 7
members, 6 of whom will be the directors of CSC immediately prior to the
effective time of the merger. The seventh will be Bobbie L. Huskey, who is
currently a member of the YSI Board, or another YSI Board member who is
reasonably acceptable to the CSC Board. Mr. Slattery will continue to serve as
Chairman, Chief Executive Officer and President of CSC and the other executive
officers of CSC immediately prior to the effective time of the merger will
continue to serve as executive officers of CSC. No executive officer of YSI is
currently expected to become an executive officer of CSC following the merger.
Change in Control and Severance Agreements. In connection with the hiring of
Mr. Cole in August 1996 and Mr. Demilio in March 1997, YSI entered into
employment agreements and change in control agreements with each of them on
such dates. These change in control agreements provide for the payment by YSI
of specified benefits in the event the employment of such executive officer
terminates under specified circumstances following a change in control of YSI.
For purposes of these agreements, a change in control is deemed to take place
whenever (i) a person, group of persons or other entities shall become the
beneficial owner, directly or indirectly, of securities of YSI having 20% or
more of the combined voting power of YSI's then outstanding securities, (ii)
there shall be certain significant changes in the composition of YSI's Board of
Directors, (iii) YSI enters into an agreement that would result in a change in
control, (iv) the stockholders of YSI approve certain mergers, share exchanges
or consolidations or the sale of substantially all assets of YSI or (v) the
stockholders of YSI approve a liquidation of YSI, or, in the case of Mr.
Demilio's agreement, Mr. Cole ceases to be Chief Executive Officer of YSI. CSC
has agreed with Messrs. Cole and Demilio that the merger constitutes a change
in control.
Circumstances triggering payment of the specified benefits to Messrs. Cole
and Demilio under their agreements include the following:
. involuntary termination of employment (for reasons other than death,
disability, retirement or cause); or
. voluntary termination by the executive officer in the event of certain
significant changes in the nature of his employment, including certain
reductions made in compensation and changes in responsibilities and
authority.
Benefits made available to the executive officer under the terms of the
change in control agreements in the event that his employment is terminated
under the above-specified circumstances may include:
. a lump sum severance payment equal to three times the sum of the
executive officer's annual base salary at the time of the events giving
rise to the notice of termination or immediately prior to a change in
control, plus bonuses or other additional monetary compensation during
the year of termination or the prior year whichever is greater;
. acceleration of vesting of all outstanding options to purchase
securities of YSI (or its successor);
. maintenance of all life, disability, accident and health insurance
substantially similar to those benefits to which the executive officer
was entitled immediately prior to termination for a period of three
additional years;
. certain additional payments to cover any excise tax imposed by Section
4999 of the Internal Revenue Code; and
. reimbursement of legal fees and expenses, if any, incurred as result of
such termination.
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Upon completion of the merger, because neither Mr. Cole nor Mr. Demilio will
continue their employment following the effective time, a triggering event will
be deemed to have occurred and the parties have agreed that Mr. Cole will
receive $1,150,000 and Mr. Demilio will receive $785,000 pursuant to their
respective change in control agreements.
Non-Compete Agreements. To clarify the obligations of YSI under the
employment agreements and change in control agreements with Messrs. Cole and
Demilio, CSC entered into non-compete agreements with Messrs. Cole and Demilio
to be effective upon the closing of the merger. Under his non-compete
agreement, Mr. Cole agreed that he will not enter into the employ of, or engage
in any business or activity which is the same as the business and activities
conducted by YSI or CSC or any of their subsidiaries for a period of two years
after the date of his termination of employment from CSC or its affiliates. In
consideration of the non-compete agreement, CSC agreed to pay Mr. Cole
$200,000. Under his non-compete agreement, Mr. Demilio agreed that he will not
enter into the employ of, or engage in any business or activity which is the
same as the business and activities conducted by YSI or CSC or any of their
subsidiaries for a period of one year after the date of his termination of
employment from CSC or its affiliates. In consideration of the non-compete
agreement, CSC agreed to pay Mr. Demilio $100,000.
Stock Plans. Employees of YSI and members of its Board of Directors who have
options to acquire shares of YSI common stock pursuant to YSI stock plans will,
as of the effective time, be deemed to have options to acquire shares of CSC
common stock pursuant to the formula for conversion of options described in the
merger agreement and elsewhere in this joint proxy statement/prospectus. Except
as described below, the vesting of these options will not accelerate or
otherwise be affected by the merger nor will any other provision of the
options. According to the terms of the change in control agreements with
Messrs. Cole and Demilio, any unvested options held by such person will be
accelerated as a result of the merger. As of the closing date, Mr. Cole will
hold unvested options to purchase an aggregate of 166,666 shares of YSI common
stock at a weighted average exercise price of $12.65 per share, which will
convert to options to purchase 62,499 shares of CSC common stock at an average
exercise price of $33.73 per share, and Mr. Demilio will hold unvested options
to purchase an aggregate of 100,000 shares of YSI common stock at a weighted
average exercise price of $13.34 per share. which will convert to options to
purchase 37,500 shares of CSC common stock at an average exercise price of
$35.57 per share.
Indemnification and Insurance. Pursuant to the merger agreement, CSC will
indemnify and hold harmless each director and officer of YSI from liabilities
or acts or omissions occurring at or prior to the effective time, liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, actual or threatened, whether civil, criminal, administrative or
investigative to the fullest extent that YSI would have been permitted under
Maryland law and its articles of incorporation and by-laws in effect on the
date of the merger agreement to indemnify such person. For six years after the
effective time , CSC will provide directors' and officers' liability insurance
covering acts or omissions occurring prior to the effective time to cover
present or former officers or directors of YSI or its subsidiaries on terms no
less favorable than those of the YSI policy in effect on the date of the merger
agreement. However, if the annual premiums for the insurance would exceed 150%
of the last annual premium paid by YSI for the directors' and officers'
insurance prior to the date of the merger agreement, CSC may obtain insurance
as comparable as possible without exceeding the premium threshold.
Delisting and Deregistration of YSI Common Stock
If the merger is consummated, the shares of YSI common stock will be
delisted from the Nasdaq National Market, and will be deregistered under the
Securities Exchange Act of 1934.
Restrictions on Resales by Affiliates
Affiliates of YSI. The shares of CSC stock to be issued to YSI stockholders
in the merger have been registered under the Securities Act. These shares may
be traded freely and without restriction by those stockholders not deemed to be
"affiliates" of YSI as that term is defined under the Securities Act. An
affiliate
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of a corporation, as defined by the rules promulgated under the Securities Act,
is a person who directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, that corporation.
Any transfer by an affiliate of YSI must be one permitted by the resale
provisions of Rule 145 promulgated under the Securities Act. If a YSI affiliate
becomes an affiliate of CSC, any transfer must be permitted by the resale
provisions of Rule 144 promulgated under the Securities Act or otherwise
permitted under the Securities Act. These restrictions are expected to apply to
the executive officers and directors of YSI.
Affiliates of CSC. Shares of CSC common stock which have been registered
under the Securities Act may be traded freely and without restriction by those
stockholders not deemed to be "affiliates" of CSC as that term is defined under
the Securities Act. Any transfer by an affiliate of CSC must be one permitted
by the resale provisions of Rule 144 promulgated under the Securities Act or as
otherwise permitted under the Securities Act. These restrictions apply to the
directors and executive officers of CSC as well as to certain other related
individuals or entities.
Affiliates of Either Company. SEC guidelines regarding qualifying for the
pooling-of-interests method of accounting also generally require that
affiliates of the acquiring company and acquired company may not take action to
reduce the risk in their shares, including through sales, during the period
surrounding the merger. These guidelines indicate that the pooling-of-interests
method of accounting will generally not be challenged on the basis of sales by
such affiliates if these persons do not dispose of any of the shares of the
corporation they own or any shares of the corporation they receive in
connection with a merger during the period beginning 30 days prior to the
effective time of the merger and ending when financial results covering at
least 30 days of post-merger operations of the combined entity have been
published.
Affiliate Agreements. CSC has agreed to use its best efforts to deliver to
YSI not less than 35 days prior to the effective time of the merger for each of
its affiliates, an agreement that such person will not dispose of any CSC
common stock or YSI common stock during the pooling restricted period.
YSI has agreed to use its best efforts to deliver to CSC not less than 35
days prior to the effective time of the merger for each of its affiliates, an
agreement that such person will not dispose of any CSC common stock or YSI
common stock during the pooling restricted period.
Notwithstanding whether YSI or CSC is able to deliver such agreements, stock
held by persons who are deemed by YSI or CSC to be affiliates of either party,
and CSC stock to be received in the merger by persons who are deemed by CSC to
be affiliates of YSI, shall be subject to restrictive legends and/or "stop
transfer" restrictions during the pooling restricted period, and such persons
will not be permitted to sell, dispose of, or effect transfers in their shares
until the pooling restricted period has expired.
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THE STOCKHOLDERS' MEETINGS
Purpose, Time and Place
This joint proxy statement/prospectus is being furnished to you in
connection with the solicitation of proxies by the YSI Board and CSC Board from
holders of YSI common stock and CSC common stock for use at special meetings to
be held on , 1999, in the case of YSI, at Harbor Court Hotel, 550 Light
Street, Baltimore, Maryland 21202 at 9:00 a.m., local time and at any
adjournments or postponements thereof and, in the case of CSC, at The Hyatt
Hotel, 1000 Boulevard of the Arts, Sarasota, Florida 34236, at 1:00 p.m., local
time, and at any adjournments or postponements thereof. At the CSC special
meeting, holders of CSC common stock will be asked to consider and vote upon a
proposal to approve and adopt the merger and the merger agreement including the
issuance of CSC common stock to YSI stockholders. At the YSI special meeting,
the holders of YSI common stock will be asked to consider and vote upon a
proposal to approve the merger as set forth in the merger agreement.
Record Date; Voting Power
CSC. The CSC Board has fixed the close of business (5:00 p.m., local time)
on January 27, 1999, as the record date for determining the holders of CSC
common stock entitled to notice of, and to vote at, the CSC special meeting. At
the close of business on the record date, shares of CSC common stock were
issued and outstanding and entitled to vote at the CSC special meeting. Only
holders of record of CSC common stock at the close of business on the record
date will be entitled to notice of, and to vote at, the CSC special meeting.
Holders of record of CSC common stock are entitled to one vote per share on any
matter which may properly come before the CSC special meeting. Votes may be
cast at the CSC special meeting in person or by proxy.
The presence at the CSC special meeting, either in person or by proxy of the
holders of a majority of the voting power represented by the CSC common stock
is necessary to constitute a quorum in order to transact business at the CSC
special meeting. In the event that a quorum is not present at the CSC special
meeting, such meeting will be adjourned or postponed in order to solicit
additional proxies.
YSI. The YSI Board has fixed the close of business (5:00 p.m., local time)
on January 27, 1999, as the record date for determining the holders of YSI
common stock entitled to notice of, and to vote at, the YSI special meeting.
Only holders of record of YSI common stock at the close of business on the
record date will be entitled to notice of, and to vote at, the YSI special
meeting.
At the close of business on the record date, shares of YSI common stock
were issued and outstanding and entitled to vote at the YSI special meeting.
Holders of record of YSI common stock are entitled to one vote per share on any
matter which may properly come before the YSI special meeting. Votes may be
cast at the YSI special meeting in person or by proxy.
The presence at the YSI special meeting, either in person or by proxy of the
holders of a majority of the outstanding YSI common stock entitled to vote, is
necessary to constitute a quorum in order to transact business at the YSI
special meeting. In the event that a quorum is not present at the YSI special
meeting, such meeting will be adjourned or postponed in order to solicit
additional proxies.
Votes Required
CSC. Approval of the proposal to adopt the merger agreement and the
transactions contemplated thereby, including the issuance of CSC common stock
to YSI stockholders, will require the affirmative vote of more than 50% of the
voting power of the CSC common stock outstanding on the record date. Under
Delaware law, in determining whether the proposal to approve and adopt the
merger agreement and the transactions contemplated thereby have received the
requisite number of affirmative votes, abstentions will be counted and have the
same effect as a vote against the proposals. Brokers who hold shares of CSC
stock as nominees will not have the discretionary authority to vote such shares
in the absence of instructions from the beneficial
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owners thereof. Any shares which are not voted because the nominee-broker lacks
discretionary authority will be counted and have the same effect as a vote
against the proposals.
YSI. Approval of the proposal to approve the merger will require the
affirmative vote of more than 50% of the shares of YSI common stock outstanding
on the record date. Under Maryland law, in determining whether the proposal to
approve the merger has received the requisite number of affirmative votes,
abstentions will be counted and have the same effect as a vote against the
proposal. Brokers who hold shares of YSI common stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners thereof. Any shares which are not voted because the
nominee-broker lacks such discretionary authority will be counted and have the
same effect as a vote against the proposal.
Share Ownership of Management
CSC. As of the close of business on the record date, CSC's directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of outstanding shares of CSC common stock (collectively
representing approximately of the outstanding CSC common stock). Such
executive officers and directors of CSC and YSI have indicated that they will
vote their shares of CSC common stock for adoption of the merger and the merger
agreement including the issuance of CSC common stock to YSI stockholders.
YSI. As of the close of business on the record date, YSI's directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of outstanding shares of YSI common stock (collectively
representing approximately of the outstanding YSI common stock). Such
executive officers and directors of YSI have indicated that they will vote
their shares of YSI common stock for adoption of the merger.
Voting of Proxies
Shares represented by properly executed proxies (whether through the return
of the enclosed proxy card or by telephone) received in time for a special
meeting will be voted at such special meeting in the manner specified by such
proxies. YSI stockholders should be aware that, if your proxy is properly
executed but does not contain voting instructions, or if you use telephonic
voting without indicating how you want to vote, your proxy will be voted FOR
approval of the merger. CSC stockholders should be aware that, if your proxy is
properly executed but does not contain voting instructions, or if you use
telephonic voting without indicating how you want to vote, your proxy will be
voted FOR adoption of the merger and the merger agreement including the
issuance of CSC common stock to YSI stockholders. It is not expected that any
matter other than as described herein will be brought before the special
meetings. If other matters are properly presented before the special meetings,
the persons named in such proxy will have authority to vote in accordance with
their judgment on any other such matter, including without limitation, any
proposal to adjourn or postpone the meeting or otherwise concerning the conduct
of the meeting; provided, that a proxy that has been designated to vote against
the approval of the merger will not be voted to adjourn the meeting to solicit
additional votes.
Revocability of Proxies
The grant of a proxy on the enclosed YSI or CSC proxy card, or a vote by
telephone, does not preclude a stockholder from voting in person. A stockholder
of CSC may revoke a proxy at any time prior to its exercise by (i) delivering,
prior to the CSC special meeting, to Debra Dawn, Secretary, CSC, 1819 Main
Street, Suite 1000, Sarasota, Florida 34236, a written notice of revocation
bearing a later date or time than the proxy; (ii) delivering to the Secretary
of CSC a duly executed proxy bearing a later date or time than the revoked
proxy; or (iii) attending the CSC special meeting and voting in person. A
stockholder of YSI may revoke a proxy at any time prior to its exercise by (i)
delivering, prior to the YSI special meeting, to Mark S. Demilio, Secretary,
Youth Services International, Inc., 2 Park Center Court, Suite 200, Owings
Mills, Maryland 21117, a
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written notice of revocation bearing a later date or time than the proxy; (ii)
delivering to the Secretary of YSI a duly executed proxy bearing a later date
or time than the revoked proxy; or (iii) attending the YSI special meeting and
voting in person. Attendance at the relevant special meeting will not by itself
constitute revocation of a proxy. Neither YSI nor CSC expects to adjourn the
relevant special meeting for a period of time long enough to require the
setting of a new record date for such meeting. If an adjournment occurs, it
will have no effect on the ability of either YSI's or CSC's stockholders of
record as of the record date to exercise their voting rights or to revoke any
previously delivered proxies unless the relevant meeting is adjourned to a date
that, under applicable law, requires the setting of a new record date.
Solicitation of Proxies
Each of YSI and CSC will bear the cost of solicitation of proxies from its
own stockholders, except that CSC and YSI intend to share equally the cost
associated with this joint proxy statement/prospectus, including related filing
fees. In addition to solicitation by mail, the directors, officers and
employees of each of YSI and CSC and their respective subsidiaries may solicit
proxies from stockholders of such company by telephone, telegram or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and YSI and CSC will
reimburse such company's custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith.
In addition, YSI and CSC have retained and to assist them in the
solicitation of proxies from stockholders in connection with the special
meetings. Each of and will receive a fee which YSI and CSC expect
will not exceed $ as compensation for its services and reimbursement of its
out-of-pocket expenses. YSI and CSC has agreed to indemnify each of and
against certain liabilities arising out of or in connection with its
engagement.
Stockholders should not send stock certificates with their proxy cards.
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THE MERGER AGREEMENT
General
The CSC Board and the YSI Board have each unanimously approved and adopted
the merger agreement. The merger agreement contemplates the merger of merger
subsidiary, a wholly-owned subsidiary of CSC, with and into YSI, with YSI
continuing as the surviving corporation. This section of the joint proxy
statement/prospectus describes material provisions of the merger agreement as
amended. The description of the merger agreement contained in this joint proxy
statement/prospectus does not purport to be complete and is qualified in its
entirety by reference to the merger agreement, a copy of which is attached as
Annex A to this joint proxy statement/prospectus and is incorporated herein by
reference. Capitalized terms in this section have the meanings assigned to them
in the merger agreement or, if not so assigned in the merger agreement, the
meanings assigned to them in this joint proxy statement/prospectus. All
stockholders of CSC and YSI are urged to read the merger agreement carefully
and in its entirety.
Closing; Effective Time
The closing of the merger will take place at the offices of Hogan & Hartson
L.L.P. , 111 S. Calvert Street Baltimore, Maryland 21202 at 9:00 a.m. on the
first business day after the day on which the last condition to the merger is
satisfied or waived or at such other place and time and/or on such other date
as YSI and CSC may agree in writing.
As soon as practicable following the closing, YSI, CSC and merger subsidiary
will cause articles of merger to be filed with and accepted by the Maryland
State Department of Taxation as provided in Section 3-102 of the Maryland law.
The merger will become effective at the time the articles of merger are filed
with the Maryland State Department of Taxation or at a later time agreed by YSI
and CSC and established under the articles of merger.
Articles of Incorporation of Surviving Corporation
The articles of incorporation of merger subsidiary will be adopted as the
articles of incorporation of YSI at the closing.
By-laws of Surviving Corporation
The by-laws of merger subsidiary will be adopted as the by-laws of YSI at
the closing.
Board and Officers of Surviving Corporation
The directors and officers of merger subsidiary will be the directors and
officers of YSI until their successors have been elected or appointed and
qualified or until their earlier death, resignation or removal.
Promptly after the effective time, CSC shall cause one person designated
prior to the effective time by YSI with CSC's consent (which will not be
unreasonably withheld) to be appointed to the CSC Board of Directors. Ms.
Bobbie L. Huskey, a director of YSI, is expected to be the person so
designated.
Consideration to be Received in the Merger
At the effective time, each share of YSI common stock issued and outstanding
immediately prior to the effective time shall be converted into the right to
receive .375 of a share of CSC common stock.
Exchange of Certificates; Fractional Shares
Promptly after the effective time, CSC will deposit with the Exchange Agent,
for the benefit of the holders of YSI common stock, certificates representing
the shares of CSC common stock and, after the effective time,
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if applicable, any cash, dividends or other distributions with respect to CSC
common stock including cash in lieu of fractional shares to be issued to YSI
stockholders, in exchange for their YSI shares upon their surrender of the
certificates (or affidavits of loss in lieu thereof) pursuant to the provisions
of the merger agreement.
Promptly after the effective time, CSC will cause the exchange agent to mail
a transmittal letter to the holders of YSI common stock. The transmittal letter
will contain instructions on how to surrender YSI Stock certificates in
exchange for shares of CSC common stock (and cash in lieu of fractional shares,
if applicable).
YSI stock certificates should not be returned with the enclosed proxy
card and should not be forwarded to the exchange agent except with a
transmittal form, which will be provided to holders following the
effective time.
In lieu of issuing fractional shares, CSC will pay each holder of YSI common
stock an amount in cash equal to the product obtained by multiplying (A) the
fraction of one share to which the holder (after taking into account all shares
of YSI common stock held of record at the effective time by the holder) would
otherwise be entitled by (B) the average closing price of a share of CSC common
stock as reported on the Nasdaq National Market for the 20 most recent days
that CSC common stock has traded ending on the last full trading day prior to
the effective time.
Representations and Warranties
The merger agreement contains certain customary mutual representations and
warranties by CSC and/or YSI relating to, among other things:
. corporate organization, structure and power;
. capitalization;
. authorization, execution, delivery, performance and enforceability of
consents, approvals, orders and authorizations of governmental authorities
relating to, and noncontravention of certain agreements as a result of,
the merger agreement;
. documents filed by each of us with the SEC and other regulatory entities, the
accuracy of information contained therein and the absence of undisclosed
liabilities of each of us;
. the accuracy of information supplied by each of us in connection with this
joint proxy statement/prospectus and the registration statement;
. absence of material changes or events with respect to each of us since
December 31, 1997;
. compliance with applicable laws and litigation;
. absence of changes in benefit plans;
. matters relating to the Employee Retirement Income Security Act of 1974,
. accounting and tax matters;
. labor matters;
. environmental matters;
. engagement of and payment of fees to brokers, investment bankers, finders and
financial advisors in connection with the merger agreement;
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. insurance matters;
. intellectual property matters, including efforts to resolve any "Year 2000"
computer problems; and
. material contracts and noncompetition agreements.
Certain Covenants
Conduct of Business.We have agreed that, except as otherwise expressly
contemplated by the merger agreement or consented to by the other party (which
consent will not be unreasonably withheld), during the period from the date of
the merger agreement to the effective time, each party will carry on its
respective businesses in the ordinary course and in compliance in all material
respects with all applicable laws and regulations and use all reasonable
efforts to preserve intact its current business organizations, and use all
reasonable efforts to keep available the services of its current officers and
other key employees and preserve its business relationships to the end that
each parties' goodwill and ongoing businesses will be unimpaired at the
effective time.
The merger agreement provides that neither YSI nor CSC take any action
outside of the parameters specified in the merger agreement, including (with
certain exceptions):
. amending its organizational documents;
. issuing, selling or encumbering any shares of capital stock or options to
acquire any shares of such capital stock;
. selling, leasing or encumbering property or assets (except in the ordinary
course of business);
. declaring or paying dividends or recapitalizing or redeeming its capital
stock;
. making specified types of acquisitions; or
. taking any action that would cause the representations and warranties
regarding absence of certain changes or events in the merger agreement to no
longer be true and correct.
No Solicitation
The merger agreement provides that YSI will not, nor will it authorize or
permit any of its officers, directors or employees or any financial adviser,
attorney, accountant or other representative retained by it to solicit or
encourage, including by furnishing information, or knowingly take any other
action to facilitate, any inquiries or the making of any acquisition proposal.
An "acquisition proposal" means any tender or exchange offer, or proposal,
other than a proposal by CSC or any of its affiliates, for a merger, share
exchange or other business combination involving YSI or any proposal or offer
to acquire a substantial equity interest in YSI or a substantial portion of the
assets of YSI.
Except as expressly permitted by the merger agreement, neither the YSI Board
nor any committee thereof, will withdraw or modify, or propose to withdraw or
modify, in a manner adverse to CSC, the approval or recommendation by the Board
of the merger or the merger agreement, or approve or recommend or propose to
approve or recommend any acquisition proposal other than pursuant to the
merger. Notwithstanding the foregoing, the YSI Board, to the extent that it
determines in good faith, after consultation with outside counsel, that in
light of an acquisition proposal it is necessary to do so in order to act in a
manner consistent with its fiduciary duties to its respective stockholders
under applicable law, may furnish information to or enter into discussions or
negotiations with any person or entity or withdraw or modify its approval or
recommendation of the merger or the merger agreement, among other things. YSI
will as soon as reasonably practicable notify CSC if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with YSI
and inform CSC of the status of any such acquisition proposal from time to
time.
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In the event the merger agreement is terminated by YSI in accordance with
Section 8.1(i) of the merger agreement, relating to YSI's fiduciary duties, or
by CSC in accordance with Section 8.1(j) of the merger agreement, relating to
YSI's Board's withdrawal or modification of its recommendation of the merger or
the merger agreement and;
1 an acquisition proposal is made by a third party prior to the date
of termination and the Board of Directors of YSI determines to
recommend such acquisition proposal, or
2 the merger agreement is terminated following a withdrawal or
modification of approval or recommendation of the merger or the
merger agreement by the Board of Directors of YSI if such withdrawal
or modification is due primarily to a decline in the market price of
the CSC common stock prior to the effective time and YSI within 12
months thereafter enters into an agreement with a third party
regarding an acquisition proposal,
then YSI shall promptly pay:
(i) all reasonable costs and expenses of CSC and merger subsidiary
incurred in connection with the negotiation and performance of the
merger agreement including without limitation, fees and expenses of
counsel, fees and expenses of independent public accountants
printing expenses and registration fees, in an amount not to exceed
$500,000; and
(ii) a fee in the amount of $1,500,000 to CSC.
YSI Stock-Based Awards and YSI Warrants
At the effective time, each option issued pursuant to any of the YSI Stock
Plans whether vested or unvested, and each warrant to purchase YSI common stock
will be deemed to constitute an option or warrant to acquire, on the same terms
and conditions as were applicable under such YSI option or such YSI warrant, a
number of shares of CSC common stock equivalent to (A) the number of shares of
YSI common stock that could have been purchased immediately prior to the
effective time under such YSI option or YSI warrant multiplied by (B) the
exchange ratio (rounded down to the nearest whole number), at a price per share
of CSC common stock (rounded up to the nearest whole cent) equal to the
exercise price per share pursuant to such YSI option or YSI warrant immediately
prior to the effective time divided by the exchange ratio. At or prior to the
effective time, YSI will make all necessary arrangements with respect to the
YSI Stock Plans and the YSI warrants to permit the assumption of the
unexercised YSI options and YSI warrants by CSC.
At the effective time, CSC will assume each YSI option and each YSI warrant
in accordance with the terms of the YSI Stock Plan and the YSI warrants under
which it was issued. At or prior to the effective time, CSC will take all
corporate action necessary to reserve for issuance a sufficient number of
shares of CSC common stock for delivery upon exercise of YSI options and the
YSI warrants assumed by it in accordance with the merger agreement. As soon as
practicable, but no later than 10 days after the effective time, CSC will file
a registration statement on Form S-8 with respect to CSC common stock subject
to YSI options which have been assumed by CSC in the merger, or will cause such
YSI options to be deemed to be issued pursuant to a CSC Stock Plan for which
shares of CSC common stock have previously been registered pursuant to an
appropriate registration form.
Employee Benefit Plans
CSC has agreed that all employees of YSI and its subsidiaries who are
provided with benefits under employee benefit plans of YSI, other than plans
involving the issuance of shares of YSI common stock, shall continue to be
covered under the YSI benefit plans after the effective time. However, CSC may
terminate all of the YSI benefit plans, so long as:
. each employee of YSI and its subsidiaries is provided coverage under CSC
employee benefit plans, other than plans involving the issuance of
shares on the same terms and conditions as similarly situated CSC
employees;
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. CSC causes each CSC benefit plan covering employees of YSI or its
subsidiaries to recognize prior service and accrued vacation of such
employees with YSI or its subsidiaries as service and accrued vacation
with CSC and its subsidiaries (A) for purposes of any waiting period,
eligibility requirements and benefit accruals under any CSC benefit plan
that is not a "pension plan" (as defined in Section 3(2) of ERISA), and
(B) for purposes of eligibility, including eligibility for early
retirement benefits, and vesting (but not benefit accrual) under any CSC
benefit plan that is a "pension plan" (as defined in Section 3(2) of
ERISA);
. CSC causes coverage to be immediately available for employees of YSI and
its subsidiaries under the comparable CSC benefit plan, if any, at the
time coverage ceases under any YSI benefit plan sought to be terminated;
and
. to the extent CSC elects to terminate any YSI benefit plan, it will
terminate the other YSI benefit plans as soon as practicable after the
termination of such YSI benefit plan.
However, nothing contained in the merger agreement requires CSC to offer
benefits under the CSC benefit plans comparable to those offered under the YSI
benefit plans. Following the effective time, CSC will honor, or cause YSI as
the surviving corporation to honor, all individual employment or severance
agreements in effect for employees or former employees of YSI, except that CSC
is permitted to amend or terminate any of these agreements in accordance with
their terms.
Indemnification and Insurance
For six years after the effective time, CSC will indemnify and hold harmless
each director and officer of YSI from liabilities for acts or omissions
occurring at or prior to the effective time. For six years after the effective
time, CSC will provide directors' and officers' liability insurance covering
acts or omissions occurring prior to the Effective Time to cover present or
former officers or directors of YSI or its subsidiaries on terms no less
favorable than those of the YSI policy in effect on the date of the merger
agreement. However, if the annual premiums for the insurance would exceed 150%
of the last annual premium paid by YSI for the directors' and officers'
insurance prior to the date of the merger agreement, CSC may obtain insurance
as comparable as possible without exceeding the premium threshold.
Conditions to the Consummation of the Merger
CSC's and YSI's obligation to effect the merger is subject to the
satisfaction or waiver on or prior to the closing date of various conditions,
which include, in addition to the other customary closing conditions, the
following:
. YSI stockholders must have approved the merger and CSC stockholders must
have approved the merger and the merger agreement including the issuance
of CSC common stock to YSI stockholders;
. the shares of CSC common stock issuable to YSI stockholders pursuant to
the merger agreement must be authorized for listing on the Nasdaq
National Market upon official notice of issuance;
. other than the filing with the Maryland State Department of Assessments
and Taxation of the articles of merger, all consents, approvals and
actions of, filings with and notices to any federal, state, local or
foreign government, any court, administrative, regulatory or other
governmental agency, commission or authority or any non-governmental
self-regulatory agency, commission or authority or arbitral tribunal
required of YSI, CSC or any of their subsidiaries to consummate the
merger must be obtained in a form satisfactory to each of us, unless the
failure to obtain any such governmental consent would not reasonably be
expected to have a material adverse effect on CSC and its prospective
subsidiaries taken as a whole;
. no court or governmental entity of competent jurisdiction shall have
enacted, issued, promulgated, enforced or entered any law, statute,
ordinance, rule, regulation, judgment, decree, injunction or other
48
<PAGE>
order, whether temporary, preliminary or permanent that is in effect and
restrains, enjoins or otherwise prohibits consummation of the merger and
no governmental entity shall have instituted any proceeding which
continues to be pending seeking any such order; and
. no stop order or proceeding seeking a stop order against the use of this
joint proxy statement/prospectus shall have been instituted by the SEC.
In addition, the obligation of each of us to effect the merger is subject to
the satisfaction or waiver of the following additional conditions:
. the representations and warranties of the other party to the merger
agreement set forth in the merger agreement must be true and correct as
of the date of the merger agreement and as of the closing date unless
another date is specified by the merger agreement, except where the
failure of such representations and warranties to be so true and
correct, without giving effect to any limitation as to "materiality" or
"material adverse effect,", would not have, individually or in the
aggregate, a material adverse effect on such other party;
. the other party to the merger agreement must have performed all material
obligations required to be performed by it under the merger agreement on
or prior to the closing date;
. both parties must have received from their respective legal counsel, on
the closing date, opinions dated as of such date as to the tax effects
of the merger;
. both parties must have received from their respective financial
advisors, an opinion dated as of the date of the mailing to you of this
joint proxy statement/prospectus, confirming their prior opinions; and
. at any time after the date of the merger agreement no material adverse
change may have occurred relating to the other party.
In addition, the obligation of CSC to effect the merger is subject to the
satisfaction or waiver of the following additional conditions:
. CSC must have received (a) at least 35 days prior to the effective time,
affiliate agreements from all persons identified on Exhibit A-1 of the
merger agreement and any other person who CSC reasonably believes to be
an affiliate of YSI and (b) CSC must have received, in form and
substance reasonably satisfactory to CSC, from Arthur Andersen LLP, and
Grant Thornton, favorable letters dated the closing date, regarding
pooling-of-interests accounting treatment;
. CSC must have received letters from Arthur Andersen LLP dated as of the
effective date of the S-4 registration statement and as of the closing
date, in each case addressed to CSC, containing such matters as are
customarily contained in auditors' letters regarding YSI financial
information provided for inclusion in such S-4 registration statement,
in form and substance reasonably satisfactory to CSC; and
. CSC must have received a copy of an audited consolidated balance sheet
of YSI dated as of September 30, 1998 and the audited consolidated
statements of income and cash flows of YSI for the nine-month period
then ended, accompanied by the related report of Arthur Andersen LLP to
YSI.
49
<PAGE>
Termination
The merger agreement may be terminated or abandoned only by:
. mutual written consent of CSC and YSI, even if the agreement has already
been approved by the YSI stockholders or CSC stockholders;
. CSC or YSI if the other party has failed to comply in any material
respect with any of its covenants or agreements contained in the merger
agreement required to be complied with prior to the date of such
termination and the failure to comply has not been cured within 30
business days following receipt by such party of written notice from the
non-breaching party of the failure to comply;
. YSI or CSC if there has been (a) a breach by the other party of any
representation or warranty that is not qualified by materiality which
has the effect of making such representation or warranty not true and
correct in all material respects or (b) a breach by the other party of
any representation or warranty that is qualified as to materiality, in
each case if the breach has not been cured within 30 business days
following receipt by the breaching party from the non-breaching party of
written notice of the breach;
. YSI after March 31, 1999, if any of the conditions set forth in the
merger agreement to which YSI's obligations are subject have not been
fulfilled or waived, unless such fulfillment has been frustrated or made
impossible by any act or failure to act of YSI;
. CSC after March 31, 1999, if any of the conditions set forth in the
merger agreement to which CSC's obligations are subject have not been
fulfilled or waived, unless such fulfillment has been frustrated or made
impossible by any act or failure to act of CSC;
. CSC or YSI if holders of YSI common stock do not approve the merger or
if holders of CSC common stock do not approve the issuance of shares of
CSC common stock at the stockholders meetings;
. CSC or YSI if a court or governmental entity of competent jurisdiction
institutes an order prohibiting the consummation of the transactions
contemplated by the merger agreement, unless the order is the result of
an action or proceeding instituted by the terminating party;
. YSI if in the exercise of its good faith determination as to its
fiduciary duties to YSI's stockholders imposed by law, the YSI Board
decides that such termination is required;
. CSC if the YSI Board shall have withdrawn or modified in any manner
adverse to CSC its approval or recommendation of the merger or the
merger agreement; and
. YSI if the Board of Directors of CSC shall have withdrawn or modified in
any manner adverse to YSI its approval or recommendation of the merger
or the merger agreement.
In the event of termination of the merger agreement by either of us, all
provisions of the merger agreement except for Section 6.14, relating to
expenses, and Section 8.2, relating to the break-up fee, of the merger
agreement, shall become void and no party or the directors, officers or
stockholders of any party will have any liability under those provisions,
except that such parties could still be held liable for any willful or
intentional breach of the merger agreement.
In the event of termination of the merger agreement, each party shall pay
the costs and expenses incurred by it in connection with the merger agreement,
and no party (or any of its directors, officers, employees, agents,
representatives or stockholders) will be liable to any other party for any
costs, expenses, damage or loss of anticipated profits thereunder except with
respect to the exceptions stated in the preceding and following paragraphs.
50
<PAGE>
Expenses
In the event the merger agreement is terminated by YSI in accordance with
Section 8.1(i) of the merger agreement, relating to YSI's fiduciary duties, or
by CSC in accordance with Section 8.1(j) of the merger agreement, relating to
YSI's withdrawal or modification of the merger or the merger agreement, and if
(a) an acquisition proposal is made by a third party prior to the date
of termination and the Board of Directors of YSI determines to recommend
such acquisition proposal, or
(b) the merger agreement is terminated following a withdrawal or
modification of approval or recommendation of the merger or the merger
agreement by the Board of Directors of YSI if such withdrawal or
modification is due primarily to a decline in the market price of the CSC
common stock prior to the effective time and YSI within 12 months
thereafter enters into an agreement with a third party regarding an
acquisition proposal,
then YSI shall promptly pay
(i) all reasonable costs and expenses of CSC and merger subsidiary
incurred in connection with the negotiation and performance of the merger
agreement including without limitation, fees and expenses of counsel and
independent public accountants, printing expenses and registration fees, in
an amount not to exceed $500,000 and
(ii) a fee in the amount of $1,500,000 to CSC.
In the case of any termination of the merger agreement triggering payment of
these amounts and provided YSI has not breached any of the covenants provided
for in the merger agreement in either Section 6.4, concerning acquisition
proposals, or 6.6, concerning stockholders meetings, payment of the amount
specified shall constitute liquidated damages and shall be the sole and
exclusive remedy of CSC and the merger subsidiary, and, upon payment of such
amount, YSI shall have no further obligation to CSC or the merger subsidiary
under the merger agreement.
Amendment, Extension and Waiver
Subject to the provisions of the applicable law, the merger agreement may be
modified or amended by the parties at any time prior to the effective time, by
written agreement executed and delivered by duly authorized officers of the
respective parties.
The conditions to each of the parties' obligations to consummate the merger
may be waived by such party in whole or in part to the extent permitted by
applicable law.
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<PAGE>
CORRECTIONAL SERVICES CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The information below has been derived from the audited consolidated
financial statements of Correctional Services Corporation as of and for its
fiscal years ended December 31, 1993 through 1997 and the unaudited
consolidated financial statements for the nine months ended September 30, 1997
and 1998 and as of September 30, 1998. The financial data for the nine-month
periods ended September 30, 1998 and 1997 reflect all adjustments necessary for
a fair presentation of the results for these periods. You should not expect the
results for the nine-month periods to be an indication of the results to be
expected for the full year or any other interim period. This information is
only a summary and should be read in conjunction with Correctional Services
Corporation's historical financial statements, and related notes, contained in
its report included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
---------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations
data:
Revenues.............. $67,577 $42,520 $59,936 $31,502 $31,490 $24,273 $14,101
Operating expenses.... 48,866 30,864 43,472 21,928 19,732 14,899 8,651
General and
administrative
expenses............. 12,804 8,679 11,859 8,656 9,938 6,696 3,579
Facility closure
costs................ -- -- -- 3,329 3,910 -- --
Operating income
(loss)............... 5,907 2,977 4,605 (2,411) (2,090) 2,678 1,871
Interest income
(expense), net....... (458) 145 444 (482) (699) (133) (31)
Earnings (loss) before
income taxes......... 5,449 3,122 5,049 (2,893) (2,789) 2,545 1,840
Income tax expense
(benefit)............ 2,153 1,220 2,023 (1,025) (1,050) 1,002 736
Net earnings (loss)... 3,296 1,902 3,026 (1,868) (1,739) 1,543 1,104
Net earnings (loss)
per share:
Basic............... $ 0.43 $ 0.25 $ 0.39 $ (0.32) $ (0.38) $ 0.35 $ 0.34
Diluted............. 0.40 0.23 0.37 (0.32) (0.38) 0.34 $ 0.34
Balance sheet data:
Working capital....... $ 9,441 $ 6,692 $23,560 $ 4,540 $ 1,356 $ (102)
Total assets.......... 76,652 55,866 50,304 23,341 14,518 4,745
Long-term debt, net of
current portion...... 10,062 321 -- 5,221 4,785 --
Shareholders' equity.. 47,235 43,188 39,925 9,222 7,093 1,926
</TABLE>
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CORRECTIONAL SERVICES CORPORATION
General
CSC's primary source of revenue is generated from the management of
correctional and detention facilities under federal, state and local
governmental agency contracts. The majority of CSC's contracts are based on a
daily rate per offender, some of which have guaranteed minimum payments; others
provide for fixed monthly payments irrespective of the number of offenders
housed.
CSC typically pays all facility operating expenses, except rent in the case
of certain government-provided facilities. CSC's primary expenses are
categorized as either operating or general and administrative. Operating
expenses consist of payroll (corporate and facility employee salaries, wages
and fringe benefits, and payroll taxes) and resident expenses which include
food, medical services, supplies and clothing. General and administrative
expenses consist among other items of rent, utilities, insurance, professional
fees, travel and lodging and depreciation and amortization.
CSC usually incurs development costs, which may range from $50,000 to
$200,000, in responding to a governmental agency RFP. Such costs include
planning and developing the project, preparing the bid proposal, travel and
legal expenses and consulting fees. If management believes the recovery of such
costs is probable, the costs are deferred until the anticipated contract has
been awarded, at which time the deferred costs are amortized on a straight-line
basis over the term of the contract, including option periods not to exceed
five years. Development costs of unsuccessful or abandoned bids are expensed.
The time period from incurring initial development costs on a project to the
commencement of operations ranges from six to eighteen months. Upon adoption of
the Financial Accounting Standards Board Statement of Position 98-5 on
Accounting for the Costs of Start-up Activities, the majority of these
development costs will be expensed as incurred.
After a contract has been awarded, CSC incurs start-up costs from the date
of the award until commencement of operations. Start-up costs include
recruitment, training and travel of personnel and certain legal costs, and are
capitalized until operations commence, at which time such costs are amortized
on a straight-line basis over the term of the contract, including option
periods not to exceed five years. Revenues generated during this initial period
under per diem contracts increase as the offender population increases. Upon
adoption of SOP 98-5 the majority of these start-up costs will be expensed as
incurred.
Recent Developments
On September 24, 1998, CSC announced that it had entered into a definitive
merger agreement with YSI, under which each outstanding share of YSI common
stock will be converted into .375 shares of CSC common stock. Under the merger
agreement, YSI will become a wholly owned subsidiary of CSC. Management expects
the merger to be completed in the first quarter of 1999. Transaction cost
consisting of financial advisory fees, legal and accounting services and travel
costs of $418,000 as of September 30, 1998 were capitalized. These non-
recurring costs will be charged to operations during the fiscal quarter in
which the merger is consummated. If circumstances arise that would prevent or
cause the merger to terminate these cost would be expensed at that time.
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<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Percentage of Total Revenues
---------------------------------------
Nine Months Ended Years Ended
September 30, December 31,
------------------ -------------------
1998 1997 1997 1996 1995
-------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Operating............................ 72.3 72.6 72.5 69.6 62.7
General and Administrative........... 18.9 20.4 19.8 27.5 31.5
Ft. Worth & NYCC Closure Costs....... -- -- -- 10.6 --
New Jersey Facility Closure Cost..... -- -- -- -- 12.4
-------- -------- ----- ----- -----
Total Expenses....................... 91.2 93.0 92.3 107.7 106.6
-------- -------- ----- ----- -----
Operating Income (Loss).............. 8.7 7.0 7.7 (7.7) (6.6)
Interest Income (Expense), Net......... (0.7) 0.3 0.7 (1.5) (2.2)
-------- -------- ----- ----- -----
Income (Loss) Before Income Taxes.... 8.1 7.3 8.4 (9.2) (8.8)
Income Tax Benefit (Expense)......... (3.2) (2.9) (3.4) 3.3 3.3
-------- -------- ----- ----- -----
Net Income (Loss).................... 4.9 4.5 5.0 (5.9) (5.5)
======== ======== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1998 Compared To Nine Months Ended September
30, 1997
Revenue increased 58.9% from $42,520,258 for the nine months ended September
30, 1997 to $67,577,232 for the nine months ended September 30, 1998. Revenues
of $15,773,000 were generated in the first nine months of 1998 by nine newly
opened facilities subsequent to September 30, 1997 (Florence, Arizona; Grenada,
Mississippi; Martin Hall, Washington; Dickens County, Texas; Newton County,
Texas; Jefferson County, Texas; Eagle Lake, Texas; Bayamon Detention and
Treatment, Puerto Rico). In addition, revenues increased $6,444,000 for the
1998 period as compared to the 1997 period from the full nine month operations
of CSC's Frio County, Texas facility, Milam County, Texas facility, Gallup, New
Mexico facility and the juvenile detention facilities and related educational
programs in Polk and Pahokee, Florida. Per diem rate and occupancy level
increases in several ongoing contracts also contributed to the increased
revenues for the nine months ended September 30, 1998.
Operating expenses increased 58.3% from $30,863,519 for the nine months
ended September 30, 1997 to $48,865,951 for the nine months ended September 30,
1998. The opening of the facilities noted above and the addition of management
personnel in the corporate office accounted for the increase in operating
expenses. As a percentage of revenues, operating expenses decreased from 72.6%
for the nine months ended September 30, 1997 to 72.3% for the nine months ended
September 30, 1998 due primarily to the contribution from new facilities, and
lower corporate compensation as a percentage of revenues.
General and administrative expenses increased 47.5% from $8,678,605 for the
nine months ended September 30, 1997 to $12,803,877 for the nine months ended
September 30, 1998. The increase in general and administrative expenses was
primarily attributable to the full nine month operations of CSC's Frio County,
Texas facility, Milam County, Texas facility, Gallup, New Mexico facility and
the juvenile detention facilities and related educational programs in Polk and
Pahokee, Florida and the opening of the nine new facilities noted above. As a
percentage of revenues, general and administrative expenses were 20.4% and
18.9% for the nine months ended September 30, 1997 and 1998, respectively. The
decrease in general and administrative expenses as a percentage of revenues is
a direct result of the increase in revenues and CSC's continuing efforts in
controlling fixed costs.
54
<PAGE>
Operating income increased 98.4% to $5,907,404 in the first nine months of
1998 from $2,978,134 in the first nine months of 1997. Improved occupancy
levels, the opening of new facilities, and the full nine months of operations
of CSC's Frio County, Texas, Milam County, Texas, Gallup, New Mexico, Polk and
Pahokee, Florida facilities primarily accounts for the increase in the
operating income.
CSC had interest income, net of interest expense of $144,936 for the nine
months ended September 30, 1997, while for the same 1998 period CSC had
interest expense, net of interest income of $458,245. During the first ten
months of 1997 a substantial portion of the net proceeds received from the
September 1996 public offering of common stock were invested in cash
equivalents which resulted in net interest income. During the remainder of 1997
and the first nine months of 1998 CSC used the balance of these proceeds and
bank financing for the construction and start up of the new facilities.
The provision for income taxes increased to $2,153,000 representing an
effective tax rate of 39.5% for the nine months ended September 30, 1998 from
$1,220,000 representing an effective tax rate of 39.1% for the nine months
ended September 30, 1997. The increase is due to higher taxable income.
Net income was $3,296,159 or $0.40 per share on a diluted basis for the nine
months ended September 30, 1998 compared to net income of $1,903,070 or $0.23
per share for the nine months ended September 30, 1997.
Year ended December 31, 1997 Compared to Year ended December 31, 1996
Revenue increased 90.3% from $31,501,658 for the year ended December 31,
1996 to $59,936,101 for the year ended December 31, 1997. The increase in
revenue from 1996 to 1997 was primarily attributable to the opening of seven
new facilities during 1997 (Bronx, New York, Polk, Florida and Pahokee, Florida
in January 1997; Frio County, Texas in March 1997; Milam County, Texas in June
1997; Gallup, New Mexico in July 1997; and Florence, Arizona in October 1997).
In addition, CSC experienced increased occupancy levels in certain facilities
and generated a full year of revenue in the Bell County, Texas and Phoenix,
Arizona facilities that were opened only a partial year in 1996. Compensated
man days was 1,115,000 in 1997 and 641,000 in 1996.
Operating expenses increased 98.2% from $21,928,329 for the year ended
December 31, 1996 to $43,472,402 for the year ended December 31, 1997 primarily
due to increases in payroll and related payroll taxes and benefits related to
the opening of the new facilities. As a percentage of revenues, operating
expenses increased from 69.6% in 1996 to 72.5% in 1997. The increase in
operating expenses as a percentage of revenues can be attributed to lower
operating margins on CSC's community corrections programs, the opening of new
facilities and an increase in corporate staff to support CSC's expanded
operations.
General and administrative expenses increased 37.0% from $8,655,628 for the
year ended December 31, 1996 to $11,859,399 for the year ended December 31,
1997. The increase in general and administrative expenses was primarily
attributable to the opening of new facilities. As a percentage of revenues,
general and administrative expenses decreased to 19.8% in 1997 from 27.5% in
1996. The decrease in general and administrative expenses as a percentage of
revenues is a result of the increase in revenues and CSC's efforts in
controlling fixed costs.
At December 31, 1996 CSC wrote-off $3,329,000 for its Fort Worth, Texas and
New York State Community Corrections programs. CSC wrote-off fixed assets,
development and start-up costs and other costs associated with the closure of
each program.
The operating loss for the year ended December 31, 1996 of $2,411,299 was
attributable principally to the above mentioned facilities closure costs.
Interest income, net of interest expense, was $444,077 for the year ended
December 31, 1997 compared to interest expense, net of interest income, of
$481,728 for the year ended December 31, 1996, a net change of
55
<PAGE>
$925,805. This increase resulted from utilizing a portion of the net proceeds
received from the September 1996 public offering of common stock to repay bank
indebtedness which reduced interest expense, and from investing the balance of
the net proceeds in cash equivalents which increased interest income. Also,
interest expense was reduced by interest capitalized on facilities under
construction. During 1996, interest of $103,576 was capitalized on the Phoenix
facility construction and during 1997, $371,500 was capitalized on the
construction of the Florence, Arizona facility.
For the year ended December 31, 1997 CSC recognized a provision for income
taxes of $2,022,853. For the year ended December 31, 1996 CSC recognized an
income tax benefit of $1,025,000 principally from the utilization of operating
losses. The effective tax rate was 35.4% in 1996 and 40.1% in 1997.
As a result of the foregoing factors, CSC had a net loss of $1,868,027 or
$0.32 per share for the year ended December 31, 1996 compared to net income of
$3,025,524 or $0.39 per share for the year ended December 31, 1997.
Year ended December 31, 1996 Compared to Year ended December 31, 1995
Revenue increased slightly from $31,490,026 for the year ended December 31,
1995 to $31,501,658 for the year ended December 31, 1996. A full year's
revenues in 1996 generated by the Canadian, Texas facility which began
operations in April, 1995 and the Bartow, Florida facility which began
operations in July 1995, as well as revenues generated by the Phoenix, Arizona
facility which began operation in April 1996, were offset by the loss in
revenues stemming principally from the discontinuance of CSC's operations at
its Elizabeth, New Jersey INS facility on June 18, 1995 and lower occupancy
rates at CSC's Fort Worth and Houston, Texas and New York State Community
Corrections facilities.
Operating expenses increased 11.1% from $19,731,797 for the year ended
December 31, 1995 to $21,928,329 for the year ended December 31, 1996 primarily
due to increases in payroll which increased $1,839,967 or 15.1%. These changes
resulted primarily from the opening of the facilities noted above, and the
addition of management personnel in the corporate office. As a percentage of
revenues, operating expenses increased from 62.7% for the year ended December
31, 1995 to 69.6% for the year ended December 31, 1996.
General and administrative expenses decreased 12.9% from $9,938,344 for the
year ended December 31, 1995 to $8,655,628 for the year ended December 31,
1996. The decline in general and administrative expenses was primarily
attributable to the closure of the Elizabeth, New Jersey INS facility in June
1995. As a percentage of revenues, general and administrative expenses were
31.5% and 27.5% for the years ended December 31, 1995 and 1996 respectively. In
addition, at December 31, 1995 and 1996, CSC wrote-off $3,909,700 and
$3,329,000 respectively in facility closure costs for its Elizabeth, New Jersey
INS facility (1995) and for its Fort Worth, Texas and New York State Community
Corrections programs (1996). In each year, CSC wrote-off fixed assets,
development and start-up costs and other costs associated with the closure of
each program.
The operating losses for the 1995 and 1996 years of $2,089,815 and
$2,411,299 respectively are attributable principally to the above mentioned
facility closure costs.
Interest expense, net of interest income, decreased 31.1% from $699,576 for
the year ended December 31, 1995 to $481,728 for the year ended December 31,
1996. This decrease resulted primarily from utilizing a portion of the net
proceeds received from the September 1996 public offering of common stock to
repay bank indebtedness which reduced interest expense, and from investing the
balance of the net proceeds in cash equivalents which increased interest
income.
The income tax benefits of $1,050,000 and $1,025,000 respectively for the
years 1995 and 1996 result principally from the utilization of operating losses
sustained in each year. The effective tax rate was 37.6% in 1995 and 35.4% in
1996.
56
<PAGE>
As a result of the foregoing factors, CSC had a net loss of $1,739,391 or
$0.38 per share for the year ended December 31, 1995 compared to a net loss of
$1,868,027 or $0.32 per share for the year ended December 31, 1996.
Liquidity and Capital Resources
CSC has historically financed its operations through private placements and
public sales of its securities, cash generated from operations and borrowings
from banks.
CSC had working capital at September 30, 1998 of $9,441,156, as compared to
working capital of $6,691,704 at December 31, 1997. CSC's current ratio was
1.50 to 1 at September 30, 1998 as compared to 1.58 to 1 at December 31, 1997.
Net cash of $540,616 was provided by operating activities for the nine
months ended September 30, 1998 as compared to $1,291,748 of cash provided by
operations for the nine months ended September 30, 1997. The change was
attributed primarily to increases in net income, depreciation and amortization,
and accounts payable and offset by an increase in accounts receivable and
prepaid expenses.
Net cash of $14,009,884 was used in investing activities during the nine
months ended September 30, 1998 as compared to $14,258,769 being used in the
nine months ended September 30, 1997. In the 1998 period such cash was used
principally for the startup of nine new facilities. In the comparable period
for 1997, the principal investing activities of CSC were the construction of
CSC's Florence, Arizona facility, and fixed asset and start-up costs associated
with the Polk and Pahokee Florida, Frio County and Milam County, Texas
facilities.
Net cash of $8,255,332 was provided by financing activities for the nine
months ended September 30, 1998 as compared to financing activities of $771,237
during the nine months ended September 30, 1997. The primary sources of funding
during 1998 were $9,742,000 in proceeds from CSC's revolving credit agreement,
proceeds from installment payments received from the sale of equipment and
leasehold improvements and proceeds from the exercise of stock warrants and
options. Approximately $2,900,000 was used to retire subordinated notes, which
became due in July of 1998. During the nine months ended September 30, 1997 net
cash provided by financing activities resulted primarily from a $325,000
mortgage for the acquisition of land for the Florence, Arizona facility and
proceeds from installment payments received from the sale of equipment and
leasehold improvements. CSC received $750,233 and $90,223 from the exercise of
stock options and warrants during the nine months ended September 30, 1998 and
1997, respectively.
CSC continues to make cash investments in the acquisition and construction
of new facilities and the expansion of existing facilities. In addition, CSC
expects to continue to have cash needs as it relates to financing start-up
costs in connection with new contracts.
In April 1998 CSC finalized a new five-year credit facility with a syndicate
of banks led by NationsBank N.A. The syndicated facility provides for up to $30
million in borrowings for working capital, construction and acquisition of
correctional facilities, and general corporate purposes. The line is comprised
of two components, a $10 million revolving credit and $20 million operating
lease facility for the construction, ownership and acquisition of correctional
facilities. Borrowings under the line are subject to compliance with financial
covenants and borrowing base criteria. As of September 30, 1998 the total
amount outstanding on the revolver was $9,742,000 and the total amount
outstanding on the operating lease facility was $16,537,000.
In August of 1998 CSC initiated an amendment to its current credit agreement
with a syndicate of banks led by NationsBank N.A. Simultaneously CSC engaged
NationsBank Montgomery Securities to serve as a placement agent in connection
with a proposed offering, issue and sale privately of senior subordinated debt
securities. Under the amendment, which was finalized on October 16, 1998, CSC
received an additional $17,500,000 temporary increase in its credit facility.
The amendment represents interim financing which
57
<PAGE>
terminates on April 16, 1999. Upon receipt of the additional subordinated debt,
the increase in the credit facility will become permanent. If CSC is unable to
. extend the temporary increase
. amend the credit facility to provide an increased borrowing base; or
. obtain alternative financing
then it may have to curtail its growth relating to the construction and
operation of potential new facilities.
In addition, CSC would be required to repay any balance outstanding at the
time of termination of the increased credit facility. Failure to do so would
enable NationsBank to exercise their rights and remedies under the loan
agreement. Any such action could have a material adverse effect on the
financial condition and results of operations of CSC. There can be no assurance
that CSC will be able to issue the necessary subordinated debt and receive the
subsequent increase in its credit facility.
Once the merger with YSI is consummated CSC will need to obtain additional
debt or equity financing to fund the redemption of up to $32.2 million of YSI's
7% Convertible Subordinated Debentures due 2006 within one year after the
merger. The holders of approximately $2 million of the debentures are entitled
to redemption of their debentures within 90 days after the merger and the
holders of the debentures representing approximately $30 million balance have
agreed to extend the redemption date for their redemptions until one year after
the merger. We cannot assure that we will be able to obtain financing to fund
the redemption obligations or, if able, that we will do so on favorable terms.
If we cannot fund this redemption obligation through new financing, our
financial viability may be impaired.
CSC is continuing to evaluate opportunities, which could require significant
outlays of cash. If such opportunities are pursued CSC would require additional
financing resources. Management believes these additional resources may be
available through alternative financing methods. In light of the prospective
merger with YSI the above financing arrangement may be modified.
Year 2000
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000. In anticipation
of the millennium, management has completed a corporate program, which has
prepared all CSC computer systems and applications for the year 2000. CSC
expects no material incremental infrastructure costs to be incurred as a result
of these enhancements. However, CSC cannot control nor give assurances that its
primary customers and suppliers are Year 2000 compliant.
58
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
YOUTH SERVICES INTERNATIONAL, INC.
(In Thousands, Except Per Share Data)
The following selected consolidated financial data of YSI as of and for the
year ended December 31, 1997, the six months ended December 31, 1996 and each
of the years in the four year period ended June 30, 1996 are derived from the
audited consolidated financial statements of YSI. The consolidated financial
data for the six month period ended December 31, 1995 and the nine months ended
September 30, 1998 and 1997 are unaudited. All of the financial data presented
in the following table should be read in conjunction with the YSI's
Consolidated Financial Statements, including the notes thereto, included herein
and Management's Discussion and Analysis of Financial Condition and Results of
Operations of Youth Services International, Inc.
<TABLE>
<CAPTION>
Year Six Months Nine Months Ended
Year Ended June 30, Ended Ended December 31, September 30,
----------------------------------- Dec. 31, ------------------- -------------------
1993 1994 1995 1996 1997 1995 1996 1997 1998
------- ------- ------- -------- -------- ----------- ------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement Of Operations
Data:
Revenues................ $ 8,895 $34,943 $53,852 $103,642 $116,102 $49,240 $59,761 $ 90,685 $ 67,365
Program expenses
Direct operating....... 8,397 29,868 45,491 89,421 100,496 42,142 50,977 78,867 60,288
Start-up costs......... 392 40 308 58 211 85 189 61 494
------- ------- ------- -------- -------- ------- ------- --------- --------
Contribution from
operations............. 106 5,025 8,053 14,163 15,395 7,013 8,595 11,757 6,583
Other operating expenses
Development costs...... 302 518 777 840 1,297 526 666 817 1,570
General and
administrative........ 1,293 2,220 3,520 5,467 8,992 2,775 3,556 6,977 5,785
Costs related to CCI
transaction........... 306
College Station closure
cost.................. -- -- -- -- -- -- -- -- 2,327
Strategic deal costs... -- -- -- -- -- -- -- -- 472
CCI special bonuses.... -- -- -- -- 1,440 -- -- 1,440 --
Loss on sale of
behavioral health
business.............. -- -- -- -- 20,898 -- -- 27,000 --
Costs of attempted
acquisitions.......... -- -- -- 569 -- -- -- -- --
------- ------- ------- -------- -------- ------- ------- --------- --------
(Loss) income from
operations............. (1,489) 2,287 3,756 7,287 (17,232) 3,712 4,373 (24,477) (3,877)
------- ------- ------- -------- -------- ------- ------- --------- --------
Other income (expense)
Interest expense....... (173) (403) (284) (3,209) (3,095) (1,268) (1,939) (2,438) (1,722)
Interest income........ 8 51 50 645 473 44 502 356 303
Loss on sale of
investments........... -- -- -- -- (203) -- (45) (203) --
Other income (expense),
net................... (17) 2 (24) (463) (105) (233) (196) (5) 334
------- ------- ------- -------- -------- ------- ------- --------- --------
(182) (350) (258) (3,027) (2,930) (1,457) (1,678) (2,290) (1,085)
------- ------- ------- -------- -------- ------- ------- --------- --------
(Loss) income before
income taxes........... (1,671) 1,937 3,498 4,260 (20,162) 2,255 2,695 (26,767) (4,962)
Income tax (expense)
benefit................ -- 140 (1,332) (1,856) 3,085 (978) (946) (5,554) (863)
------- ------- ------- -------- -------- ------- ------- --------- --------
Net (loss) income....... $(1,671) $ 2,077 $ 2,166 $ 2,404 $(17,077) $ 1,277 $ 1,749 $ (21,213) $ (4,099)
======= ======= ======= ======== ======== ======= ======= ========= ========
(Loss) earnings per
common share:
Basic.................. $ (.27) $ .28 $ .25 $ .26 $ (1.57) $ .14 $ .18 $ (1.96) $ (0.36)
======= ======= ======= ======== ======== ======= ======= ========= ========
Diluted................ $ (.27) $ .26 $ .24 $ .24 $ (1.57) $ .13 $ .16 $ (1.96) $ (0.36)
======= ======= ======= ======== ======== ======= ======= ========= ========
Weighted average common
shares outstanding:
Basic.................. 6,271 7,399 8,507 9,138 10,911 8,987 9,981 10,846 11,251
======= ======= ======= ======== ======== ======= ======= ========= ========
Diluted................ 6,271 7,961 9,131 10,134 10,911 9,765 10,894 10,846 11,251
======= ======= ======= ======== ======== ======= ======= ========= ========
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
As of June 30, As of December 31, As of
------------------------------- ------------------- September 30,
1993 1994 1995 1996 1996 1997 1998
------ ------- ------- ------- --------- --------- ------------- ---
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 663 $ 3,898 $ 848 $ 7,080 $ 3,120 $ 8,015 $ 6,570
Working capital......... 178 6,163 9,728 30,267 13,260 23,136 18,478
Total assets............ 4,704 18,245 29,309 75,507 94,133 66,367 63,520
Long-term obligations,
net of current
portion................ 3,141 1,391 7,158 43,508 37,235 33,078 33,897
Total liabilities....... 5,452 4,443 11,666 51,948 61,220 43,032 42,979
Shareholders' (deficit)
equity................. (748) 13,802 17,643 23,559 32,913 23,335 20,541
</TABLE>
60
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF YOUTH SERVICES INTERNATIONAL, INC.
YSI operates programs designed to provide educational, developmental and
rehabilitative services to adjudicated youth. As of December 31, 1998, YSI
operated 27 residential programs in twelve states serving approximately 2,300
youth and provided non-residential aftercare services for approximately 800
youth.
Revenues are derived from YSI's operation of its programs pursuant to
contracts with governmental entities and management agreements with private
not-for-profit entities that contract with governmental entities. Generally,
YSI's contracts provide for per diem payments based upon program occupancy. YSI
recognizes revenues from its fixed per diem and management contracts when YSI
performs services pursuant to such contracts. One of YSI's significant programs
operates under a contract whereby revenues recognized as reimbursable costs are
incurred through a gross maximum price, cost reimbursement arrangement. Under
this contract, contract revenues are recorded at amounts that are expected to
be realized. This contract has certain costs subject to audit and adjustment as
determined through negotiations with government representatives. Subsequent
adjustments, if any, resulting from the audit process are recorded when known.
Program direct operating expenses are principally comprised of salaries and
related benefits of personnel, insurance, security expenses, transportation
costs, meal costs, clothing, depreciation, rent, utilities and other occupancy
expenses associated with the operation of YSI's programs at its facilities.
Start-up costs are principally comprised of expenses associated with the
hiring and training of staff required to obtain licensing and other expenses
incurred prior to admitting students into a new program.
Contribution from operations consists of revenues minus program direct
operating expenses and start-up costs. Contribution from operations, in
general, is lower in the initial stages of a program's development primarily
because of start-up costs and other costs incurred during the period prior to
the achievement of stable occupancy. Contribution from operations as a
percentage of revenues is greater under some of YSI's contracts with
unaffiliated, not-for-profit entities because the not-for-profit entities are
responsible for certain elements of operating the programs and incur some of
the costs but do not retain as much margin, if any. Therefore, in these
instances, YSI earns its margin on a lower base of revenues and expenses.
Development costs are principally comprised of salaries, related benefits
and travel costs for personnel associated with YSI's efforts to expand into new
markets and a pro rata portion of certain other general and administrative
costs.
General and administrative costs are principally comprised of salaries and
related benefits of management and corporate office personnel, rent, utilities
and other occupancy expenses associated with the operation of YSI's executive
offices, general liability and certain other insurance, depreciation, training
costs, and other costs associated with the management of YSI's operations.
Recent Developments
In November 1998, YSI's contract to operate the 30-bed Timberline program
for girls in Daytona Beach, Florida expired. The cost associated with closing
this program as well as the operating losses through the end of the contract
are reflected in the results of operations for the nine months ended September
30, 1998.
In October 1998, YSI opened the JoAnn Bridges Academy, a 30-bed program for
girls in Greenville, Florida. The start-up costs associated with this program
were reimbursable by the customer and therefore, no start-up costs are
reflected in the results of operations for the nine months ended September 30,
1998.
On September 24, 1998, YSI announced that it had entered into a definitive
merger agreement with CSC under which each outstanding share of YSI common
stock will be converted into .375 shares of CSC common stock. Under the merger
agreement, YSI will become a wholly owned subsidiary of CSC.
61
<PAGE>
In late August 1998, YSI decided to close its program in College Station,
Texas. The program was a behavioral health program originally intended to be
sold with the other seven behavioral health programs sold by YSI on October 31,
1997. This program, as well as YSI's Los Hermanos program in Texas, were
excluded from the October 31, 1997 sale and held for sale by YSI during 1998.
The College Station facility closed entirely on September 15, 1998. Included in
the results of operations for the nine months ended September 30, 1998 and 1997
are the operations of the College Station program as well as a charge for the
anticipated future losses from the closed facility. In August 1998, YSI also
decided to no longer hold the Los Hermanos program for sale but to continue to
include it in its operating portfolio.
On June 30, 1998, YSI exchanged 866,772 shares of YSI's common stock for all
of the common stock of Community Corrections, Inc. CCI operates residential
boot camp and detention facilities with a total capacity of 353 beds in Texas
and provides aftercare services to adjudicated youth in Georgia. The
transaction was accounted for as pooling of interests. Accordingly, the results
of operations presented include the results of CCI for all periods.
Results of Operations
The following table sets forth selected items from YSI's consolidated
financial statements (including the results of CCI) expressed as a percentage
of total revenues:
<TABLE>
<CAPTION>
For The Nine For The For The Six For The
Months Ended Years Ended Months Ended Years Ended
September 30, December 31, December 31, June 30,
--------------- --------------- -------------- ------------
1998 1997 1997 1996 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating........ 89.5 87.0 86.6 85.9 85.3 85.6 86.3 84.5
Start-up................ 0.7 -- 0.2 0.2 0.3 0.2 -- 0.6
------ ------ ------ ------ ------ ------ ----- -----
Contribution from opera-
tions.................. 9.8 13.0 13.2 13.9 14.4 14.2 13.7 14.9
Development costs....... 2.3 0.9 1.1 1.0 1.1 1.1 0.8 1.4
General and administra-
tive................... 8.6 7.7 7.7 5.5 6.0 5.6 5.3 6.5
CCI special bonuses..... -- 1.6 1.2 -- -- -- -- --
Loss on sale of behav-
ioral health business.. -- 29.8 18.0 -- -- -- -- --
(Loss) income from oper-
ations................. (5.8) (27.0) (14.8) 6.9 7.3 7.5 7.0 7.0
(Loss) income before in-
come taxes............. (7.4) (29.5) (17.4) 4.0 4.5 4.6 4.1 6.5
------ ------ ------ ------ ------ ------ ----- -----
Net (loss) income....... (6.1)% (23.4)% (14.7)% 2.5% 2.9% 2.6% 2.3% 4.0%
====== ====== ====== ====== ====== ====== ===== =====
</TABLE>
Given YSI's sale of the seven behavioral health programs during the year
ended December 31, 1997 and the closure of the College Station behavioral
health program in September 1998, certain portions of the discussion below
address the historical results and trends of the continuing juvenile justice
business and the behavioral health business separately. The juvenile justice
business includes, for all periods, the CCI business acquired in June 1998 in a
pooling-of-interests transaction and the Los Hermanos program which YSI
attempted to include in the sale of the behavioral health programs in October
1997, but which was excluded from such sale and which YSI subsequently
determined to continue to operate. References in the discussion to the
behavioral health business include the seven programs sold in October 31, 1997
and the College Station program YSI closed in September 1998.
62
<PAGE>
The following table sets forth selected items from YSI's consolidated
financial statements with respect to only the juvenile justice business,
expressed as a percentage of revenues from the juvenile justice business:
<TABLE>
<CAPTION>
For The Nine For The For The Six For The
Months Ended Years Ended Month Ended Years Ended
September 30, December 31, December 31, June 30,
-------------- -------------- -------------- ------------
1998 1997 1997 1996 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating....... 88.0 81.3 80.9 82.6 82.7 80.9 83.3 84.3
Start-up costs......... 0.7 0.3 0.3 0.3 0.5 0.3 0.1 0.7
------ ------ ------ ------ ------ ------ ----- -----
Contribution from opera-
tions.................. 11.3% 18.4% 18.8% 17.1% 16.8% 18.8% 16.6% 15.0%
====== ====== ====== ====== ====== ====== ===== =====
</TABLE>
Nine Months Ended September 30, 1998 Compared To Nine Months Ended September
30, 1997
Revenues. Revenues decreased $23,320,000, or 25.7%, to $67,365,000 for the
nine months ended September 30, 1998 from $90,685,000 for the nine months ended
September 30, 1997. This net decrease resulted primarily from the sale of seven
behavioral health programs in October 1997. Revenues from the programs that
were sold were $29,060,000 for the nine months ended September 30, 1997. The
decrease from the sale of these programs was partially offset by $1,020,000 of
revenues related to these programs that were recorded in the nine months ended
September 30, 1998. In addition, revenues of the College Station program
decreased by $327,000 during the nine months ended September 30, 1998 resulting
partially from the closure of the program in September 1998. Also contributing
to the decrease in revenues was a $798,000 bad debt charge in the nine months
ended September 30, 1998 recognized by certain not-for-profit companies with
whom YSI has management contracts which, based upon such contracts, serve to
decrease the amount of revenues recognized by YSI. These decreases were
partially offset by the addition of five new juvenile justice programs
subsequent to September 30, 1997 which provided revenues of $2,808,000, and an
increase in the number of youth served in the juvenile justice programs
existing at September 30, 1997 which generated increased revenues of
$3,037,000. The average residential census for YSI's juvenile justice programs
increased 8.1% to 2,174 youth for the nine months ended September 30, 1998 from
2,012 youth for the nine months ended September 30, 1997.
Program Direct Operating Expenses. Program direct operating expenses
decreased $18,579,000, or 23.6%, to $60,288,000 for the nine months ended
September 30, 1998 from $78,867,000 for the nine months ended September 30,
1997. The decrease resulted primarily from the sale of the seven behavioral
health programs in October 1997. Program direct operating expenses for the
behavioral health programs that were sold were $28,046,000 for the nine months
ended September 30, 1997. This decrease was partially offset by the program
direct operating expenses for the College Station facility that was closed in
September 1998, which increased by $96,000 in the nine months ended September
30, 1998 compared to the nine months ended September 30, 1997.
Program direct operating expenses of the juvenile justice business increased
$9,371,000 for the nine months ended September 30, 1998 versus the comparable
1997 period. Included in the expenses for the nine months ended September 30,
1998 for these businesses were the effect of certain adjustments to accruals
and reserves associated with the collectibility of accounts receivable and the
recoverability of certain program expenses of approximately $891,000. The
adjustments relating to collectibility of accounts receivable resulted
primarily from a dispute with a customer regarding certain aftercare services
provided. As a result of such dispute, in the second quarter of 1998, YSI
agreed with the customer that approximately $190,000 of receivables related to
such services were not due and collectible. YSI and the customer clarified the
issues with the respect to these services, YSI continues to provide such
services to the customer and there has been no further issue with the
collection of receivables for such services. YSI believes that its net
receivables as recorded are collectible.
63
<PAGE>
The adjustments to reserves relating to recoverability of program expenses
resulted from the progress of certain audits conducted by parties responsible
for reimbursement of certain costs. Certain expenses of YSI are recoverable as
incurred pursuant to cost reimbursement contracts, Medicaid reimbursement
provisions or other similar arrangements. Subsequent to the recoverability by
YSI, these costs generally are subject to audit for allowability by the party
responsible for reimbursement. Based on the progress of certain audits and
related negotiations during the second quarter of 1998, YSI believed that the
recognition of a liability related to disallowed costs was appropriate and
necessary and recorded such reserve in June 1998.
Also included in the program direct operating expenses for the juvenile
justice business are the estimated losses as of September 30, 1998 of
approximately $315,000 to be incurred under the remaining term of YSI's
contracts to operate the Timberline facility, which contract expired in
November 1998, and the Hillsborough facility, which contract expires in June
2000.
The increase also resulted from approximately $3,123,000 of additional
operating expenses in the nine months ended September 30, 1998 attributable to
the five new juvenile justice programs that commenced operation after September
30, 1997 and increases in operating expenses of approximately $5,042,000
attributable to juvenile justice programs existing at September 30, 1997
(including the CCI programs and the Los Hermanos program in Texas) primarily
due to an increase in the number of youth served in these facilities. As a
percentage of revenues, program direct operating expenses were 89.5% and 87.0%
for the nine months ended September 30, 1998 and 1997, respectively. Salaries
and related employee benefits constituted approximately 72.8% of program direct
operating expenses for the nine months ended September 30, 1998 compared to
73.0% of program direct operating expenses for the nine months ended September
30, 1997.
Start-up Costs. Start-up costs were $494,000 for the nine months ended
September 30, 1998 compared to $61,000 for the nine months ended September 30,
1997. The start-up costs in the 1998 period relate to the start-up of the
Elmore Academy and the Chanute Transition Center, which opened in April and
July 1998, respectively. The start-up costs in the 1997 period also were
incurred in connection with the start-up of the Elmore Academy.
Contribution from Operations. Contribution from operations, which includes
the effects of start-up costs in each period, decreased $5,174,000, or 44.0%,
for the nine months ended September 30, 1998 to $6,583,000 from $11,757,000 for
the nine months ended September 30, 1997. Contribution from operations
decreased as a percentage of revenues to 9.8% for the nine months ended
September 30, 1998 compared to 13.0% for the nine months ended September 30,
1997.
Development Costs. For the nine months ended September 30, 1998, development
costs increased $753,000, or 92.2%, to $1,570,000 from $817,000 for the nine
months ended September 30, 1997. This increase was primarily due to the
expensing of $170,000 of costs related to YSI's proposal efforts in South
Africa that previously had been capitalized as an investment in the joint
venture created to pursue such business, the hiring of individuals specifically
targeting development activities in new markets in the 1998 period and an
increase in the level of such development activity.
General and Administrative Expenses. For the nine months ended September 30,
1998, general and administrative expenses decreased $1,192,000, or 17.1%, to
$5,785,000 from $6,977,000 for the nine months ended September 30, 1997. This
decrease is primarily due to savings attributable to the sale of the behavioral
health business as well as other administrative staff reductions. As a
percentage of revenues, general and administrative expenses increased to 8.6%
for the nine months ended September 30, 1998 from 7.7% for the nine months
ended September 30, 1997.
College Station Closure Charges. YSI recorded a charge of $2,327,000 in the
nine months ended September 30, 1998 relating to anticipated losses in
connection with the College Station program that YSI closed as of September 15,
1998.
64
<PAGE>
CCI Special Bonuses. For the nine months ended September 30, 1997, CCI paid
out special bonuses of $1,440,000 to certain key officers of CCI. There were no
such bonuses in the nine months ended September 30, 1998.
Strategic Deal Costs. YSI incurred $472,000 of costs in the nine months
ended September 30, 1998 in connection with the pursuit by YSI of strategic
alternatives to enhance shareholder value, as announced on June 19, 1998,
including costs incurred in connection with entering into the Merger Agreement
with CSC, as announced on September 24, 1998. There were no such costs in the
1997 period.
Net Interest and Other Expense. Net interest and other expense decreased
$1,205,000, or 52.6%, to $1,085,000 for the nine months ended September 30,
1998 from $2,290,000 for the nine months ended September 30, 1997. The decrease
primarily was attributable to the repayment by YSI of its 12% subordinated
debentures in early January 1998, as well as the disposition of the behavioral
health business, whose liabilities included a significant amount of capital
lease obligations.
Income Taxes. The income tax benefit was $863,000, representing an effective
tax rate of 17.4% for the nine months ended September 30, 1998 as compared to
an income tax benefit of $5,554,000, representing an effective tax rate of
20.7% for the nine months ended September 30, 1997. The reduced effective tax
benefit rates are due to the non-recognition of the tax benefit on certain
current period expense items due to uncertainties of realizability in the 1998
period and the non-deductibility of a large component of the goodwill in the
1997 period related to the behavioral health business which was included in the
$27,000,000 loss on sale of behavioral health business. The effective tax rate
fluctuations between periods is also due to the effect of CCI earnings in the
nine months ended September 30, 1997 and the first six months of the nine
months ended September 30, 1998 for which no tax provisions are recorded due to
CCI's Subchapter S status during these periods.
Net Loss. Net loss was $4,099,000, or $0.36 per share on a basic and diluted
basis, for the nine months ended September 30, 1998 compared to a net loss of
$21,213,000, or $1.96 per share on a basic and diluted basis, for the nine
months ended September 30, 1997.
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Revenues increased $1,073,000, or 0.9%, to $116,102,000 for the year ended
December 31, 1997 from $115,029,000 for the year ended December 31, 1996.
Revenues derived from juvenile justice programs increased $15,756,000, or
24.0%, to $81,366,000 for the year ended December 31, 1997 from $65,610,000 for
the year ended December 31, 1996. This increase was substantially offset by a
decrease of $12,443,000 in the revenues generated from the behavioral health
business between the periods. The increase was further offset by the effect of
non-recurring consulting revenues of $2,240,000 in the 1996 period.
The increase in revenues from the juvenile justice programs resulted
primarily from the addition of 10 new juvenile justice programs subsequent to
December 31, 1996, which provided additional revenues of $10,260,000 and the
expansion of juvenile justice programs existing at December 31, 1996, which
generated an increase of $5,496,000. The average daily enrollment for all of
YSI's residential juvenile justice programs increased 24.2% to 2,015 youth for
the year ended December 31, 1997 from 1,623 youth for the year ended December
31, 1996, including a 9.7% increase in average daily enrollment in the 15
programs that YSI operated during both the years ended December 31, 1997 and
1996 to 1,781 from 1,623.
The decrease in the revenues generated from the behavioral health business
between periods was due to the fact that only 10 months of behavioral health
revenues were included in the year ended December 31, 1997 for the seven
behavioral health programs sold on October 31, 1997, and also due to declines
between years in the reimbursement from certain third-party payors in the
behavioral health business.
Program direct operating expenses increased $1,668,000, or 1.7%, to
$100,496,000 for the year ended December 31, 1997 from $98,828,000 for the year
ended December 31, 1996. As a percentage of revenues,
65
<PAGE>
program direct operating expenses were 86.6% and 85.9% for the years ended
December 31, 1997 and 1996, respectively. Salaries and related employee
benefits constituted approximately 71.5% of program direct operating expenses
for the year ended December 31, 1997 compared to 82.7% of program direct
operating expenses for the year ended December 31, 1996.
Program direct operating expenses incurred from juvenile justice programs
increased $11,690,000, or 21.6%, to $65,853,000 for the year ended December 31,
1997 from $54,163,000 for the year ended December 31, 1996. As a percentage of
juvenile justice program revenues, juvenile justice program direct operating
expenses were 80.9% and 82.6%, thereby generating program contribution margin
percentages for these programs of 19.1% and 17.4% for the years ended December
31, 1997 and 1996, respectively. This improvement between periods is due to
certain operating efficiencies and consolidations implemented throughout YSI's
juvenile justice programs. Salaries and related benefits constituted
approximately 73.0% of program direct operating expenses for the year ended
December 31, 1997 compared to 72.1% of program direct operating expenses for
the year ended December 31, 1996.
Start-up costs decreased $6,000 for the year ended December 31, 1997 to
$211,000 from $217,000 for the year ended December 31, 1996. The start-up costs
in the 1997 period relate to pre-opening costs associated with the Elmore
Academy in Minnesota, the Chanute Transition Center in Illinois and the
Texarkana Boot Camp in Texas, all juvenile justice programs. The start-up costs
in the 1996 period relate to the opening of the Keweenaw Academy in Michigan,
the Camp Washington Boot Camp in Virginia and the Texarkana Boot Camp in Texas,
all juvenile justice programs.
Contribution from operations, which includes the effects of start-up costs
in each period, decreased $589,000, or 3.7%, for the year ended December 31,
1997 to $15,395,000 from $15,984,000 for the year ended December 31, 1996.
Contribution from operations decreased as a percentage of revenues to 13.2% for
the year ended December 31, 1997 compared to 13.9% for the year ended December
31, 1996.
Contribution from operations derived from juvenile justice programs, which
includes the effects of start-up costs in each period, increased $4,072,000, or
36.3%, for the year ended December 31, 1997 to $15,302,000 from $11,230,000 for
the year ended December 31, 1996. Contribution from operations increased as a
percentage of juvenile justice revenues to 18.8% for the year ended December
31, 1997 compared to 17.1% for the year ended December 31, 1996.
For the year ended December 31, 1997, development costs increased $170,000,
or 15.1%, to $1,297,000 from $1,127,000 for the year ended December 31, 1996.
This increase was primarily due to YSI's focus on growth and the hiring of
experienced, professional staff to focus exclusively on development activities.
For the year ended December 31, 1997, general and administrative expenses
increased $2,622,000, or 41.2%, to $8,992,000 from $6,370,000 for the year
ended December 31, 1996. As a percentage of revenues, general and
administrative expenses increased to 7.7% for the year ended December 31, 1997
from 5.5% for the year ended December 31, 1996. The most significant components
of these costs relate to the compensation expense associated with business
professionals necessary for the oversight of YSI's operations. The increase as
a percentage of revenues for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 is primarily attributable to YSI's efforts to
develop the infrastructure necessary to enhance its current operations and
required training expenses for staff.
Net interest and other expense decreased $334,000, or 10.2%, to $2,930,000
for the year ended December 31, 1997 as compared to $3,264,000 for the year
ended December 31, 1996. The decrease was primarily attributable to a decrease
in the average outstanding line of credit balance and the repayment of debt
secured by certain personal property, which were paid down from the cash flow
of the juvenile justice business.
The benefit for income taxes was $3,085,000, representing an effective tax
benefit rate of 15.3% for the year ended December 31, 1997 as compared to an
income tax provision of $1,824,000, representing an effective tax rate of 34.9%
for the year ended December 31, 1996. The decrease in the effective tax rate
was
66
<PAGE>
primarily attributable to YSI's inability to recognize fully the tax benefits
associated with the $20,898,000 loss on the sale of the behavioral health
business due to the non-deductibility of a large component of the loss.
Net loss, including the $17,113,000 after-tax effect of the $20,898,000 loss
on sale of the behavioral health business in the 1997 period, was $17,077,000,
or $1.57 per share on a diluted basis, for the year ended December 31, 1997
compared to net income of $2,829,000, or $.27 per share on a diluted basis, for
the year ended December 31, 1996.
Six Months Ended December 31, 1996 Compared To Six Months Ended December 31,
1995
Revenues increased $10,521,000, or 21.4%, to $59,761,000 for the six months
ended December 31, 1996 from $49,240,000 for the six months ended December 31,
1995. Revenues derived from juvenile justice programs increased $4,551,000, or
15.7%, to $33,582,000 for the six months ended December 31, 1996 from
$29,031,000 for the six months ended December 31, 1995. The increase resulted
from the expansion of programs existing at December 31, 1995 which generated an
increase of $5,910,000, including the expansion of juvenile justice programs
which generated an increase of $3,240,000, and the addition of four new
programs subsequent to December 31, 1995 which provided additional revenues of
$4,563,000, including three new juvenile justice programs which provided
additional revenues of $1,311,000. In addition, the increase further resulted
from $1,310,000 of non-recurring consulting revenues during the six months
ended December 31, 1996. These increases in revenues were partially offset by a
decrease in revenues of $1,262,000 resulting from the cancellation of a
management contract of a behavioral health program in 1996.
The average daily enrollment for all of YSI's residential juvenile justice
programs increased 24.3% to 1,700 youth for the six months ended December 31,
1996 from 1,368 youth for the six months ended December 31, 1995, including an
18.5% increase in average daily enrollment in the ten programs that YSI
operated during both six month periods ended December 31, 1996 and 1995 to
1,621 from 1,368, respectively.
Program direct operating expenses increased $8,835,000, or 21.0%, to
$50,977,000 for the six months ended December 31, 1996 from $42,142,000 for the
six months ended December 31, 1995. As a percentage of revenues, program direct
operating expenses were 85.3% and 85.6%, for the six months ended December 31,
1996 and 1995, respectively. Salaries and related employee benefits constituted
approximately 66.4% of program direct operating expenses for the six months
ended December 31, 1996 compared to 64.5% of program direct operating expenses
for the six months ended December 31, 1995.
Program direct operating expenses incurred from juvenile justice programs
increased $4,294,000, or 18.3%, to $27,767,000 for the six months ended
December 31, 1996 from $23,473,000 for the six months ended December 31, 1995.
As a percentage of revenues, program direct operating expenses were 82.7% and
80.9% for the six months ended December 31, 1996 and 1995 respectively. This
increase between periods is due primarily to the opening of three new juvenile
justice programs during the six month period ended December 31, 1996. During
the early stages after opening a new program, expenses as a percentage of
revenues generally are higher until a more stable occupancy level is achieved.
Salaries and related benefits constituted approximately 74.4% of program direct
operating expenses for the six months ended December 31, 1996 compared to 75.4%
of program direct operating expenses for the six months ended December 31,
1995.
Start-up costs increased $104,000, or 122.4%, to $189,000 for the six months
ended December 31, 1996 from $85,000 for the six months ended December 31,
1995. The start-up costs in the 1996 period relate to the pre-opening costs
associated with the Keweenaw Academy in Michigan and the Lockhart Boot Camp in
Texas, each a juvenile justice program. The start-up costs in the 1995 period
relate to the opening of the juvenile justice programs, the Camp Washington
Boot Camp in Virginia and the San Marcos Boot Camp in Texas.
Contribution from operations for the six months ended December 31, 1996
increased $1,582,000, or 22.6%, to $8,595,000 from $7,013,000 for the six
months ended December 31, 1995. Contribution from operations increased as a
percentage of revenues to 14.4% for the six months ended December 31, 1996
compared to 14.2% for the six months ended December 31, 1995.
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<PAGE>
Contribution from operations for the juvenile justice programs, which
includes the effects of start-up costs in each period, increased $153,000, or
2.8%, for the six months ended December 31, 1996 to $5,626,000 from $5,473,000
for the six months ended December 31, 1995. Contribution from operations
decreased as a percentage of juvenile justice revenues to 16.8% for the six
months ended December 31, 1996 compared to 18.8% for the six months ended
December 31, 1995 due primarily to the increase in start-up costs and to the
opening of new facilities in the six months ended December 31, 1996.
For the six months ended December 31, 1996, development costs increased
$140,000, or 26.6%, to $666,000 from $526,000 for the six months ended December
31, 1995. This increase was primarily due to YSI's focus on growth and the
hiring of individuals specifically targeting development activities.
For the six months ended December 31, 1996, general and administrative
expenses increased $781,000, or 28.1%, to $3,556,000 from $2,775,000 for the
six months ended December 31, 1995. As a percentage of revenues, general and
administrative expenses increased to 6.0% for the six months ended December 31,
1996 from 5.6% for the six months ended December 31, 1995. The most significant
components of these costs relate to the compensation expense and consulting
fees associated with business professionals necessary for the oversight of
YSI's operations. The increase as a percentage of revenues for the six months
ended December 31, 1996 as compared to the six months ended December 31, 1995
is primarily attributable to YSI's efforts to develop the infrastructure
necessary to enhance its current operations and continue its growth.
Net interest and other expense increased $221,000, or 15.2%, to $1,678,000
for the six months ended December 31, 1996 from $1,457,000 for the six months
ended December 31, 1995. The increase was due primarily to the interest expense
attributable to the issuance of 7% Convertible Subordinated Debentures in 1996
partially offset by the decrease in the interest expense resulting from the
payoff of debt incurred in connection with the acquisitions of Desert Hills of
New Mexico and Introspect behavioral health programs.
The provision for income taxes was $946,000, representing an effective tax
rate of 35.1% for the six months ended December 31, 1996 as compared to
$978,000, representing an effective tax rate of 43.4% for the six months ended
December 31, 1995. The decrease in the effective tax rate was attributable to a
$264,000 increase in the pre-acquisition operating results of Introspect. These
operating results were not taxable to YSI, and therefore had a favorable impact
on YSI's effective tax rate.
Net income was $1,749,000, or $.16 per share on a diluted basis for the six
months ended December 31, 1996 compared to $1,277,000, or $.13 per share on a
diluted basis for the six months ended December 31, 1995.
Year Ended June 30, 1996 Compared To Year Ended June 30, 1995
Revenues increased $49,790,000, or 92.5%, to $103,642,000 for the year ended
June 30, 1996 from $53,852,000 for the year ended June 30, 1995. Revenues
derived from juvenile justice programs increased $14,652,000, or 33.5%, to
$58,413,000 for the year ended June 30, 1996 from $43,761,000 for the year
ended June 30, 1995. The increase resulted primarily from the addition of seven
new programs subsequent to June 30, 1995 which provided additional revenues of
$34,134,000, including three new juvenile justice programs which provided
additional revenues of $2,527,000, and the expansion of programs existing at
June 30, 1995, which generated an increase of $16,876,000, including the
expansion of juvenile justice programs, which generated an increase of
$12,125,000. The increase in revenues was partially offset by a decrease in
revenues of $885,000 resulting from the cancellation of a management contract
for a behavioral health program in 1996 and a decrease in consulting services
and other revenues of $335,000 as compared to the previous period.
The average daily enrollment for all of YSI's residential juvenile justice
programs increased 35.5% to 1,463 youth for the year ended June 30, 1996 from
1,080 for the year ended June 30, 1995, including a 28.1% increase in average
daily enrollment in the ten programs that YSI operated during both the year
ended June 30, 1996 and 1995 to 1,384 youth from 1,080 youth.
68
<PAGE>
Program direct operating expenses increased $43,930,000, or 96.6%, to
$89,421,000 for the year ended June 30, 1996 from $45,491,000 for the year
ended June 30, 1995. As a percentage of revenues, program direct operating
expenses were 86.3% and 84.5%. This increase between periods is due primarily
to the fact that the acquisitions and growth in the 1996 period were in the
behavioral health business, where expenses as a percentage of revenues are
typically higher than in the juvenile justice business. Salaries and related
employee benefits decreased to approximately 64.5% of program direct operating
expenses for the year ended June 30, 1996 compared to 70.6% of program direct
operating expenses for the year ended June 30, 1995.
Program direct operating expenses incurred from juvenile justice programs
increased $11,758,000, or 31.9%, to $48,655,000 for the year ended June 30,
1996 from $36,897,000 for the year ended June 30, 1995. As a percentage of
revenues, program direct operating expenses were 83.3% and 84.3% for the years
ended June 30, 1996 and 1995, respectively. This improvement between periods is
due to the increased census levels and the inherent profitability thereof in
several of the juvenile justice programs that commenced operations in the 1995
period. Salaries and related benefits constituted approximately 72.3% of
program direct operating expenses for the year ended June 30, 1996 compared to
75.2% of program direct operating expenses for the year ended June 30, 1995.
Start-up costs decreased $250,000, or 81.2%, for the year ended June 30,
1996 to $58,000 from $308,000 for the year ended June 30, 1995. The start-up
costs in the 1996 period relate to the opening of the Camp Washington Boot Camp
juvenile justice project. The start-up costs in the 1995 period relate to the
opening of the Tarkio Academy in Missouri, the Woodward Academy in Iowa and the
Cotulla Boot Camp in Texas, all juvenile justice projects.
Contribution from operations, which includes the effects of start-up costs
in each period, increased $6,110,000, or 75.9%, for the year ended June 30,
1996 to $14,163,000 from $8,053,000 for the year ended June 30, 1995.
Contribution from operations decreased as a percentage of revenues to 13.7% for
the year ended June 30, 1996 compared to 14.9% for the year ended June 30,
1995.
Contribution from operations derived from juvenile justice programs, which
includes the effects of start-up costs in each period, increased $3,144,000, or
48.0%, for the year ended June 30, 1996 to $9,700,000 from $6,556,000 for the
year ended June 30, 1995. Contribution from operations increased as a
percentage of juvenile justice revenues to 16.6% for the year ended June 30,
1996 compared to 15.0% for the year ended June 30, 1995.
For the year ended June 30, 1996, development costs increased $63,000, or
8.1%, to $840,000 from $777,000 for the year ended June 30, 1995. This increase
was primarily due to an increase in the level of development activity.
For the year ended June 30, 1996, general and administrative expenses
increased $1,947,000, or 55.3%, to $5,467,000 from $3,520,000 for the year
ended June 30, 1995. As a percentage of revenues, general and administrative
expenses decreased to 5.3% for the year ended June 30, 1996 from 6.5% for the
year ended June 30, 1995. The most significant components of these costs relate
to the compensation expense associated with business professionals necessary
for the oversight of YSI's operations. The decrease as a percentage of revenues
for the year ended June 30, 1996 as compared to the year ended June 30, 1995 is
primarily attributable to certain efficiencies and economies of scale being
gained through growth.
Net interest and other expense increased $2,769,000, or 1,073.3%, to
$3,027,000 for the year ended June 30, 1996 as compared to $258,000 for the
year ended June 30, 1995. The increase was primarily attributable to YSI's 7%
Convertible Subordinated Debentures issued during the 1996 period, as well as
increases in the outstanding balance on YSI's line of credit.
The income tax provision was $1,856,000, representing an effective tax rate
of 43.6%, for the year ended June 30, 1996 as compared to an income tax
provision of $1,332,000, representing an effective tax rate of
69
<PAGE>
38.1%, for the year ended June 30, 1995. The increase in the effective tax rate
was the result of the loss from Introspect operations in the 1996 period which
was not consolidated for tax purposes, the increase in non-deductible goodwill
and other non-deductible expenses.
Net income was $2,404,000, or $.24 per share on a diluted basis, for the
year ended June 30, 1996, compared to net income of $2,166,000, or $.24 per
share on a diluted basis, for the year ended June 30, 1995.
Liquidity and Capital Resources
At September 30, 1998, YSI had $6,570,000 in cash and $18,478,000 of working
capital. Net cash used in operating activities was $207,000 for the nine months
ended September 30, 1998 compared to net cash provided by operating activities
of $7,964,000 for the nine months ended September 30, 1997. This decrease
resulted primarily from a decline in operating earnings between years as well
as unfavorable changes in receivable collections.
Net cash used in investing activities was $677,000 for the nine months ended
September 30, 1998, comprised primarily of $4,786,000 used to fund capital
expenditures, partially offset by the proceeds from the sale of the behavioral
health business of $4,500,000.
Net cash used in financing activities was $561,000 for the nine months ended
September 30, 1998 comprised primarily of repayments of short-term borrowings
and long-term debt of $1,446,000, partially offset by $944,000 of proceeds from
stock option exercises.
YSI has a Revolving Line of Credit agreement with a bank for the lesser of
$20,000,000 or the sum of 85% of the eligible accounts receivable and 95% of
the cash and cash equivalents on deposit with the bank. Amounts drawn under
this line of credit bear interest at LIBOR plus 150 basis points and are
payable on demand. As of September 30, 1998, YSI had no outstanding balance
under this agreement.
Year 2000
YSI continues to assess the potential impact of the Year 2000 on its
computer software and is developing plans to address any deficiencies. A Year
2000 plan has been developed addressing Year 2000 awareness, specific problem
identification, potential impact assessment, remediation work required, and a
completion timetable.
An oversight committee consisting of members of senior management has been
established. An outside consultant was retained and recently completed a study
of YSI's Year 2000 exposure. The results of that study have been reported to
senior management. The consultant is now assisting with both planning and
remediation of systems. All remediation is expected to be completed by the
first quarter of 1999.
Remediation work and systems testing will be accomplished using a
combination of existing internal Company resources and outsourcing and will be
funded with cash on hand. Total expenditures on the remediation efforts are not
expected to exceed $75,000.
In addition to addressing its own computer systems, YSI has surveyed and
continues to work with its principal subcontractors, suppliers and customers to
promote their Year 2000 compliance as it may impact the financial position or
results of operations of YSI. Nevertheless, YSI does not control and can give
no assurances as to the substance or success of the Year 2000 compliance
efforts of such independent third parties.
As implementation of YSI's Year 2000 remediation plan progresses, and more
information becomes available to it, YSI expects to periodically reassess the
content of, as well as its strategy for implementing, that plan. Management
believes that YSI will successfully implement its Year 2000 remediation plan on
schedule and will be Year 2000 compliant before the end of 1999.
70
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND
YOUTH SERVICES INTERNATIONAL, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except per share amounts)
The information below has been derived from the unaudited pro forma combined
financial statements of Correctional Services Corporation and Youth Services
International, Inc. for the fiscal years ended December 31, 1995 through 1997
and the unaudited pro forma combined financial statements for the nine months
ended September 30, 1997 and 1998 and as of September 30, 1998. The financial
data for the nine-month periods ended September 30, 1998 and 1997 reflect all
adjustments necessary for a fair presentation of the results for these periods.
You should not expect the results for the nine-month periods to be an
indication of the results to be expected for the full year or any other interim
period. This information is only a summary and should be read in conjunction
with the Correctional Services Corporation and Youth Services International,
Inc. unaudited pro forma combined financial statements, and related notes,
included elsewhere herein.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------ --------------------------
1998 1997 1997 1996 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Revenues..................... $132,356 $102,252 $141,305 $99,349 $83,960
Operating expenses........... 106,801 79,427 109,330 75,710 62,400
General and administrative
expenses.................... 20,653 17,974 23,703 16,898 15,313
Other operating expenses..... 778 -- -- 3,329 3,910
-------- -------- -------- ------- -------
Income from operations....... 4,124 4,851 8,272 3,412 2,337
Interest expense, net........ (1,543) (1,965) (2,297) (3,317) (1,743)
-------- -------- -------- ------- -------
Income before income taxes... 2,581 2,886 5,975 95 594
Income tax provision......... 1,204 1,587 2,784 183 400
-------- -------- -------- ------- -------
Net earnings (loss).......... $ 1,377 $ 1,299 $ 3,191 $ (88) $194
======== ======== ======== ======= =======
Net earnings (loss) per
share:
Basic...................... $ 0.12 $ 0.11 $ 0.27 $ (0.01) $ 0.02
======== ======== ======== ======= =======
Diluted.................... $ 0.11 $ 0.10 $ 0.26 $ (0.01) $ 0.02
======== ======== ======== ======= =======
Balance sheet data:
Working capital.............. $ 13,142
Total assets................. $143,258
Long-term debt, net of
current portion............. $ 42,336
Shareholders' equity......... $ 56,502
</TABLE>
71
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statement of financial
position combines the historical consolidated statement of financial position
of CSC and the historical consolidated statement of financial position of YSI
giving effect to the merger as if it had been consummated on September 30,
1998. The following unaudited pro forma condensed combined statement of income
combines the historical statements of income of CSC and YSI giving effect to
the merger as if it had occurred on January 1, 1995. This information should be
read in conjunction with the accompanying notes hereto, the separate historical
financial statements of CSC as of September 30, 1998 and for the nine months
ended September 30, 1998 and 1997, and for each of the three years ended
December 31, 1997 which are contained elsewhere herein, and the separate
historical financial statements of YSI as of September 30, 1998 and for the
nine months ended September 30, 1998 and 1997, and for the year ended December
31, 1997, the six months ended December 31, 1996 and each of the two years
ended June 30, 1996 and 1995, which are contained elsewhere herein.
The pro forma data is not necessarily indicative of the results of
operations that would have occurred had the merger been consummated on the date
indicated or of future operations of the combined companies.
72
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Index
- -----
<S> <C>
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Balance Sheet
As of September 30, 1998.................................................... 75
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Nine Months Ended September 30, 1998.................................... 76
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For the Nine Months Ended September 30, 1998................................ 77
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Nine Months Ended September 30, 1997.................................... 78
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For the Nine Months Ended September 30, 1997................................ 79
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1997............................................ 80
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1997............................................ 81
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1996............................................ 82
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1996............................................ 83
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1995............................................ 84
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1995............................................ 85
Notes to Unaudited Pro Forma Combined Condensed Financial Statements........ 86
</TABLE>
73
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
We intend that the merger will be accounted for as a pooling-of-interest,
which means that after the merger CSC will treat the companies as if they had
always been combined for accounting and financial reporting purposes. The
following Unaudited Pro Forma Combined Condensed Statements of Operations and
Balances Sheet give effect to the combination of CSC and YSI on a pooling-of-
interest basis of accounting. These Unaudited Pro Forma Combined Condensed
Financial Statements have been prepared from the historical consolidated
financial statements of CSC and YSI and should be read in conjunction
therewith, and in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations of CSC and YSI. The amounts
presented to not reflect any cost savings or other synergies anticipated by CSC
or YSI management as a result of the merger.
During 1997 YSI changed its year-end from June 30 to December 31. The
selected historical financial statements of YSI for periods prior to the year
ended December 31, 1997 have been compiled from YSI's audited historical
financial statements for the six months ended December 31, 1996 and the years
ended June 30, 1996 and 1995. The adjusted historical financial statements of
YSI includes for all periods the financial results and accounts of Community
Corrections, Inc. (CCI), which YSI acquired in a pooling-of-interest
transaction on June 30, 1998. The adjusted historical financial statements of
YSI excludes for all periods the Behavioral Health Business, which was
comprised of seven programs YSI sold on October 31, 1997 and one program YSI
closed in September 1998, including the loss on such sale and the costs of such
closing. The historical financial statements of CSC and of YSI are contained
elsewhere in this Joint Proxy Statement/Prospectus.
This unaudited pro forma combined condensed financial information is not
necessarily indicative of actual or future operating results or financial
position that would have occurred or will occur upon consummation of the
Merger.
The Unaudited Pro Forma Combined Condensed Balances Sheet gives effect to
the Merger as if had occurred on September 30, 1998, combining the balance
sheets of CSC and YSI as of that date. The Unaudited Pro Forma Combined
Condensed Statements of Operations give effect to the Merger as if it had
occurred on January 1, 1995, combining results of CSC and YSI for each of the
three years in the period ended December 31, 1997, and for each of the nine
month periods ended September 30, 1998 and 1997.
74
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical-
Correctional Historical-
Services Youth Services Pro Forma Pro Forma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash
equivalents.......... $ 2 $ 6,570 $ -- $ 6,572
Restricted cash....... 89 68 157
Accounts receivable... 24,454 17,815 42,269
Receivable from sale
of equipment and
leasehold
improvements......... 1,339 -- 1,339
Prepaid expenses and
other current
assets............... 2,558 3,107 (418) 5,247
------- -------- -------- --------
Total current assets... 28,442 27,560 (418) 55,584
PROPERTY, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS
AT COST, NET........... 27,562 23,712 51,274
OTHER ASSETS
Deferred development
and start-up costs,
net.................. 15,532 -- (15,532)(7) --
Deferred tax asset.... -- 7,493 4,904 (3) 18,397
6,000 (7)
Other................. 5,116 4,755 (1,400)(3) 8,471
------- -------- -------- --------
$76,652 $ 63,520 $ (6,446) $133,726
======= ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and
accrued liabilities.. $17,772 $ 8,389 $ 14,360 (3) $ 40,521
Subordinated
promissory notes..... 1,101 -- 1,101
Deferred revenue...... -- 208 208
Deferred tax
liability............ 125 464 589
Current portion of
long-term
obligations.......... 2 21 23
------- -------- -------- --------
Total current
liabilities........... 19,000 9,082 14,360 42,442
LONG-TERM SENIOR DEBT... 9,742 -- 9,742
7% CONVERTIBLE
SUBORDINATED
DEBENTURES............. -- 32,200 32,200
LONG-TERM MORTGAGE
PAYABLE................ 319 75 394
LONG-TERM PORTION OF
ACCRUED CLOSURE COSTS.. 356 1,622 1,978
STOCKHOLDERS' EQUITY
Preferred Stock....... -- -- --
Common Stock.......... 78 113 (71)(6) 120
Additional paid-in
capital.............. 43,010 36,417 71 (6) 79,498
Retained earnings
(deficit)............ 4,147 (15,989) (11,274)(3) (32,648)
(9,532)(7)
------- -------- -------- --------
47,235 20,541 (20,806) 46,970
------- -------- -------- --------
$76,652 $ 63,520 $ (6,446) $133,726
======= ======== ======== ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
75
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical- Adjusted
Correctional Historical-
Services Youth Services Proforma Proforma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues................ $67,577 $64,779 $-- $132,356
Expenses:
Operating.............. 48,866 57,935 106,801
General and
administrative........ 12,804 7,849 20,653
Other Operating
Expenses:
Strategic deal costs.. -- 472 472
Costs related to CCI
transaction.......... -- 306 306
------- ------- ---- --------
61,670 66,562 -- 128,232
------- ------- ---- --------
Income (loss) from
operations............. 5,907 (1,783) 4,124
Interest expense, net... (458) (1,085) (1,543)
------- ------- ---- --------
Income (loss) before
income taxes........... 5,449 (2,868) -- 2,581
Income tax provision
(benefit).............. 2,153 (949) 1,204
------- ------- ---- --------
Net earnings (loss)..... $ 3,296 $(1,919) $-- $ 1,377
======= ======= ==== ========
Net earnings (loss) per
share:
Basic.................. $ 0.43 $ (0.17) $ 0.12
======= ======= ========
Diluted................ $ 0.40 $ (0.17) $ 0.11
======= ======= ========
Weighted average shares
outstanding:
Basic.................. 7,751 11,251 11,970
======= ======= ========
Diluted................ 8,256 11,251 12,518
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
76
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Historical-- Less: Historical--
Youth Services Behavioral Youth Services
International, Inc. Health Business International, Inc.
------------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenues................ $67,365 $ 2,586 $64,779
Expenses:
Direct operating...... 60,288 2,353 57,935
General and
administrative....... 7,849 -- 7,849
Other Operating
Expenses:
College Station
shutdown charge.... 2,327 2,327 --
Strategic deal
costs.............. 472 -- 472
Costs related to CCI
transaction........ 306 -- 306
------- ------- -------
71,242 4,680 66,562
------- ------- -------
Loss from operations.... (3,877) (2,094) (1,783)
Interest expense, net... (1,085) -- (1,085)
------- ------- -------
Loss before income
taxes.................. (4,962) (2,094) (2,868)
Income tax expense
(benefit).............. (863) 86 (949)
------- ------- -------
Net loss................ $(4,099) $(2,180) $(1,919)
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
77
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical-- Adjusted
Correctional Historical--
Services Youth Services Proforma Proforma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues................ $42,520 $59,732 $ -- $102,252
Expenses:
Operating............. 30,863 48,564 79,427
General and
administrative....... 8,679 8,977 17,656
------- ------- ----- --------
39,542 57,541 -- 97,083
------- ------- ----- --------
Income from operations.. 2,978 2,191 5,169
Interest income
(expense), net......... 145 (2,110) (1,965)
------- ------- ----- --------
Income (loss) before
income taxes........... 3,123 81 -- 3,204
Income tax provision.... 1,220 488 1,708
------- ------- ----- --------
Net earnings (loss)..... $ 1,903 $ (407) $ -- $ 1,496
======= ======= ===== ========
Net earnings (loss) per
share:
Basic................. $ 0.25 $ (0.04) $ 0.13
======= ======= ========
Diluted............... $ 0.23 $ (0.04) $ 0.12
======= ======= ========
Weighted average shares
outstanding:
Basic................. 7,670 10,846 11,737
======= ======= ========
Diluted............... 8,126 11,523 12,447
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
78
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Historical-- Less: Historical--
Youth Services Behavioral Youth Services
International, Inc. Health Business International, Inc.
------------------- --------------- -------------------
<S> <C> <C> <C>
Revenues................ $ 90,685 $ 30,953 $59,732
Expenses:
Direct operating...... 78,867 30,303 48,564
General and
administrative....... 9,295 318 8,977
Loss on sale of
behavioral health
business............. 27,000 27,000 --
-------- -------- -------
115,162 57,621 57,541
-------- -------- -------
Income (loss) from
operations............. (24,477) (26,668) 2,191
Interest expense, net... (2,290) (180) (2,110)
-------- -------- -------
Loss before income
taxes.................. (26,767) (26,848) 81
Income tax provision
(benefit).............. (5,554) (6,042) 488
-------- -------- -------
Net loss................ $(21,213) $(20,806) $ (407)
======== ======== =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
79
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical-- Adjusted
Correctional Historical--
Services Youth Services Proforma Proforma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues................ $59,936 $81,369 $ -- $141,305
Expenses:
Direct operating...... 43,472 65,858 109,330
General and
administrative....... 11,859 11,477 23,336
------- ------- ----- --------
55,331 77,335 -- 132,666
------- ------- ----- --------
Income from operations.. 4,605 4,034 8,639
Interest income
(expense), net......... 444 (2,741) (2,297)
------- ------- ----- --------
Income before income
taxes.................. 5,049 1,293 -- 6,342
Income tax provision.... 2,023 900 2,923
------- ------- ----- --------
Net earnings............ $ 3,026 $ 393 $ -- $ 3,419
======= ======= ===== ========
Net earnings per share:
Basic................. $ 0.39 $ 0.04 $ 0.29
======= ======= ========
Diluted............... $ 0.37 $ 0.03 $ 0.27
======= ======= ========
Weighted average shares
outstanding:
Basic................. 7,675 10,911 11,767
======= ======= ========
Diluted............... 8,118 11,554 12,451
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
80
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Historical-- Less: Historical--
Youth Services Behavioral Youth Services
International, Inc. Health Business International, Inc.
------------------- --------------- -------------------
<S> <C> <C> <C>
Revenues................ $116,102 $ 34,733 $81,369
Expenses:
Direct operating...... 100,496 34,638 65,858
General and
administrative....... 11,940 463 11,477
Loss on sale of
behavioral health
business............. 20,898 20,898 --
-------- -------- -------
133,334 55,999 77,335
-------- -------- -------
Income (loss) from
operations............. (17,232) (21,266) 4,034
Interest expense, net... (2,930) (189) (2,741)
-------- -------- -------
Income (loss) before
income taxes........... (20,162) (21,455) 1,293
Income tax (benefit)
expense................ (3,085) (3,985) 900
-------- -------- -------
Net earnings (loss)..... $(17,077) $(17,470) $ 393
======== ======== =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
81
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical-- Adjusted
Correctional Historical--
Services Youth Services Proforma Proforma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues................ $31,502 $67,847 $ -- $99,349
Expenses:
Direct operating....... 21,928 53,782 75,710
General and
administrative........ 8,656 7,863 16,519
Facility closure
costs................. 3,329 -- 3,329
------- ------- ----- -------
33,913 61,645 -- 95,558
------- ------- ----- -------
Income (loss) from
operations............. (2,411) 6,202 3,791
Interest expense, net... (482) (2,835) (3,317)
------- ------- ----- -------
Income (loss) before
income taxes........... (2,893) 3,367 -- 474
Income tax provision
(benefit).............. (1,025) 1,348 323
------- ------- ----- -------
Net earnings (loss)..... $(1,868) $ 2,019 $ -- $ 151
======= ======= ===== =======
Net earnings (loss) per
share:
Basic.................. $ (0.32) $ 0.21 $ 0.02
======= ======= =======
Diluted................ $ (0.32) $ 0.19 $
======= ======= =======
Weighted average shares
outstanding:
Basic.................. 5,782 9,521 9,352
======= ======= =======
Diluted................ [5,782] 10,435
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
82
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Historical-- Less: Historical--
Youth Services Behavioral Youth Services
International, Inc. Health Business International, Inc.
------------------- --------------- -------------------
<S> <C> <C> <C>
Revenues................ $115,029 $47,182 $67,847
Expenses:
Direct operating...... 98,828 45,046 53,782
General and
administrative....... 8,284 421 7,863
-------- ------- -------
107,112 45,467 61,645
-------- ------- -------
Income from operations.. 7,917 1,715 6,202
Interest expense, net... (3,264) (429) (2,835)
-------- ------- -------
Income before income
taxes.................. 4,653 1,286 3,367
Income tax provision.... 1,824 476 1,348
-------- ------- -------
Net earnings............ $ 2,829 $ 810 $ 2,019
======== ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
83
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical-- Adjusted
Correctional Historical--
Services Youth Services Proforma Proforma
Corporation International, Inc. Adjustments Combined
------------ ------------------- ----------- --------
<S> <C> <C> <C> <C>
Revenues................ $31,490 $52,470 $ -- $83,960
Expenses:
Direct operating....... 19,732 42,668 62,400
General and
administrative........ 9,938 5,375 15,313
Facility closure
costs................. 3,910 -- 3,910
------- ------- ----- -------
33,580 48,043 -- 81,623
------- ------- ----- -------
Income (loss) from
operations............. (2,090) 4,427 2,337
Interest expense, net... (700) (1,043) (1,743)
------- ------- ----- -------
Income (loss) before
income taxes........... (2,790) 3,384 -- 594
Income tax provision
(benefit).............. (1,050) 1,450 400
------- ------- ----- -------
Net earnings (loss)..... $(1,740) $ 1,934 $ -- $ 194
======= ======= ===== =======
Net earnings (loss) per
share:
Basic.................. $ (0.38) $ 0.22 $ 0.02
======= ======= =======
Diluted................ $ (0.38) $ 0.20 $ 0.02
======= ======= =======
Weighted average shares
outstanding:
Basic.................. 4,553 8,732 7,828
======= ======= =======
Diluted................ 4,553 9,511 8,695
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
84
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Adjusted
Historical-- Less: Historical--
Youth Services Behavioral Youth Services
International, Inc. Health Business International, Inc.
------------------- --------------- -------------------
<S> <C> <C> <C>
Revenues................ $78,296 $25,826 $52,470
Expenses:
Direct operating...... 66,603 23,935 42,668
General and
administrative....... 5,375 -- 5,375
------- ------- -------
71,978 23,935 48,043
------- ------- -------
Income from operations.. 6,318 1,891 4,427
Interest expense, net... (1,566) (523) (1,043)
------- ------- -------
Income (loss) before
income taxes........... 4,752 1,368 3,384
Income tax provision.... 1,956 506 1,450
------- ------- -------
Net earnings (loss)..... $ 2,796 $ 862 $ 1,934
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
85
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1--PRO FORMA BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Condensed Financial Statements reflect the
Exchange Ratio of .375 shares of CSC common stock for one share of YSI common
stock. The actual number of shares of CSC to be issued will be determined at
the effective time based on the number of shares of YSI common stock
outstanding at that date.
The Adjusted Historical Financial Statements of YSI give effect to YSI's
merger with Community Corrections, Inc. consummated on June 30, 1998 accounted
for as a pooling-of-interest. These financial statements exclude the results of
operations of the seven behavioral health programs YSI sold on October 31, 1997
and the College Station behavioral health program YSI closed on September 15,
1998, as well as the loss from such sale and the costs associated with such
closing. The Adjusted Historical Financial Statements of YSI serve to reflect
the historical results of the continuing operations of YSI existing as of
September 30, 1998
NOTE 2--PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share amounts are based on the weighted average
number of common shares outstanding and dilutive common equivalent shares
assumed to be outstanding during the period using the treasury stock method,
giving effect to the Merger as if it had been consummated at the beginning of
the years presented given the assumptions described in Note 1.
NOTE 3--TRANSACTION COSTS AND RELATED EXPENSES
CSC and YSI estimate that they will incur direct and indirect costs of
approximately $14.85 million in connection with the merger as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Write off of redundant assets and excess capacity......... $ 3,600
Personnel costs........................................... 3,500
Cancellation of contractual obligations................... 800
Financial advisory fees................................... 1,700
Legal and accounting services............................. 1,000
Integration Costs (not included above):
Write off debt issuance costs........................... 1,400
Computer integration costs.............................. 1,500
Travel/printing/filing fees/marketing materials......... 850
Other................................................... 500
-------
$14,850
=======
</TABLE>
These nonrecurring costs will be charged to operations in the fiscal quarter
in which the Merger is consummated or as incurred depending on the nature of
such costs and except for certain transaction costs incurred by YSI which are
being expensed as incurred. The following describes the pro forma adjustments
to record the effect of the transaction and related costs as of September 30,
1998.
As of September 30, 1998, CSC has capitalized $418,000 and YSI has expensed
$472,000 of transaction and related costs.
The pro forma adjustment to expense CSC's capitalized transaction costs
totals 418,000 as of September 30, 1998. As a result of the merger, the 7%
convertible subordinated debentures owed by YSI can be redeemed by the holders
of such debentures beginning one year from the consummation of the merger. As a
result, the $1,400,000 reduction of other assets represents the write off of
the unamortized debt issuance costs for periods beyond one year.
86
<PAGE>
The adjustment to increase accounts payable and accrued liabilities by
$14,360,000 represents the $16.65 million of estimated total transaction costs
net of CSC and YSI incurred as of September 30, 1998 and net of the write off
of unamortized debt issuance costs described above.
The $11,274,000 adjustment to increase the deficit as of September 30, 1998
reflects the after tax effect of the adjustments described herein. The pro
forma adjustment to the deferred tax asset reflects the tax benefit of
transaction costs and related expenses. Based on its internal projections, CSC
believes such asset is recoverable well within the recovery period.
NOTE 4--CONFORMING ADJUSTMENTS
CSC has reviewed the status of the combined company's deferred taxes as if
the acquisition had occurred at the beginning of the first period presented and
has made necessary adjustments to the combined company's deferred taxes based
upon the combined company's profitability. Management of CSC and YSI are
evaluating the accounting policies and financial statement presentation
currently utilized by CSC and YSI to determine the policies and presentation to
be adopted by the combined company. Accordingly, the financial statements for
the combined company may differ from the presentation herein. Management does
not believe the adjustments, if any, will be material to such financial
statements.
The deferred tax asset on the books of YSI represents net operating loss
carryforwards primarily generated over the past two years. Accordingly, these
carryforwards do not begin to expire until 2012. Based upon internal forecasts,
YSI and CSC believe the NOL will be utilized well within the available period.
NOTE 5--DILUTIVE DERIVATIVE SECURITIES
Under the treasury stock method, dilutive derivative securities are not
included in the computation of diluted weighted average shares outstanding for
any period in which the reporting company incurred a net loss. In the Unaudited
Pro Forma Combined Condensed Statements of Operations, the determination of
whether to include derivative securities in the computation of diluted weighted
average shares outstanding was based on the pro forma combined results of
operations. Accordingly, the diluted weighted average shares outstanding, and
consequently the diluted net earnings (loss) per share, for CSC or YSI will
differ from that reflected on its historical statements of operations if the
historical results were a loss and the pro forma combined results reflect net
earnings or if the historical results reflect net earnings and the pro forma
combined results were a loss.
NOTE 6--STOCKHOLDERS' EQUITY
Adjustment to reflect the par value of CSC common stock assumed to be
outstanding at September 30, 1998 upon exchange of one share of YSI common
stock for .375 shares of CSC common stock.
NOTE 7--DEFERRED DEVELOPMENT AND START-UP COSTS
Represents adjustment to write off deferred development and start-up costs
to be expensed in accordance with Statement of Position ("SOP") 98-5 "Reporting
on the Costs of Start-Up Activities" which CSC will adopt during the fourth
quarter of fiscal 1998.
87
<PAGE>
Comparative Per Share Data
The following tables set forth certain per share data for CSC on a
historical basis YSI, on an adjusted historical basis, CSC and YSI on a
supplemental pro forma combined basis and on a per share equivalent pro forma
basis for YSI. The information gives effect to the proposed merger between CSC
and YSI on a pooling-of-interests basis, which means that after the merger CSC
will treat the companies as if they had always been combined for accounting and
financial reporting purposes, at the exchange ratio of .375 of a share of CSC
common stock for each share of YSI common stock. The supplemental unaudited pro
forma combined and equivalent financial data do not reflect any cost savings or
other synergies anticipated by CSC or YSI management as a result of the merger.
The companies may have performed differently if they had always been combined.
You should not rely on the pro forma information as being indicative of the
historical results the combined companies would have had or the results that
they will experience in the future. The following information should be read in
conjunction with the unaudited pro forma financial data of CSC and YSI and the
historical financial statements included elsewhere herein. See "Unaudited Pro
Forma Condensed Combined Financial Statement."
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------- Nine Months Ended
1995 1996 1997 September 30, 1998
-------- -------- ------- ------------------
<S> <C> <C> <C> <C>
CSC--HISTORICAL
Net Income (loss)
Diluted...................... $ (0.38) $ (0.32) $ 0.37 $0.40
Basic........................ (0.38) (0.32) 0.39 0.43
Cash Dividends declared per
common share.................. -- -- -- --
Book value per basic common
share......................... 5.63 6.09
YSI--HISTORICAL ADJUSTED(1)
Earnings (loss) per common
share
Net Income (loss)
Diluted...................... 0.20 0.19 0.03 (0.17)
Basic........................ 0.22 0.21 0.04 (0.17)
Cash dividends declared per
common share(2)............... -- -- -- --
Book value per basic common
share......................... 2.14 1.83
PRO FORMA COMBINED(3)(4)
Net Income (loss)
Diluted...................... 0.02 (0.01) 0.27 0.11
Basic........................ 0.02 (0.01) 0.29 0.12
Cash dividends declared per
common share.................. -- -- -- --
Book value per common share.... 4.70 4.72
EQUIVALENT PRO FORMA COMBINED
PER YSI SHARE(1)
Net Income (loss)
Diluted...................... 0.01 0.00 0.10 0.04
Basic........................ 0.01 0.00 0.11 0.05
Cash dividends declared per
basic common share............ -- -- -- --
Book value per common share.... 1.76 1.77
</TABLE>
- --------
(1) Includes the results of operations and accounts of Community Corrections,
Inc. (CCI), and excludes the results of operations of the Behavioral Health
business for all periods presented.
(2) Excludes S corporation cash dividends declared for the payment of income
taxes by CCI prior to consummation of its merger with YSI. Such dividends
totaled approximately $129,000 and $59,000 for the year ended December 31,
1997 and the nine months ended September 30, 1998 respectively.
(3) Assumes an exchange ratio of .375 of a CSC share for each share of YSI.
(4) Pro Forma Combined and Equivalent Pro Forma Combined Book Value per share
is adjusted to reflect estimated transaction costs to be incurred
subsequent to September 30, 1998 totaling $13,200,000 net of applicable
income taxes.
88
<PAGE>
INFORMATION CONCERNING
CORRECTIONAL SERVICES CORPORATION
Corporate Structure
CSC was incorporated in Delaware on October 28, 1993 to acquire all of the
outstanding capital stock of a number of affiliated corporations engaged in the
operation of correctional and detention facilities.
Description
CSC is a leading developer and operator of adult correctional facilities and
services for federal, state, and local governments. CSC believes it is one of
the largest operators of private secure juvenile correctional facilities in the
U.S. CSC has recently experienced rapid growth in both its juvenile and adult
divisions, all of which have been internally generated. As of December 31, 1998
CSC had agreements to operate 36 correctional and detention facilities in 21
states and Puerto Rico for an aggregate of approximately 9,800 beds. This
represents a 100% increase in the number of agreements and 291% increase in the
number of beds from the same date one year ago. Of these agreements,
agreements representing beds in states and Puerto Rico were for the
operation of juvenile correctional facilities. CSC reported revenues of $67.6
million and net income of $3.3 million for the nine months ended September 30,
1998. This represents an increase in revenues and net income of 59% and 73%,
respectively, over the comparable 1997 period.
CSC operates a wide range of correctional facilities targeted toward solving
the specialized needs of governmental agencies. CSC's adult division
specializes, in facilities which house, among other populations (i) substance
abuse offenders, (ii) parole violators, (iii) pre-trial detainees, (iv)
females, and (v) sex offenders. CSC's juvenile division focuses on secure
facilities which provide (i) rehabilitative services for large populations
(over 200), (ii) intensive treatment programs including educational and
vocational services, (iii) treatment for habitual offenders, (iv) specialized
female services, (v) detention services, and (vi) sex offender treatment
programs. In addition to providing fundamental residential services for adult
and juvenile offenders, CSC has developed a broad range of programs intended to
reduce recidivism, including basic and special education, substance abuse
treatment and counseling, vocational training, life skills training, and
behavioral modification counseling. In all of its facilities, CSC strives to
provide the highest quality services designed to reduce recidivism. CSC
continually evaluates its programs and believes the reputation of its programs
will lead to continued business opportunities.
CSC also is a leading provider of design and construction services for
correctional facilities, including project consulting; the design, development
and construction of new correctional and detention facilities and the redesign
and renovation of existing facilities. These services usually are provided in
conjunction with an agreement for CSC to operate the facility upon completion
of the construction or renovation. CSC believes its proven ability to manage
the full spectrum of correctional facilities and its wide variety of programs
and services will continue to increase its marketing opportunities.
Business Strategy
The following Business Strategy discussion does not give effect to the
proposed merger, but represents CSC's views of its business strategy absent the
merger.
CSC's goal is to maintain its recent growth in contracts, revenues and
earnings. CSC believes it can achieve this goal through the implementation of
the following elements of its business strategy:
Continued Enhancement of Juvenile Services. CSC has been highly successful
in obtaining juvenile contracts due to its recognized expertise in operating a
variety of juvenile programs. CSC continues to enhance its juvenile programs to
further reduce projected levels of recidivism. By demonstrating its programs
are effective and incorporate proven techniques, CSC believes it will continue
to win a significant percentage of the juvenile projects it pursues.
Focused Development on Specialized Adult Facilities. CSC has established
itself as a leading provider of specialized adult facilities. CSC currently
operates facilities for substance abuse offenders, parole violators, females,
pretrial detainees and sex offenders. By specializing in these specific
segments of the adult market,
89
<PAGE>
CSC has established itself as a provider of services for niche populations.
This has significantly increased CSC's competitiveness in obtaining new
contracts.
Development of New Markets in the United States and Internationally. By
diversifying its product offering in both the juvenile and adult markets, CSC
has significantly broadened the contract opportunities it can pursue and has
reduced its dependence on the growth of one particular market. CSC currently
operates in states and in the Commonwealth of Puerto Rico. CSC has
identified several new states for which it can provide services and has
initiated marketing efforts in these states. CSC believes its position as a
leader in the juvenile and specialized adult markets provides it with an
excellent opportunity to capture business in new states. In addition, CSC has
been "qualified" to bid on both juvenile and adult contracts in the United
Kingdom and Australia. This bidding status has been limited to a few select
companies. CSC believes there are significant growth opportunities in the
United Kingdom and elsewhere internationally.
Emphasis on Quality Operations. CSC believes its past success in obtaining
contracts has been based on its reputation as a high quality operator. In
addition to winning competitive bids for new facilities, CSC has also been
selected to assume the management of facilities which needed improvement in
their operations. CSC believes it maintains one of the most extensive ethical
and compliance programs in the industry, which dictates the conduct of all
employees. These programs require adherence to strict codes of conduct and
combined with the operation of facilities in accordance with the standards of
the American Correctional Association provides CSC with a competitive advantage
over operators which do not employ such programs.
Commitment of Capital. From time to time CSC will finance and own the
facilities it operates. Ownership of facilities can provide CSC with numerous
benefits including: (i) control over the use of the facility; (ii) improved
long term returns; (iii) ability to expand capacity; and (iv) the ability to
accelerate the contract process. CSC believes its ability to commit capital to
facility ownership reduces its competition and can provide a valuable strategic
asset. CSC anticipates using its capital to build and purchase facilities which
address specific client needs and believes this will provide CSC with increased
business opportunities.
Partnering With Government. CSC views its contracting agencies as partners
and works closely with them to modify programs, share financial benefits, and
solve issues. CSC believes its focus on customer service has led to CSC's
receipt of multiple contracts from the same jurisdiction. In addition, CSC
consistently receives outstanding references from its contracting agencies
which provide business opportunities in new markets. CSC will continue to
encourage potential new clients to contact its existing client base and
believes its reputation for servicing its clients will lead to continued
opportunities.
Operational Divisions
CSC has organized its operations into three divisions: Adult, Juvenile and
Community Corrections.
Adult. The Adult Division operates 14 secure facilities, seven in Texas, two
in Arizona and one in each of Colorado, Mississippi, New Mexico, Oklahoma and
Washington, with a total of 4,145 beds. In addition, CSC has a contract to
begin operating a 196-bed prison in South Fulton, Georgia. In addition to
providing housing for adult inmates, CSC provides a variety of rehabilitative
and educational services. CSC also provides health care, transportation, food
services and work and recreational programs for adult inmates.
Juvenile. The Juvenile Division operates 16 facilities, 10 located in Texas.
In addition, CSC has contracts to begin operating a 100 bed facility in
Salinas, Puerto Rico. The juvenile facilities house convicted youths aged 12 to
20 and represent a total of 1,924 beds under contract. CSC manages secure and
non-secure juvenile offender facilities for low, medium, and high risk youths
in highly structured programs, including military-style boot camps, wilderness
programs, secure education and training centers, and detention facilities. CSC
believes these programs, by instilling the qualities of self-respect, respect
for others and their property, personal responsibility and family values, can
help reduce the recidivism rate of its program participants.
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Community Corrections. The Community Corrections Division operates four
facilities, two in each of Texas and New York with a total of 459 beds. These
are non-secure residential facilities for adult male and female offenders
transitioning from institutional to independent living. Offenders are eligible
for these programs based upon the type of offense committed and behavior while
incarcerated in prison. If qualified, offenders may generally spend the last
six months of their sentence in a community corrections program, whose mission
is to reduce the likelihood of an inmate committing an offense after release by
assisting in the reunification process with family and the community. Normally,
in order to remain in the program, offenders must be employed, participate in
substance abuse programs, submit to frequent random drug testing, and pay a
predetermined percentage of their earnings to the government to offset the cost
of the program. CSC supervises these activities and also provides life skills
training, case management, home confinement supervision and family
reunification programs from these facilities. CSC believes that community
correctional facilities help reduce recidivism, result in prison beds being
available for more violent offenders and, in appropriate cases, represent cost-
effective alternatives to prisons.
Marketing and Business Development
CSC engages in extensive marketing and business development on a national
basis and markets selected projects in the international arena. Marketing
efforts are spearheaded by CSC's business development team in conjunction with
CSC's executive officers and outside consultants.
CSC's business development department is responsible for marketing the full
range of services to clients. CSC's business development department has
specialists in both the juvenile and adult markets. Marketing responsibilities
include identifying new clients, preparing and delivering formal presentations
and identifying strategic partners.
CSC receives frequent inquiries from or on behalf of governmental agencies.
Upon receiving such an inquiry, CSC determines whether there is an existing or
future need for CSC's services, whether the legal and political climate is
conducive to privatized correctional operations and whether or not the project
is commercially viable.
Contract Award Process
Most governmental procurement and purchasing activities are controlled by
procurement regulations take the form of a Request for a Proposal, and to date
most of CSC's new business has resulted from responding to these requests.
Interested parties submit proposals in response to an RFP within a time period
of 15 to 120 days from the time the RFP is issued. A typical RFP requires a
bidder to provide detailed information, including the services to be provided
by the bidder, the bidder's experience and qualifications and the price at
which the bidder is willing to provide the services. From time to time, CSC
engages independent consultants to assist in responding to the RFPs.
Approximately six to eighteen months is generally required from the issuance of
the RFP to the contract award.
Before responding to an RFP, CSC researches and evaluates, among other
factors:
(i) the current size and growth projections of the available correctional
and detention population;
(ii) whether or not a minimum capacity level is guaranteed;
(iii) the willingness of the contracting authority to allow CSC to house
populations of similar classification within the proposed facility
for other governmental agencies; and
(iv) the willingness of the contracting authority to allow CSC to make
adjustments in operating activities, such as work force reductions in
the event the actual population is less than the contracted capacity.
Under the RFP, the bidder may be required to design and construct a new
facility or to redesign and renovate an existing facility at its own cost. In
such event, CSC's ability to obtain the contract award is dependent upon its
ability to obtain the necessary financing or fund such costs internally.
In addition to issuing formal RFPs, governmental agencies may use a
procedure known as Purchase of Services or Requests for Qualification. In the
case of an RFQ, the requesting agency selects a firm it believes is
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<PAGE>
most qualified to provide the necessary services and then negotiates the terms
of the contract, including the price at which the services are to be provided.
Market
Throughout the United States, there is a growing trend toward privatization
of correctional and detention functions as federal, state and local governments
have faced continuing pressure to control costs and improve the quality of
services. Further, incarceration costs generally grow faster than many other
parts of budget items. In an attempt to address these pressures, governmental
agencies responsible for correctional and detention facilities are increasingly
privatizing facilities.
Numerous studies have proven there is a general shortage of beds available
in detention and treatment facilities. That fact, coupled with the high rate of
recidivism and the public demand for longer sentences, has resulted in over-
crowding in these facilities and a growing. In addition, numerous courts and
other governmental entities in the United States have mandated that services
offered to inmates be expanded and living conditions be improved. Many
governments do not have the readily available resources to make the changes
necessary to meet such mandates.
According to the United State Department of Justice Office and Juvenile
Justice Delinquency Prevention, "Juvenile Offenders and Victims: 1996 Update of
Violence" and "Juvenile Arrests 1995", in 1996 there were 2.7 million arrests
of persons under 18, up 67% from 1986. One-fourth of juvenile arrests in 1995
were of females--a steady increase since 1991. By the year 2010, juvenile
arrests for violent crime are expected to more than double.
In the international sector, the demand for privately managed facilities is
increasing due to fiscal pressures, overcrowding, increasing recidivism and an
overall desire to deliver augmented services while minimizing their cost
impact.
Competition
CSC competes on the basis of cost, quality and range of services offered,
its experience in managing facilities, the reputation of its personnel and its
ability to design, finance and construct new facilities. Some of CSC's
competitors have greater resources than CSC. CSC also competes in some markets
with local companies that may have a better understanding of local conditions
and a better ability to gain political and public acceptance. In addition,
CSC's Community Corrections and Juvenile Divisions compete with governmental
and not-for-profit entities. CSC's main competitors include Wackenhut
Corrections Corporation, Cornell Corrections and Corrections Corporation of
America.
Recent Events
On September 2, 1998, CSC announced it had finalized a contract to operate a
125 bed detention center in Paulding, Georgia. The contract with the State of
Georgia's Department of Juvenile Justice calls for CSC to provide a short-term
detention program for male and female juveniles ranging in ages from 10 to 18.
This regional detention facility is the first of its kind to be privatized in
the state.
On October 20, 1998, CSC announced it had commenced operations of a 1,200
bed adult prison in Crowley, Colorado.
On September 11, 1998, CSC announced it had finalized a contract to operate
a 96 bed secure juvenile facility in Dallas, Texas. The facility will provide
two distinct programs: a 44 bed secure short-term post-adjudication residential
program with an aftercare component and a detention center with up to 52 beds.
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Facilities
CSC operates both pre-disposition and post-disposition secure and non-secure
correctional and detention facilities and non-secure community correctional
facilities for federal, state and local correctional agencies. Pre-disposition
secure detention facilities provide secure residential detention for
individuals awaiting trial and/or the outcome of judicial proceedings, and for
aliens awaiting deportation or the disposition of deportation hearings. Post-
disposition secure facilities provide secure incarceration for individuals who
have been found guilty of a crime by a court of law. CSC operates four types of
post-disposition facilities: secure prisons, intermediate sanction facilities,
military-style boot camps, and secure treatment and training facilities. Secure
prisons and intermediate sanction facilities provide secure correctional
services for individuals who have been found guilty of one or more offenses.
Offenders placed in intermediate sanction facilities are typically persons who
have committed a technical violation of their parole conditions, but whose
offense history or current offense does not warrant incarceration in a prison.
Both types of facilities offer vocational training, substance abuse treatment
and offense specific treatment. Boot camps provide intensely structured and
regimented residential correctional services which emphasize disciplined
activities modeled after the training principles of military boot camps and
stress physical challenges, fitness, discipline and personal appearance. Secure
treatment and training facilities provide numerous services designed to reduce
recidivism including: educational and vocational training, life skills, anger
control management, and substance abuse counseling and treatment.
CSC also operates non-secure residential and non-residential community
corrections programs. Non-secure residential facilities, known as half-way
houses, provide residential correctional services for offenders in need of less
supervision and monitoring than are provided in a secure environment. Offenders
in community corrections facilities are typically allowed to leave the facility
to work in the immediate community and/or participate in community-based
educational and vocational training programs during daytime hours. Generally,
persons in community correctional facilities are serving the last nine months
of their sentence. Non-residential programs permit the offender to reside at
home or in some other approved setting under supervision and monitoring by CSC.
Supervision may take the form of either requiring the offender to report to a
correctional facility a specified number of times each week and/or having CSC
employees monitor the offender on a case management basis at his/her work site
and home.
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The following information is provided with respect to the facilities for
which CSC had management contracts as of December 31, 1998:
Adult Division
<TABLE>
<CAPTION>
Facility Name, Location
and Contracting Owned,
Year Operations Contracted Governmental Leased, or
Commenced Beds(1) Type of Facility Agency Managed(2)
----------------------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Seattle INS Detention 150 Secure Detention INS Managed
Center Facility
Seattle, Washington
(1989)
South Texas Intermediate 400 Secure Intermediate State Managed
Sanction Facility Sanction Facility
Houston, Texas (1993)
Tarrant County Community 230 Secure Intermediate County Managed
Correctional Sanction Facility
Facility(3)
Mansfield, Texas (1992)
Travis County Substance 74 Secure Intermediate County Managed
Abuse Treatment Sanction Facility
Facility
Del Valle, Texas (1994)
Arizona State Prison 400 State Prison State Owned
Phoenix, West
Phoenix, Arizona (1996)
AZ State Prison, 600 State Prison State Owned
Florence
Florence, Arizona
(1997)
Gallup 200 Jail/Long-Term County Managed
Gallup, New Mexico Detention
(1997)
Frio County Jail 300 Jail/Long-Term County/State Leased
Pearsall, Texas (1997) Detention
Grenada County Jail 160 Jail County Managed
Grenada, Mississippi
(1998)
Jefferson County 500 Jail/Long Term County/State Managed
Downtown Jail Detention
Beaumont, Texas (1998)
Newton County 872 Prison Mult-State/Federal Managed
Correctional Facility
Newton, Texas (1998)
Central Oklahoma 850 Prison Multi-State Managed
Correctional Facility
McLoud, Oklahoma (1998)
South Fulton Municipal 196 Jail/Long Term State/Federal Managed
Regional Jail Detention
Union City, Georgia
(1999)
Dickens County 489 Long Term Detention State Managed
Correctional Center
Spur, Texas (1998)
Crowley County 1200 Prison Multi-State Managed
Correctional Facility
Crowley, Colorado
(1998)
</TABLE>
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<PAGE>
Juvenile Division
<TABLE>
<CAPTION>
Facility Name, Location
and Contracting Owned,
Year Operations Contracted Governmental Leased, or
Commenced Beds(1) Type of Facility Agency Managed(2)
----------------------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Tarrant County Community 120 Secure Boot Camp County Managed
Correctional Center(3) Facility
Mansfield, Texas (1992)
Hemphill County Juvenile 100 Secure Boot Camp County Leased
Detention Center Facility
Canadian, Texas (1994)
Bartow Youth Training 74 Secure & State Managed
Center Bartow, Florida Residential
(1995) Treatment Facility
Pahokee Youth Training 350 Secure Treatment State Managed
Center Pahokee, Florida Facility
(1997)
Polk City Youth Training 350 Secure Treatment State Managed
Center Facility
Polk City, Florida
(1997)
Bell County Youth 96 Secure Detention County Managed
Training Center Facility
Killeen, Texas (1997)
Okaloosa County Juvenile 65 Half Way House County Owned
Residential Facility
Okaloosa, Florida
(1998)
Bayamon Detention Center 120 Secure Detention Commonwealth of Managed
Bayamon, Puerto Rico Facility Puerto Rico
(1998)
Bayamon Detention Center 141 Secure Treatment Commonwealth of Managed
Bayamon, Puerto Rico Facility Puerto Rico
(1998)
Salinas Treatment Center 100 Secure Detention Commonwealth of Owned
Salinas, Puerto Rico Facility Puerto Rico
(1999)
Colorado County Boot 100 Secure Detention County Managed
Camp Facility
Eagle Lake, Colorado
(1998)
Judge Roger Hashem 64 Secure Detention County Managed
Juvenile Justice Center Facility
Rockdale, Texas (1997)
Martin Hall Juvenile 52 Secure Correctional County Managed
Facility Facility
Medical Lake,
Washington (1997)
Dallas County Secure 96 Secure Treatment County Managed
Post Adjudication Facility
Facility
Dallas, Texas (1998)
Dallas Youth Academy 96 Secure Treatment County Managed
Dallas, Texas (1998) Facility
Paulding Regional Youth 126 Secure Detention State Managed
Detention Center Facility
Paulding, Georgia
(1999)
Tallulah Correctional 700 Secure Treatment State Managed
Center for Youth Facility
Tallulah, Louisiana
(1998)
</TABLE>
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<PAGE>
Community Corrections Division
<TABLE>
<CAPTION>
Facility Name, Location
and Contracting Owned,
Year Operations Contracted Governmental Leased, or
Commenced Beds(1) Type of Facility Agency Managed(2)
----------------------- ---------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Brooklyn Community 99 Residential Federal Bureau Leased
Correctional Center Correctional of Prisons
Brooklyn, New York Facility
(1989)
Manhattan Community 60 Residential Federal Bureau Leased
Corrections Center Correctional of Prisons
New York, New York Facility
(1990)
Bronx Community 40 Residential Federal Bureau Leased
Corrections Center Correctional of Prisons
Bronx, New York (1996) Facility
New York State Community 135 Residential State Leased
Corrections Center Correctional
Manhattan, NY (1998) Facility
Fort Worth Community 125 Residential State Leased
Corrections Center Fort Correctional
Worth, Texas (1994) Facility
</TABLE>
- --------
(1) The number of beds under contract generally is an estimate in the contract
by the contracting government agency of the number of offenders expected to
be assigned to the facility and not a guarantee of a minimum or maximum
number of offenders to be so assigned. Certain facilities have bed capacity
in excess of the number of beds under contract and therefore may be
occupied by a greater number of offenders than is estimated pursuant to the
contract.
(2) A managed facility is a facility for which CSC provides management services
pursuant to a management contract with the applicable governmental agency
but, unlike a leased or owned facility, CSC has no property interest in the
facility.
(3) This facility is listed both as part of CSC's Adult Division and its
Juvenile Division as the facility houses both adult and juvenile offenders.
Facility Management Contracts
CSC is primarily compensated on the basis of the population in each of its
facilities on a fixed rate per inmate per day; however, some contracts have a
minimum revenue guarantee. Invoices are generally sent on a monthly basis
detailing the population for the prior month. Occupancy rates for facilities
tend to be low when first opened or when expansions are first available.
However, after a facility passes the start-up period, typically 3 months, the
occupancy rate tends to stabilize.
CSC is required by its contracts to maintain certain levels of insurance
coverage for general liability, workers' compensation, vehicle liability and
property loss or damage. CSC is also required to indemnify the contracting
agencies for claims and costs arising out of CSC's operations and in certain
cases, to maintain performance bonds.
As is standard in the industry, CSC's contracts are short term in nature,
generally ranging from one to three years and contain multiple renewal options.
Most facility contracts also generally contain clauses which allow the
governmental agency to terminate a contract without cause, and are subject to
legislative appropriation of funds. To date, none of CSC's contracts have been
terminated though any of these methods.
Operating Procedures
CSC is responsible for the overall operation of each facility under its
management, including staff recruitment, general administration of the
facility, security of inmates and employees, supervision of the offenders and
facility maintenance. CSC, either directly or through subcontractors, also
provides health care, including medical, dental and psychiatric services and
food service. Certain facilities also offer special
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rehabilitative and educational programs, such as academic or vocational
education, job and life skills training, counseling, substance abuse programs,
and work and recreational programs.
CSC's contracts generally require CSC to operate each facility in accordance
with all applicable local, state and federal laws, rules and regulations and
the standards and guidelines of the American Correctional Association. The ACA
standards, designed to safeguard the life, health and safety of offenders and
personnel, describe specific objectives with respect to administration,
personnel and staff training, security, medical and health care, food service,
inmate supervision and physical plant requirements. CSC believes the benefits
of operating its facilities in accordance with ACA standards include improved
management, better defense against lawsuits by offenders alleging violations of
civil rights, a more humane environment for personnel and offenders and
measurable criteria for upgrading programs, personnel and the physical plant on
a continuous basis. CSC's Seattle INS Detention Center, Tarrant County
Community Correctional Facility and Polk City and Pahokee Youth Training
Centers are fully accredited by the ACA and certain other facilities currently
are being reviewed for accreditation. CSC's goal is to obtain and maintain ACA
accreditation for all of its facilities. Richard P. Staley, CSC's Senior Vice
President and director, is a member of the ACA and a certified ACA standards
auditor for jail and detention facilities. James Irving, CSC's Vice President
for Juvenile Justice, is a past Chairman of the ACA Standards Committee and a
certified ACA standard auditor for jail and detention facilities.
Facility Design and Construction
In addition to its facility management services, CSC also consults with
various governmental entities to design and construct new correctional and
detention facilities and renovate older facilities to provide enhanced services
to the population. CSC manages all of the facilities it has designed and
constructed or redesigned and renovated.
Pursuant to CSC's design, construction and management contracts, it is
responsible for overall project development and completion. Typically, CSC
develops the conceptual design for a project, then hires architects, engineers
and construction companies to complete the development. When designing a
particular facility, CSC utilizes, with appropriate modifications, prototype
designs CSC has used in developing other projects. Management of CSC believes
that the use of such prototype designs allows it to reduce cost overruns and
construction delays.
Facilities Under Construction
Renovations are underway in the 141 bed juvenile treatment facility in
Bayamon, Puerto Rico. The facility currently houses 96 residents. It is
expected that the renovation will be complete in June 1999.
Construction has begun on a 100 bed juvenile detention center in Salinas,
Puerto Rico. The facility will house minimum to medium risk inmates, aged 12 to
17, and is expected to be completed in October 1999.
Employees
At December 31, 1998, CSC had approximately 3,825 full-time employees,
consisting of clerical and administrative personnel, security personnel, food
service personnel and facility administrators. CSC believes its relationship
with its employees is good.
Each of CSC's facilities is led by an experienced facility administrator.
Other facility personnel include administrative, security, medical, food
service, counseling, classification and educational and vocational training
personnel. CSC conducts background screening checks and drug testing on
potential facility employees. Some of the services rendered at certain
facilities, such as medical services and education or training, are provided by
third-party contractors.
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<PAGE>
Employee Training
All jurisdictions require corrections officers to complete a specified
amount of training prior to employment. In most cases, CSC employees must
undergo at least 160 hours of training before being allowed to work in a
position that will bring them in contact with offenders or detainees. This
training consists of approximately 40 hours relating to CSC policies,
operational procedures and management philosophy, and 120 hours relating to
legal issues, rights of offenders and detainees, techniques of communication
and supervision, improvement of interpersonal skills and job training relating
to the specific tasks to be held. Each CSC employee having contact with
offenders receives a minimum of 40 hours of additional training each year, and
each management employee receives a minimum of 24 hours of training each year.
Insurance
Each management contract with a governmental agency requires CSC to maintain
certain levels of insurance coverage for general liability, workers'
compensation, vehicle liability and property loss or damage and to indemnify
the contracting agency for claims and costs arising out of CSC's operations.
CSC maintains general liability insurance in the amount of $5,000,000 and
two umbrella policies in the amount of $5,000,000 and $20,000,000,
respectively, covering itself and each of its subsidiaries. There can be no
assurance that the aggregate amount and kinds of CSC's insurance are adequate
to cover all risks it may incur or that insurance will be available in the
future.
In addition, CSC is unable to secure insurance for some unique business
risks including, but not limited to, riot and civil commotion or the acts of an
escaped offender.
Regulation
The industry in which CSC operates is subject to federal, state and local
regulations which are administered by a variety of regulatory authorities.
Generally, providers of correctional services must comply with a variety of
applicable federal, state and local regulations, including educational, health
care and safety regulations. Management contracts frequently include extensive
reporting requirements. In addition, many federal, state and local governments
are required to follow competitive bidding procedures before awarding a
contract. Certain jurisdictions may also require the successful bidder to award
subcontracts on a competitive bid basis and to subcontract to varying degrees
with businesses owned by women or minorities.
Litigation
The nature of CSC's business results in numerous claims or litigation
against CSC for damages arising from the conduct of its employees or others.
Under the rules of the SEC, CSC is obligated to disclose lawsuits which involve
a claim for damages in excess of 10% of its current assets notwithstanding
CSC's belief as to the merit of the lawsuit and the existence of adequate
insurance coverage.
In May 1993, a former employee of CSC filed suit in the United States
District Court, Southern District of New York, claiming he was intentionally
assaulted by employees of CSC and claiming $5,000,000 in damages on each of six
causes of action. A motion to dismiss is pending. In January 1996, a lawsuit
was filed with the Supreme Court of New York, County of Kings, by a former
employee alleging sexual harassment and discrimination, physical assault, rape
and negligent screening of employees and claiming damages of $4,000,000 plus
attorneys fees. This case was dismissed in July 1998.
In March 1996, former inmates at one of CSC's facilities filed suit in the
Supreme Court of the State of New York, County of Bronx on behalf of themselves
and others similarly situated, alleging personal injuries and property damage
purportedly caused by negligence and intentional acts of CSC and claiming
$500,000,000 for each compensatory and punitive damages, which suit was
transferred to the United States District Court,
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<PAGE>
Southern District of New York, in April 1996. In July 1996, seven detainees at
one of CSC's facilities, and certain of their spouses, filed suit in the
Superior Court of New Jersey, County of Union, seeking $10,000,000 each in
damages arising from alleged mistreatment of the detainees, which suit was
transferred to the United States District Court, District of New Jersey, in
August 1996. In July 1997 former detainees of CSC's Elizabeth, New Jersey
Facility filed suit in the United States District Court for the District of New
Jersey. The suit claims violations of civil rights, personal injury and
property damage allegedly caused by the negligent and intentional acts of CSC.
No monetary damages have been stated.
CSC believes the claims made in each of the foregoing actions to be without
merit and will vigorously defend such actions. CSC further believes the outcome
of these actions and all other current legal proceedings to which it is a party
will not have a material adverse effect upon its results of operations,
financial condition or liquidity. However, there is an inherent risk in any
litigation and a decision adverse to CSC could be rendered.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND OFFICERS OF CSC
The following table sets forth certain information as of December 31, 1998,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of CSC common stock by (i) each person known by
CSC to beneficially own more than 5% of the outstanding shares of CSC common
stock, (ii) each executive officer and director of CSC, and (iii) all officers
and directors of CSC as a group:
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the merger After the merger
--------------------- ---------------------
CSC Post merger CSC
Common Stock Common Stock
--------------------- ---------------------
Name and Address of Number of Number of
Beneficial Owner (1) Shares % Shares %
- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Esther Horn........................ 648,175 8.3% 648,175 5.4%
James F. Slattery(2)............... 839,792 10.8% 839,792 7.0%
Aaron Speisman(3).................. 438,930 5.6% 438,930 3.6%
Jennifer Anna Speisman 1992 Trust.. 83,438 1.1% 83,438 *
Joshua Israel Speisman 1992 Trust.. 83,438 1.1% 83,438 *
Ira M. Cotler(4)................... 122,368 1.6% 122,368 1.0%
Richard P. Staley(5)............... 64,083 * 64,083 *
Michael C. Garretson(6)............ 96,250 1.2% 96,250 *
Stuart Gerson(7)................... 36,975 * 36,975 *
Melvin T. Stith(8)................. 22,500 * 22,500 *
Shimmie Horn(9).................... 6,667 * 6,667 *
Gilder, Gagnon, Howe & Co.(10)..... 2,144,740 27.5% 2,941,990 24.4%
All officers and directors as a
group
(eight persons)(2)(3)(4)
(5)(6)(7)(8)(9)................... 1,577,565 20.3% 1,577,565 12.7%
</TABLE>
- --------
* Less than 1%
(1) All addresses are c/o Correctional Services Corporation, 1819 Main
Street, Suite 1000, Sarasota, Florida 34236.
(2) Includes options to purchase 18,125 shares of CSC common stock. Does not
include options to purchase 100,000 shares of CSC common stock not
exercisable within 60 days.
(3) Director and founder. Does not include 83,438 shares of CSC common stock
owned by the Jennifer Anna Speisman 1992 Trust and 83,438 shares of CSC
common stock owned by the Joshua Israel Speisman 1992 Trust, trusts for
the benefit of Mr. Speisman's children, as to which Mr. Speisman disclaims
beneficial ownership. Includes options to purchase 18,135 shares of CSC
common stock and a Series A Warrant to purchase 6,700 shares of CSC common
stock.
(4) Includes 2,612 shares of CSC common stock owned by his wife as to which he
disclaims beneficial ownership. Also includes options to purchase 100,000
shares of CSC common stock, a Series A Warrant to purchase 3,850 shares of
CSC common stock and other warrants to purchase 10,906 shares of CSC
common stock. Does not include options to purchase 25,000 shares of CSC
common stock not exercisable within 60 days.
(5) Includes options to purchase 64,083 shares of CSC common stock. Does not
include options to purchase 1,667 shares of CSC common stock not
exercisable within 60 days.
(6) Consists of options to purchase 96,250 shares of CSC common stock. Does
not include options to purchase 25,000 shares of CSC common stock not
exercisable within 60 days
(7) Consists of options to purchase 33,125 shares of CSC common stock and a
Series A Warrant to purchase 3,850 shares of CSC common stock. Does not
include options to purchase 13,333 shares of CSC common stock not
exercisable within 60 days.
(8) Consists of options to purchase 22,500 shares of CSC common stock. Does
not include options to purchase 10,000 shares of CSC common stock not
exercisable within 60 days.
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(9) Consists of options to purchase 6,667 shares of CSC common stock. Does
not include options to purchase 3,333 shares of CSC common stock not
exercisable within 60 days.
(10) 1775 Broadway, 26th Floor, New York, New York 10019. Based on a Schedule
13G filed with the SEC by Gilder, Gagnon, Howe & Co. ("Gilder, Gagnon") on
August 11, 1998, Gilder, Gagnon has shared power to dispose or to direct
the disposition of 2,144,740 shares and has shared power to vote or to
direct the vote of 6,700 shares. The shares reported include 1,982,930
shares held in customer accounts over which partners and/or employees of
Gilder, Gagnon have discretionary authority to dispose of or direct the
disposition of the shares, 155,110 shares held in accounts owned by the
partners of Gilder, Gagnon and their families, and 6,700 shares held in
the account of the profit-sharing plan of Gilder Gagnon. The information
regarding the beneficial ownership of common stock by Gilder, Gagnon is
included herein in reliance on its report filed with the SEC, except that
the percentage of common stock beneficially owned is based upon CSC's
calculations made in reliance upon the number of shares of common stock
reported to be beneficially owned by such person in such report and the
number of shares of common stock issued and outstanding as of October 31,
1998.
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INFORMATION CONCERNING
YOUTH SERVICES INTERNATIONAL, INC.
Description
YSI is a leading national provider of private educational, developmental and
rehabilitative programs which encompass a holistic approach to education,
training and socialization of adjudicated youth in order to prepare them to
reenter society as positive, contributing, tax-paying members of their
community. YSI's programs are designed to equip youth with the skills,
educational base and behavioral norms to enable the youth to be successful in
the work place, in school and in the community. YSI provides its programs
primarily in residential settings and its programs include academy, sexual
offender, high impact, boot camp, female academy, transition and detention. As
of December 31, 1998, YSI operated 27 residential juvenile justice programs in
twelve states serving approximately 2,300 youth and conducted non-residential
programs serving approximately 800 additional youth.
Since its formation in 1991, YSI has expanded its base of operations through
a combination of external and internal growth by developing new programs in
response to privatization opportunities, increasing student capacity at
existing facilities, expanding program offerings and acquiring complementary
programs and businesses.
YSI was established to capitalize on emerging opportunities in the
privatization of juvenile justice programs by state and local governments.
Management believes that opportunities in this market continue to increase as
the juvenile population rises, public facilities continue to be more
overcrowded and government agencies turn to privatization as an effective
alternative because of lower costs and demonstrated results in lowering
recidivism rates. Based on its experience to date, YSI believes that it can
operate its programs at a lower cost while offering a higher quality of
services as compared to similar programs operated directly by government
agencies.
During the period August 1994 through September 1996, YSI acquired several
companies which operate in the juvenile behavioral health business. In an
effort to focus on YSI's core juvenile justice business, YSI announced in April
1997 that it had committed to a plan to dispose of its behavioral health
business. On October 31, 1997, YSI sold seven of its nine behavioral health
programs. YSI subsequently closed, in September 1998, one of the two remaining
behavioral health programs and continues to operate the last of these programs,
the Los Hermanos Academy. YSI believes the Los Hermanos program is a hybrid
program, with many of the attributes of YSI's juvenile justice academy model,
and thus believes the program fits in the YSI juvenile justice portfolio.
Market
YSI believes that the juvenile segment of the corrections market continues
to grow and sees an industry trend reflecting increases in both the number of
juveniles and the severity of the crimes committed by them. YSI believes that
this may cause a shortage in residential facilities and a lack of comprehensive
programs to treat juvenile offenders. YSI expects that as juvenile crime
continues to receive increasing levels of visibility, the need for services for
adjudicated youth will continue to increase. YSI also believes that certain
demographic trends, such as annual increases in both the number of teenagers
and the number of youth from single parent families, will further contribute to
the overall growth in the population of adjudicated youth in the United States.
YSI believes that many of these trends also exist in the international
markets and YSI will explore opportunities that arise internationally. YSI
believes that privatization opportunities may occur in the near future in
markets such as Australia, Canada, South Africa and the United Kingdom.
Programs for adjudicated youth generally are created in response to a
Request For Proposals from a state, federal or local agency or created "de
novo" by a provider to accommodate the demand for a facility by
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placement authorities due primarily to the lack of available effective
programs. In the early stages of privatization of the juvenile corrections
industry, "de novo" programs were in demand because of the lack of effective
programs and capacity.
In an RFP, the government agency determines the type of program and the
number of youth to be served and specifies factors such as operating and
licensing requirements in the RFP, which it publishes for competitive bidding.
Successful proposals by YSI under an RFP have resulted in contracts between YSI
and the government agency under which youth are placed in YSI's program by the
government agency up to the licensed capacity. Generally, YSI has little
flexibility in admitting youth to facilities resulting from an RFP other than
those placed by the contracting agency or agencies. Historically, under the RFP
process, the government agency also provided the facility for the program.
These facilities typically were either existing programs and facilities
operated by the state agency or vacant or under-utilized government-owned
facilities that required minimal renovation for conversion into a program
facility. Recently, the trend has been developing whereby the RFP involves the
design, construction and financing of a new facility as well as the operation
of the program upon its completion.
"De novo" programs are initiated by YSI to provide a facility based on a
shortage of beds or programs. YSI is in regular contact with placement
authorities regarding their needs and the shortages of facilities and beds to
fulfill those needs. Placement authorities for adjudicated youth vary from
state to state and include state juvenile services agencies, judges of juvenile
and other courts, parole officers and, in certain states, state correctional
agencies. Once a shortage of beds or programs is determined, YSI will work with
the appropriate placement authorities to determine the ability and willingness
to place youth in a private facility, the process necessary to permit such
placements, the programming desires or requirements, the budget constraints and
other matters. YSI also will investigate potential sites and facilities for the
program, focusing on abandoned or under-utilized facilities that could be
renovated with minimal capital deployment. YSI also will obtain zoning and
other permits for the facility and attempt to foster community acceptance and
support. YSI enters into contracts with the placement authorities which permit
the placement of youth at the YSI program, delineate the services to be
provided and set forth the compensation to be paid to YSI. However, these
contracts generally do not require placement of youth or guarantee any minimum
number of youth. These contracts generally have a term of one year and are
renewable on an annual basis by the placement authority. In the initial stages
of YSI, although placement authorities generally preferred to place youth in a
facility in the state of such placement authority, students were often placed
in facilities in other states due to the lack of facilities or programs in the
home state. Consequently, several of YSI's early de novo facilities are
"magnet" facilities to which referrals of youth are derived from placement
authorities in numerous states, each of which has its own contract. However,
the recent trend has been for placement authorities to place youth in the home
state. Therefore, the de novo programs more recently developed by YSI derive
youth only from placement authorities in the state of the facility and these
programs may have only one contracted source and may provide for a minimum or
guaranteed number of youth, much like an RFP project.
Business Strategy
The following Business Strategy discussion does not give effect to the
proposed merger, but represents YSI's views of its business strategy absent the
merger.
YSI's objective is to continue to expand the provision of its high-quality,
innovative and effective programs and services on a national and international
basis to a broad variety of adjudicated youth. The key elements of YSI's growth
strategy are to:
(i) develop new programs through RFP and de novo privatization;
(ii) increase the licensed capacity of its existing programs;
(iii) expand its range of services; and
(iv) pursue mergers and acquisitions.
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Develop New Programs Through Privatization. YSI will continue to pursue the
development of new programs in response to privatization opportunities. In
addition, YSI will continue to work with government agencies to help develop
privatization opportunities. YSI believes it can continue to facilitate and
assist states and state agencies in the process of determining to shift certain
of their services for adjudicated youth to private industry. In some instances,
involvement in the privatization process may result in the opening or expansion
of a "de novo" program by YSI to service youth referred by placement
authorities. In addition, where the result of the process is the issuance of an
RFP, YSI's involvement in the process has often exposed YSI's abilities and
experience to the states and state agencies, which YSI believes are key factors
in RFP award decisions. Further, YSI believes that new opportunities are
arising to provide governmental agencies with services relating to the design,
construction and financing of new facilities for adjudicated youth in
connection with the award of an RFP to operate a program. YSI is positioning
itself to provide these development activities in order to enhance its ability
to win RFP awards to operate new programs.
Increase Licensed Capacity. YSI believes that its privatization programs
have been successful in terms of better preparing youth to become productive
members of society and generating cost efficiencies. This success has enabled
YSI to increase the licensed capacity of many of its programs and should assist
YSI in obtaining governmental approval for further increases in licensed
capacity. YSI believes it has physical facilities and campuses that are able to
permit significant expansion of its current programs without significant
additional capital outlays. YSI generally has been able to add beds to existing
facilities at a cost that is substantially lower than the cost of new
construction, which results in lower costs per student.
Expand Range of Services. YSI will continue to expand the types of programs
and the range of program components it offers in response to the demand for
more programs from its customers. YSI will continuously evaluate the
effectiveness of its programs in preparing adjudicated youth to become
responsible, self-sufficient taxpayers. As YSI, or customers, identify new or
more effective programs or program components, YSI will strive to develop and
provide such programs and program components. Because the core competency of
YSI's services is the rehabilitative and educational components of its program,
YSI believes there are opportunities to provide such services to a broader
range of troubled youth. Certain of YSI's customers that are responsible for
and refer adjudicated youth also are responsible for other troubled or "at-
risk" youth. In addition, YSI believes there may be opportunities to enter the
alternative education market for non-adjudicated youth. Since the majority of
youth needing an alternative educational experience are at-risk, this business
is very compatible with YSI's strengths.
In order to continue to improve its business, YSI is developing and
integrating an information management system that will produce better and more
timely information and create cost efficiencies by enhancing the operation and
control of YSI's student data management. The student data management function
consists of maintaining a student data base, gathering information regarding
the students upon arrival, monitoring and supplementing such information
throughout their stay and developing meaningful reports of such data that will
assist YSI in measuring the effectiveness of various programs and education and
training techniques.
Pursue Mergers and Acquisitions. YSI will continue to evaluate and
selectively pursue merger and acquisition opportunities. YSI's objective is to
acquire businesses that can be integrated into YSI's high quality, cost-
effective approach to servicing troubled youth in YSI's core business, in areas
that complement existing programs and in new markets.
YSI has sought and will continue to seek to minimize the amount of capital
required to develop and operate programs, particularly investment in real
estate and facility costs. YSI seeks, and consequently many of its existing
facilities are comprised of, facilities that were previously used for purposes
that lend themselves to efficient conversion to use for YSI programs, such as
schools, hospitals and military bases. Utilization of these facilities allows
YSI to focus on the operation of programs rather than the development and
financing of real estate. However, YSI, after careful review, will make such
investments when it is advantageous to do so in
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order to respond to an RFP that requires such investment as a component of the
bid or otherwise enhances YSI's chances to be awarded a desired RFP, or in
connection with an acquisition.
YSI Programs
Program Description
YSI's programs encompass a holistic approach to education, training and
socialization of youth in order to prepare them to reenter society as positive,
contributing, tax-paying members of their community. YSI's programs are
designed to equip youth with the skills, educational base and behavioral norms
to enable the youth to be successful in the work place, in school and in the
community.
YSI's programs are comprised of four major components: education; vocational
training; group living (i.e., socialization); and recreation. Applied
consistently throughout these components are behavioral management principles
that are intended to change dramatically the thinking and behavior of
delinquent youth, teach basic life skills and reinforce the principle that
success begins with appropriate, acceptable behavior. Consequently, the program
components interlock and blend together to form a cohesive consistent program
designed to develop a youth that is fully-equipped to meet the challenges of
life in a responsible acceptable manner. In addition, YSI's foremost priority
is to provide its programs in a safe and secure environment for the community,
the youth and the staff.
This program design is implemented through the application of its components
in an environment which stresses security and behavior management, as described
below.
Program Environment
Security--YSI believes that its first priority and responsibility is to
conduct its programs in an environment that is safe and secure for the
community, its staff and the youth in its programs. YSI provides that security
primarily through hardware and staff supervision. Security is also derived from
an intense schedule of activities that occupy the youth at all times during the
day and involve them in activities that require, and reinforce the need for and
benefits of, positive thinking and behavior.
Behavior Management--YSI's focus on behavior management principles is
intended to change dramatically the thinking and behavior of delinquent youth.
The behavior management approach requires a focus not just on behavior, but
also on positive thinking patterns, healthy belief systems, and the development
of a value system that provides guidance in understanding that which is
important in life. The behavior management principles coupled with the intense
schedule of activities serve to create a safe environment for the community and
the staff and students at each YSI project.
Program Components
Education--YSI provides accredited educational courses at the appropriate
grade levels for the youth in its facilities. YSI's educational programs are
accredited with the state and local school districts in which its facilities
are located. The education component follows "School-to-Work" principles to
complement the vocational component of the programs and to prepare the youth
for the job market. Training in basic behavior and socialization skills are
also applied in the education curriculum. Special education needs are provided
as appropriate to address learning differences and disabilities.
Vocational Training--YSI's vocational training includes instruction in
skills in vocations that are most likely to provide employment opportunities
for the youth. YSI researches the job market in the areas in which its
facilities are located and from which the youth are derived to provide training
in appropriate areas. YSI also provides basic work skills and socialization
skills to better enable youth to survive and succeed in the work place.
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Group Living--YSI's group living component includes individual and group
counseling, case management, community service, family support and other group
level activities. Through these sessions, youth constantly assess their own
behavior, the progress of their individual development and the achievement of
the goals which each youth, together with staff, establishes for himself or
herself. An element of this component involves substance abuse counseling, as
well as other behavior management counseling, such as anger management. In
addition, group living includes those portions of a youth's day that he is not
in school, vocational training or recreation. Socialization and life skills are
applied and behavior management implemented at all times during a youth's day.
Recreation--YSI's programs include athletics and other recreational
activities as an integral element of the holistic, balanced approach. These
activities include intramurals, interscholastic athletics, physical education
and recreational activities. These experiences provide a physical outlet for
the youth but, more importantly, provide instruction and experience in
teamwork, preparation, mentoring and other life and socialization skills.
The goal of the YSI program is to provide, through the application of its
components, for the transition of the youth back into the community with the
skills required to live as a successful member of society.
Program Types
YSI currently provides the following programs: academy, sex offender, high
impact, boot camp, female academy, transition and detention. The distinguishing
characteristics of these programs are as follows:
Academy Programs. The YSI program components described above are generally
applied in its academy program, which is the most common program and which
serves the standard, or typical, adjudicated youth. These adjudicated youth
generally are repeat offenders and/or violent crime offenders who are sentenced
to a length of stay ranging from nine to fifteen months. Academy programs
generally are located in campus-type facilities which range from staff-secure
to hardware-secure.
At certain projects, YSI offers various specialized programs in addition to
the academy program. These specialized programs are designed to achieve the
same goals as the academy program, but are tailored to a particular segment of
adjudicated youth. Accordingly, at these projects, YSI's educational,
developmental and rehabilitative programs are modified to account for the
purpose of the program and/or the particular issues facing the residents of the
program. These programs are described below:
Sex Offender Programs. YSI's sex offender programs serve the special needs
of youth involved in sexual offenses. The programs are generally locked-secure
and involve lengths of stay from 12 to 24 months. The programs generally
involve more treatment and counseling than academy programs to address the
particular issues facing these youth.
High Impact Programs. YSI's high impact programs generally serve first-time
offenders or "lower-level" offenders who have failed or performed below
expectations in non-residential settings. The lengths of stay generally range
from 30 to 90 days. These programs are intense, physically demanding and
designed to confront the youth with the consequences of their actions in an
abrupt and quick fashion.
Boot Camp Programs. YSI's boot camp programs are similar to high impact
programs in that they are intense and physically demanding, but they are
conducted in a military format, including uniforms and drills. These programs
generally involve lengths of stay from 30 to 150 days.
Female Academy. YSI's female academy programs serve adjudicated female youth
and include, in concert with the academy program, gender-specific programming,
influence and focus. The gender-specific programs account for the differing
motivations, ambitions, societal roles, physical attributes and emotional needs
of females.
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Transition. YSI's transition programs serve youth who have been discharged
from a correctional program but are not yet released into the community. In
these shorter-term programs, the focus is on preparing the youth for his/her
imminent return to the community.
Detention Programs. YSI's detention programs house youth for periods of one
to 90 days as they await disposition of court cases or determinations of
placement. The components of the program are provided in an abbreviated format,
with more counseling focus.
YSI also provides non-residential aftercare programs for youth who have been
discharged from YSI or other residential juvenile facilities to assist them in
transitioning back into the community. These services generally involve
tracking, periodic contact with the youth and the youth's family, group and
individual counseling and gathering reports from teachers and employers of the
youth.
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Projects
The residential juvenile justice projects operated by YSI as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Start Licensed
Residential Project(1) Type of Program Date Source Capacity Census
---------------------- --------------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
Clarinda Academy, IA Academy Feb-92 De Novo 247 191
Victor Cullen Academy,
MD Academy Sep-92 RFP 225 222
Reflections Treatment
Agency, TN Sexual Offender Sep-92 RFP 52 45
Forest Ridge Youth Serv-
ices, IA Female Academy Feb-93 Acquisition 140 140
Charles H. Hickey, Jr. Academy/High Impact/ Jul-93 RFP 330 314
School, MD Detention/Sexual Offender
Chamberlain Academy, SD Academy Nov-93 Acquisition 78 79
Springfield Academy, SD Academy Nov-93 Acquisition 108 59
Tarkio Academy, MO Academy/Sexual Offender Sep-94 De Novo 302 206
Woodward Academy, IA Academy/Sexual Offender Jul-95 RFP 98 75
Camp Washington, VA Boot Camp Jan-96 RFP 45 29
Everglades Academy, FL Academy Dec-96 RFP 102 95
Keweenaw Academy, MI Academy Jan-97 De Novo 148 147
Los Hermanos, TX Academy Jan-97 Acquisition 60 60
Cypress Creek Academy,
FL Academy Mar-97 RFP 100 73
Genesis Treatment Agen-
cy, VA Sexual Offender May-97 RFP 30 30
Hillsborough Academy, FL Academy Jul-97 RFP 25 24
Pompano Academy, FL Academy Nov-97 RFP 40 36
Snowden Cottage Academy,
DE Academy Nov-97 RFP 18 16
Elmore Academy, MN Academy Apr-98 De Novo 100 75
Chanute Transition Cen-
ter, IL Transition Jul-98 De Novo 50 50
Cotulla Boot Camp, TX Boot Camp Jul-98 Acquisition 60 54
Hondo Detention Center,
TX Detention Jul-98 Acquisition 15 8
Lockhart Boot Camp, TX Boot Camp/Detention July-98 Acquisition 38 30
San Marcos Boot Camp, TX Boot Camp/Detention Jul-98 Acquisition 76 59
Stuart Nunn Boot Camp,
TX Boot Camp Jul-98 Acquisition 36 18
Texarkana Boot Camp, TX Boot Camp/Detention July-98 Acquisition 148 117
JoAnn Bridges Academy,
FL Female Academy Sep-98 RFP 30 19
----- -----
Total 2,701 2,271
===== =====
</TABLE>
YSI's aftercare programs for youth who have been discharged from YSI or
other residential juvenile facilities are the Reflections Aftercare Program in
Knoxville, Tennessee; Virginia Aftercare Program & Services in Richmond,
Virginia; YSI Community-Based Services in Des Moines, Iowa, Cedar Rapids, Iowa,
Estherville, Iowa, and Detroit, Michigan; Ramsey County Aftercare in
Minneapolis/St. Paul, Minnesota; Georgia Aftercare Program and Services in
Dublin, Georgia; and Chanute Transition Center Aftercare in Rantoul, Illinois.
Consulting and Development Services
Consulting Services
Opportunities to provide consulting services have been presented to YSI from
time to time on projects to assist in the evaluation of problems of youth, the
improvement of services for troubled youth, the implementation of programs in a
community, privatization and other similar projects. YSI does not actively
pursue the provision of these services but is willing to respond to
opportunities if, after evaluating the project, YSI determines that such an
opportunity presents a profitable use of resources, permits YSI to participate
in a
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privatization process with potential to position YSI as the provider of choice,
assists in community acceptance of potential youth care programs or is
beneficial to YSI based on other similar factors.
Development Services
YSI believes that new opportunities are arising to provide governmental
agencies with services relating to the design, construction and financing of
new facilities for adjudicated youth. YSI expects that governmental agencies
will favor companies that can provide turnkey services from designing,
constructing and financing a facility to creating and operating a program. YSI
is positioning itself to provide these development activities in order to be
awarded the contract to operate these new programs. However, even on projects
that do not afford a private operation opportunity, YSI may provide the design,
construction and financing of a facility for the state agency if YSI believes
it can benefit financially from these activities.
Customers and Marketing
YSI's sales and marketing efforts are directed toward developing new
programs for state agencies and other placement authorities. Placement
authorities consist of state juvenile services agencies, judges of juvenile and
other courts, parole officers and state welfare and child protective agencies.
YSI's senior management coordinate with personnel at YSI's programs to pursue
RFP and purchase of service contracts with governments and government agencies.
YSI believes that this combined sales and marketing effort ensures that its
regional efforts are consistent with YSI's overall business strategy and that
sales efforts conform to the condition of the market in each region. Further,
YSI believes that its local executive directors and personnel provide YSI with
a competitive advantage through their local contacts and understanding of local
and regional business conditions.
YSI must market its services to governments and government agencies in order
to capitalize on privatization opportunities. In the case of certain de novo
projects, the placements need to be actively sought by YSI from various sources
and require a concerted effort by the admissions personnel to manage the
admissions and graduation of youth in order to maintain high occupancy levels.
YSI programs develop local community involvement and relations activities,
including instituting Community Advisory Boards, Community Relations Groups,
Foster Grandparents Programs and Volunteer Programs. In addition, most of the
YSI programs include student involvement in local community service projects
such as park and highway clean-up, snow removal, holiday and festival set-up,
feeding the homeless, and charity races and marathons.
Personnel and Training
General
YSI has attempted to assemble an experienced team of managers and staff that
blends program expertise with business and financial experience in each area of
its operations. This team includes juvenile justice administrators, educators,
mental health professionals, retired military officers and collegiate coaches
and athletes, combined with human resource, financial, facilities and marketing
professionals. YSI prefers to recruit direct care staff who have obtained
undergraduate or graduate degrees in education and in behavioral or social
sciences. YSI believes that its team is fully qualified to carry out YSI's
mission.
YSI employed approximately 2,500 personnel as of December 31, 1998:
approximately 60% of whom were in direct care workers; approximately 32% were
in professional, teacher and manager positions; and approximately 6% were in
support functions. In addition, YSI routinely utilizes independent contractors
as needed for medical, educational, facility expansion, and support services.
Newly hired direct care staff receive pre-service and continuing training.
Core training includes courses in the certain aspects of major YSI program
components such as behavior change education, positive peer culture,
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discipline and limit setting, emotion management and the teaching of pro-social
skills. Annual continuing education also is required of all professional staff.
In addition, YSI demonstrates its commitment to its employees' professional
development by offering lectures, classes and training programs as well as
tuition reimbursement benefits.
YSI believes that its recruitment, selection and training programs provide
YSI with quality personnel experienced in YSI's holistic approach to the
education, training and socialization of youth. YSI also believes that these
programs, which are conducted throughout the YSI system, provide YSI with
management depth and consistency. These programs promote the cross training of
staff resources which, in turn, creates flexibility in managing YSI's personnel
resources as the number and location of projects expand. Management is
committed to programs that foster career planning and development and that
include elements such as succession planning, regularly scheduled and timely
performance reviews and promoting talented people as they move through the
organization.
Quality Assurance
YSI's management includes a contract compliance officer who ensures that the
various programs are in compliance with their respective contractual
requirements. The contract compliance officer coordinates with YSI's various
projects and provides senior management with periodic reports regarding the
overall status of YSI's programs. YSI believes that the contract compliance
officer provides senior management with a vital link to program operations and
helps ensure that YSI provides consistent, quality service. In addition, from
time to time, employees of one facility visit other facilities and perform
inspections and critique programs.
Governmental agencies perform audits of each operating program, its record
keeping, and the condition of the physical plant pursuant to YSI's contracts or
as part of the initial licensing or license renewal process.
Competition
YSI competes with a wide variety of organizations, including other for-
profit companies, not-for-profit companies and governmental agencies that
provide services to adjudicated youth. YSI distinguishes itself from its
competitors by providing a program that encompasses a holistic approach to the
education, training and socialization of adjudicated youth as opposed to
strictly punitive incarceration and institutionalization. YSI competes
primarily on the basis of the quality of its programs, on price and on the
professional reputation of its programs and personnel. The industry is highly
fragmented and YSI believes that most private providers of services to
adjudicated youth are small and operate on a local or regional basis. Some of
YSI's competitors have financial resources greater than YSI and could expand
their operations and scope.
Regulation
The industry in which YSI operates is subject to extensive federal, state
and local regulations that are administered by a variety of regulatory
authorities. Providers of youth services must comply with a variety of
applicable state and local regulations, including education, health care and
safety regulations. YSI must maintain appropriate licenses, certifications and
accreditation for its programs in order to conduct its operations. In addition,
many state and local governments are required to conduct a competitive bidding
procedure before awarding contracts for products or services. The failure to
comply with any applicable laws, rules or regulations or the suspension,
placement of provisions on or loss of a license may have a material adverse
effect on YSI's business, financial condition and results of operations.
Further, the current and future operations of YSI 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 may have a material
adverse effect on YSI's business, financial condition and results of
operations.
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Properties
Consistent with YSI's policy of limited capital deployment, most of YSI's
facilities are leased. The total cost to YSI for the land and facilities that
it owns was approximately $7,451 million as of October 31, 1998. Many of the
lease arrangements are on terms YSI considers to be favorable. Several leases
provide for multiple renewal periods at the option of YSI, providing long-term
availability for YSI without the long-term commitment of resources.
In many cases, YSI leases the facilities it uses in connection with its
program from the customer with which it contracts for the services. In these
cases, the lease terms are concurrent with the terms of the service contracts.
The rent varies based upon the terms of the service contract. YSI is generally
responsible for the utilities, maintenance and repair of the facilities.
YSI's executive offices and headquarters are located in a 10,845 square foot
leased facility located at 2 Park Center Court, Suite 200, Owings Mills,
Maryland 21117. The lease for these offices expires in May 2002.
Litigation
The nature of YSI's business results in numerous claims or litigation
against YSI for damages arising from the conduct of its employees, other youth
or others. Under the rules of the SEC, YSI is required to disclose lawsuits
that involve a claim for damages in excess of 10% of its current assets
notwithstanding YSI's belief as to the merit of the lawsuit and the existence
of adequate insurance coverage.
In May, 1998, a former resident of YSI's Tampa Bay Academy, a behavioral
health facility sold by YSI in October 1997, filed suit in the 4th Judicial
Circuit Court for Duval County, Florida, alleging that while a resident at the
Tampa Bay Academy he had been sexually molested and raped by other youth. He is
claiming $100,000,000 in damages, alleging that YSI was negligent in the care
and treatment of the plaintiff and in the supervision of the youth in its care.
YSI believes the claim is without merit and will vigorously defend such claim.
On or about December 21, 1998, Kimberly E. Nichols, a former employee of
YSI, filed a complaint in the Circuit Court for Baltimore County claiming
entitlement to certain severance amounts under an unsigned change in control
agreement, purportedly between YSI and Ms. Nichols, and seeking arbitration.
The complaint names as defendants both YSI and Timothy Cole and seeks actual
and punitive damages totalling $800,000 and other relief. YSI believes the
complaint is without merit because it believes that Ms. Nichols did not have
any change in control agreement in place at any time. YSI will vigorously
defend such complaint.
YSI is not a party to any other legal proceedings other than routine
litigation which YSI does not believe is material to its future financial
position or results of operation.
111
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND OFFICERS OF YSI
The following table presents certain information, as of December 31, 1998,
based on information obtained from the persons named below, regarding the
beneficial ownership of shares of YSI common stock by (i) each of the current
YSI directors and named executive officers of YSI as set forth in its 1998
Proxy Statement, (ii) all current directors and executive officers of YSI as a
group and (iii) each person or entity known by YSI to own beneficially more
than 5% of the outstanding shares of YSI common stock. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
shares which the person or entity has or shares voting or investment power, and
shares issuable to such person or entity pursuant to options exercisable within
60 days of the Record Date.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Merger After the Merger
------------------------- ---------------------
Post Merger CSC
YSI Common Stock Common Stock
------------------------- ---------------------
Number of Number of
Name and Address of Beneficial Shares % Shares %
Owner -------------- -------- ---------------------
<S> <C> <C> <C> <C>
Timothy P. Cole............... 207,668(1) 1.8% 77,875 *
Mark S. Demilio............... 50,000(2) * 18,750 *
Alan J. Andreini.............. 49,405(3) * 18,526 *
James A. Flick, Jr............ 13,416(4) * 5,031 *
Lenneal J. Henderson.......... 12,225(5) * 4,584 *
Bobbie L. Huskey.............. 16,263(6) * 6,098 *
All current directors and
executive officers as a group
(6 persons).................. 348,977(7) 3.0% 130,864 *
Gilder, Gagnon, Howe & Co..... 2,126,000(8) 18.8% 2,941,990 24.4%
1775 Broadway, 26th Floor
New York, NY 10019
Jacob May..................... 1,796,300(9) 15.9% 673,613 5.6%
1900 Church Street, Suite 400
Nashville, TN 37203
Essex Investment Management 844,562(10) 7.5% 316,711 2.6%
Company......................
125 High Street
Boston, Massachusetts 02110
Forest Investment Management 605,453(11) 5.3% 227,045 1.9%
LLC..........................
53 Forest Avenue Old
Greenwich, Connecticut 06870
HBK Investments L.P........... 874,330(12) 7.2% 327,874 2.7%
777 Main Street, Suite 2750
Fort Worth, Texas 76102
J.P. Morgan & Co. Inc......... 625,700(13) 5.5% 234,638 1.9%
60 Wall Street
New York, New York 10260
Wellington Management Company, 593,000(14) 5.2% 222,375 1.8%
LLP..........................
75 State Street
Boston, Massachusetts 02109
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of outstanding Common
Stock.
(1) Includes 191,668 shares issuable pursuant to options granted to Mr. Cole
that are exercisable as of December 31, 1998 or within 60 days of December
31, 1998 at an average exercise price of $15.33 per share.
112
<PAGE>
(2) Includes 50,000 shares issuable pursuant to options granted to Mr. Demilio
that are exercisable as of December 31, 1998 or within 60 days of December
31, 1998 at an average exercise price of $12.19 per share.
(3) Includes 14,404 shares issuable pursuant to options granted to Mr. Andreini
that are exercisable as of December 31, 1998 at an average exercise price
of $14.76 per share.
(4) Includes 8,137 shares issuable pursuant to options granted to Mr. Flick
that are exercisable as of December 31, 1998 at an exercise price of $14.50
per share.
(5) Includes 8,425 shares issuable pursuant to options granted to Dr. Henderson
that are exercisable as of December 31, 1998 at an exercise price of $14.50
per share.
(6) Includes 11,877 shares issuable pursuant to options granted to Ms. Huskey
that are exercisable as of December 31, 1998 or within 60 days of December
31, 1998 at an exercise price of $14.50 per share.
(7) Includes 284,511 shares issuable pursuant to options granted to directors
and executive officers that are exercisable as of December 31, 1998 or
within 60 days of December 31, 1998 at an average exercise price of $14.66
per share.
(8) Based upon a Schedule 13G filed with the SEC by Gilder, Gagnon, Howe & Co.,
a broker or dealer registered under Section 15 of the Securities Act of
1933, ("Gilder, Gagnon") on August 11, 1998, Gilder, Gagnon has shared
dispositive power with regard to 2,126,000 shares. According to the
Schedule 13G, Gilder, Gagnon has no voting power over any of these shares.
The information regarding the beneficial ownership of Common Stock by
Gilder, Gagnon is included herein in reliance on its report filed with the
SEC, except that the percentage of Common Stock beneficially owned is based
upon YSI's calculations made in reliance upon the number of shares of
Common Stock reported to be beneficially owned by such person in such
report and the number of shares of Common Stock issued and outstanding as
of December 31, 1998. Beneficial ownership of Post Merger CSC Common Stock
includes 2,144,740 shares of CSC Common Stock beneficially owned as of
December 31, 1998.
(9) Based upon an Amendment No. 4 to Schedule 13D filed by Mr. Jacob May with
the SEC on November 12, 1998, Mr. May has sole voting and dispositive power
with regard to 1,796,300 shares. The information regarding the beneficial
ownership of Common Stock by Mr. May is included herein in reliance on his
report filed with the SEC, except that the percentage of Common Stock
beneficially owned is based upon YSI's calculations made in reliance upon
the number of shares of Common Stock reported to be beneficially owned by
such person in such report and the number of shares of Common Stock issued
and outstanding as of December 31, 1998.
(10) Based upon an Amendment No. 2 to Schedule 13G filed with the SEC on
September 13, 1996 by Essex Investment Management Company ("Essex"), an
investment adviser registered under the Investment Advisers Act, Essex has
sole voting power with regard to 672,200 shares and sole dispositive power
with regard to 844,562 shares. The information regarding the beneficial
ownership of Common Stock by Essex is included herein in reliance on its
report filed with the SEC, except that the percentage of Common Stock
beneficially owned is based upon YSI's calculations made in reliance upon
the number of shares of Common Stock reported to be beneficially owned by
such person in such report and the number of shares of Common Stock issued
and outstanding as of December 31, 1998.
(11) Based upon a Schedule 13G filed with the SEC on February 17, 1998 by
Forest Investment Management LLC ("Forest"), an investment adviser
registered under the Investment Advisers Act, Founders Financial Group
L.P. ("Founders"), in its capacity as the owner of a controlling interest
in Forest, Michael A. Boyd, Inc. ("MAB, Inc.") in its capacity as the
general partner of Founders, and Michael A. Boyd, in his capacity as the
sole director and shareholder of MAB, Inc. (collectively, the "Filing
Parties"). According to the Schedule 13G, the Filing Parties have sole
voting power and sole dispositive power with regard to 605,453 shares. The
information regarding the beneficial ownership of Common Stock by the
Filing Parties is included herein in reliance on their report filed with
the SEC, except that the percentage of Common Stock beneficially owned is
based upon YSI's calculations made in reliance upon the number of shares
of Common Stock reported to be beneficially owned by such persons in such
report and the number of shares of Common Stock issued and outstanding as
of December 31, 1998.
113
<PAGE>
(12) Based upon an Amendment No. 3 to Schedule 13D filed with the SEC on March
26, 1998 by HBK Investments L.P. ("Investments"), HBK Finance, L.P.
("Finance") and HBK Main Street Investments, L.P. ("Main Street"), HBK
Securities Ltd. ("Securities") owns $3,890,500 principal amount of YSI's
7% Convertible Subordinated Debentures due 2006 (the "Convertible
Debentures"), HBK Offshore Fund Ltd. ("Offshore") owns $1,635,000
principal amount of the Convertible Debentures, Finance owns $5,239,500
principal amount of the Convertible Debentures, and Main Street owns
$135,000 principal amount of the Convertible Debentures, all of which are
convertible into Common Stock. Assuming conversion of such Convertible
Debentures, Investments (pursuant to Investment Management Agreements
among the parties) will have sole voting power and sole dispositive power
with regard to the 443,221 shares issuable to Securities and Offshore;
Investments and Finance will have shared voting power and shared
dispositive power with regard to 420,281 shares issuable to Finance; and
Investments and Main Street will have shared voting power and shared
dispositive power with regard to 10,828 shares issuable to Main Street.
The information regarding the beneficial ownership of Common Stock (and
Convertible Debentures) by Investments, Finance and Main Street is
included herein in reliance on their report filed with the SEC, except
that the percentage of Common Stock beneficially owned is based upon YSI's
calculations made in reliance upon the number of shares of Common Stock
reported to be beneficially owned, assuming conversion of the Convertible
Debentures, by such persons in such report and the number of shares of
Common Stock issued and outstanding as of December 31, 1998.
(13) Based on a Schedule 13G filed with the SEC by J.P. Morgan & Co.
Incorporated ("J.P. Morgan") on February 13, 1998, J.P. Morgan has sole
voting power with regard to 489,200 shares and sole dispositive power with
regard to 625,700 shares. The information regarding the beneficial
ownership of Common Stock by J.P. Morgan is included herein in reliance on
its report filed with the SEC, except that the percentage of Common Stock
beneficially owned is based upon YSI's calculations made in reliance upon
the number of shares of Common Stock reported to be beneficially owned by
such person in such report and the number of shares of Common Stock issued
and outstanding as of December 31, 1998.
(14) Based on an Amendment No. 1 to Schedule 13G filed with the SEC on February
10, 1998 by Wellington Management Company, LLP ("WMC"), WMC is an
investment adviser registered under the Investment Advisers Act and a
parent holding company of Wellington Trust Company. WMC has shared voting
power with regard to 270,000 shares and shared dispositive power with
regard to 593,000 shares. The information regarding the beneficial
ownership of Common Stock by WMC is included herein in reliance on its
report filed with the SEC, except that the percentage of Common Stock
beneficially owned is based upon YSI's calculations made in reliance upon
the number of shares of Common Stock reported to be beneficially owned by
such person in such report and the number of shares of Common Stock issued
and outstanding as of December 31, 1998.
114
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
CSC and YSI file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information that the companies file at the SEC's public reference
rooms at 450 Fifth Street, N.W., Washington, D.C., 20549, 7 World Trade Center
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. CSC and YSI public filings are also
available to the public from commercial document retrieval services and at the
Internet World Wide Web site maintained by the SEC at "http:// www.sec.gov."
CSC has filed the registration statement to register with the SEC the shares
of CSC common stock to be issued to YSI stockholders in the merger. This joint
proxy statement/prospectus is a part of the registration statement and
constitutes a prospectus of CSC, a proxy statement of CSC for the CSC special
meeting and a proxy statement of YSI for the YSI special meeting.
As allowed by SEC rules, this joint proxy statement/prospectus does not
contain all the information that stockholders can find in the registration
statement or the exhibits to the registration statement.
CSC has supplied all information contained in this joint proxy
statement/prospectus relating to CSC, and YSI has supplied all such information
relating to YSI.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote your shares at the CSC special meeting and/or YSI
special meeting. CSC and YSI have not authorized anyone to provide you with
information that is different from what is contained in this joint proxy
statement/prospectus. This joint proxy statement/prospectus is dated ,
1999. You should not assume that the information contained in the joint proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement/prospectus to stockholders
nor the issuance of CSC's securities in the merger shall create any implication
to the contrary.
115
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the proposed composition of the Board of
Directors and executive officers of CSC following the Effective Time of the
merger:
<TABLE>
<CAPTION>
Name Age Position with CSC
- ---- --- -----------------
<S> <C> <C>
James F. Slattery....... 49 President, Chief Executive Officer and Chairman of the Board
Michael C. Garretson.... 51 Executive Vice President, Chief Operating Officer
Ira M. Cotler........... 35 Executive Vice President, Chief Financial Officer
Aaron Speisman.......... 50 Executive Vice President, Secretary and Director
Richard P. Staley....... 66 Senior Vice President and Director
Stuart M. Gerson(1)..... 54 Director
Shimmie Horn............ 26 Director
Bobbie L. Huskey........ 50 Director Nominee
Melvin T. Stith(1)...... 51 Director
</TABLE>
- --------
(1) Member of Audit, Compensation and Stock Option Committees.
James F. Slattery co-founded CSC in October 1987 and has been its President,
Chief Executive Officer and a director since CSC's inception and Chairman since
August 1994. Prior to co-founding CSC, Mr. Slattery had been a managing partner
of Merco Properties, Inc., a hotel operation company, Vice President of Coastal
Investment Group, a real estate development company, and had held several
management positions with the Sheraton Hotel Corporation.
Michael C. Garretson joined the Company in August 1994 as its Vice President
of Business Development. In October 1995, he became the Director of Planning
and Economic Development for the City of Jacksonville, Florida and served in
such position until rejoining the Company in January 1996, during which period
he also acted as a consultant to the company. Mr. Garretson was elected
Executive Vice President and Chief Operating Officer in March 1996. From
September 1993 to August 1994, Mr. Garretson was Senior Vice President of
Wackenhut and from August 1990 to August 1993 was Director of Area Development
for Euro Disney S.C.A., the operator of a European theme park.
Ira M. Cotler was elected Chief Financial Officer in January, 1998. He had
served as the Company's Executive Vice President-Finance since joining CSC in
March 1996. Prior to joining the Company, from June 1989 to February 1996, Mr.
Cotler was employed by Janney Montgomery Scott Inc., an investment banking
firm, serving in several capacities, most recently as Vice President of
Corporate Finance.
Aaron Speisman co-founded CSC in October 1987 and has been its Executive
Vice President, Secretary and a director since CSC's inception. From October
1987 to March 1994, Mr. Speisman also served as Chief Financial Officer of CSC.
Since June 1, 1996, Mr. Speisman has been employed by CSC on a part-time basis.
Richard P. Staley has served as CSC's Senior Vice President of Operations
since November 1988 and as a director since May 1994. From 1984 to 1987, Mr.
Staley was the Evaluation and Compliance Director for Corrections Corporation
of America and from 1953 to 1983, held various positions with the United States
Department of Justice, Immigration and Naturalization Service. Mr. Staley is a
certified American Correctional Association standards auditor for jail and
detention facilities.
Stuart M. Gerson was elected a director of CSC in June 1994. Since March
1993, Mr. Gerson has been a member of the law firm of Epstein Becker & Green,
P.C. From January 1993 to March 1993, he was acting Attorney General of the
United States. From January 1989 to January 1993, Mr. Gerson was the Assistant
U.S. Attorney General for the Civil Division of the Department of Justice.
116
<PAGE>
Shimmie Horn was elected a director of CSC in June 1996. Mr. Horn is
President of Iroquois Properties, Inc. a real estate holding company. Mr. Horn,
received a B.A. degree in Economics from Yeshiva College in 1993, and graduated
from the Benjamin Cardozo School of Law in 1996. He is the son of the late
Morris Horn, the former Chairman and a founder of CSC.
Bobbie L. Huskey was appointed a director of YSI in June 1997 and elected to
a full term in 1998. The CSC Board has elected Ms. Husky to the CSC Board,
subject to and upon the completion of the Merger. She has 27 years experience
in corrections and has been president of Huskey & Associates since 1984. Mrs.
Huskey specializes in juvenile justice planning and facilities and program
development. She has led more than 60 needs assessments and planning studies in
20 states. She has hands-on experience in juvenile justice facilities, having
worked with delinquent girls in a treatment facility in Kentucky and has served
in executive leadership positions in corrections agencies in Virginia, Indiana
and Chicago. She has held every elective office in the American Correctional
Association, including president, and was a member of the association's
executive committee for 12 years. Ms. Huskey has authored numerous articles and
appeared on national news programs discussing corrections and juvenile justice
issues. She has won national awards including the E.R. Cass Award for
outstanding achievement in the correctional field.
Melvin T. Stith was elected a director of CSC in November 1994. Since July
1991, Mr. Stith has been Dean of the Florida State University College of
Business. From December 1989 to July 1991, Mr. Stith was Chairman of the
Marketing Department of the Florida State University College of Business where
he was also a Professor. Mr. Stith is also a director of Sprint and United
Telephone of Florida.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. There are no
family relationships between any of the directors, executive officers or
persons nominated or chosen by CSC to become directors or executive officers.
CSC's officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
Committees of the Board of Directors
The Board of Directors has an audit committee, a compensation committee and
a stock option committee. The Board of Directors does not have a nominating
committee or a committee performing the functions of a nominating committee.
The members of the Audit Committee are Melvin T. Stith and Stuart M. Gerson.
The Audit Committee held one meeting during the year ended December 31, 1997
and acted only by unanimous consent. The functions of the Audit Committee are
to recommend annually to the Board of Directors the appointment of CSC's
independent public accountants, discuss and review the scope and the fees of
the prospective annual audit and review the results thereof with the
independent public accountants, review and approve non-audit services of the
independent public accountants, review compliance with existing major
accounting and financial policies of CSC, review the adequacy of the financial
organization of CSC and review management's procedures and policies relative to
the adequacy of CSC's internal accounting controls.
Messrs. Stith and Gerson also serve on the Stock Option and Compensation
Committees. The Compensation Committee held one meeting during the year ended
December 31, 1997 and the Stock Option Committee acted four times by unanimous
written consent during the year ended December 31, 1997. The function of the
Compensation Committee is to determine the compensation of CSC's executives.
The Stock Option Committee administers CSC's stock option plans and awards
stock options.
Directors Compensation
Employee-directors of CSC receive no compensation for serving on the Board
of Directors other than reimbursement of expenses incurred in attending
meetings. Non-employee directors elected or appointed to the CSC Board of
Directors are paid an annual directors' fee of $5,000 plus $500 for each Board
meeting attended
117
<PAGE>
and $250 for each committee meeting attended. In addition, all non-employee
directors participate in CSC's 1994 Non-Employee Director Stock Option Plan and
are reimbursed for expenses incurred in attending meetings.
Pursuant to the YSI 1998 Director Stock Option Plan, Bobbie L. Huskey
received options to purchase 11,877 shares of YSI common stock on February 9,
1998 and options to purchase 7,500 shares of YSI common stock on January 1,
1999. In addition, as a non-employee director of YSI, Ms. Huskey received a
fee, payable in stock, of $15,000 per year, paid in quarterly installments,
plus $500 for attendance at each meeting of the Board.
Indemnification
CSC's By-Laws provide that CSC shall indemnify each director and such
officers, employees and agents as the Board of Directors shall determine from
time to time to the fullest extent provided by the laws of the State of
Delaware.
CSC carries insurance providing indemnification, under certain
circumstances, to all of CSC's directors and officers for claims against them
by reason of, among other things, any act or failure to act in their capacities
as directors or officers. The current annual premium for this insurance is
approximately $73,000, all of which is paid by CSC. To date, no sums have been
paid to any past or present director or officer of CSC under this or any prior
indemnification insurance policy.
CSC has also entered into Indemnity Agreements with all of its directors and
executive officers. The Indemnity Agreements provide that CSC will pay any
costs which an indemnitee actually and reasonably incurs because of the claims
made against him by reason of the fact that he is or was a director or officer
of CSC, except that CSC is not obligated to make any payment which CSC is
prohibited by law from paying as indemnity, or where:
. a final determination is rendered on a claim based upon the indemnitee's
obtaining a personal profit or advantage to which he was not legally
entitled;
. a final determination is rendered on a claim for an accounting of profits
made in connection with a violation of Section 16(b) of the Securities
Exchange Act of 1934, or similar state or common law provisions;
. a claim where the indemnitee was adjudged to be deliberately dishonest; or
. a final determination is rendered that indemnification is not lawful.
Executive Compensation
The following table sets forth the compensation paid or accrued by CSC
during the three fiscal years ended December 31, 1998, 1997 and 1996 to CSC's
Chief Executive Officer and to CSC's executive officers whose total cash
compensation at the end of 1998 exceeded $100,000 for that year (the "Named
Executives"):
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Number of
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Year ($) ($) ($)(1) Options (2)
Position ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery 1998 260,519 200,000 11,815 150,000 18,365
Chairman, Chief 1997 208,373 200,000 17,988 0 27,270
Executive Officer 1996 208,685 0 19,984 0 20,139
and President
Michael Garretson(3) 1998 128,814 75,000 12,000(3) 0 292
Executive Vice
President 1997 118,834 75,000 12,000(3) 0 288
1996 112,406 507 12,000(3) 100,000 0
Ira Cotler 1998 141,431 75,000 6,000 25,000 67
Executive Vice
President, 1997 135,115 75,000 6,000 0 54
Chief Financial
Officer 1996 107,261 507 50,396(4) 100,000 0
</TABLE>
- --------
(1) Consists of car lease payments.
(2) Consists of life insurance premiums.
(3) Also includes housing allowance.
(4) Also includes relocation and related costs.
In addition to the compensation described above, for 1995, Mr. Slattery
received S corporation distributions of $134,400.
The following table sets forth information relating to options granted to
executive officers named in the Summary Compensation Table during CSC's fiscal
year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Annual Rates
of Stock Price
Appreciation For
Individual Grants Option Term
- ------------------------------------------------------------------ --------------------
Percent Of
Total
Number Of Options Exercise
Securities Granted to Of
Underlying Employees Base
Options In Fiscal Price Expiration
Name Granted Year ($/Sb) Date 5% ($) 10% ($)
---- ---------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James F. Slattery....... 150,000 63.1% $13.00 2/17/03 $538,749 $1,190,494
</TABLE>
Options become exercisable at the annual rate of 33% of the underlying
shares, commencing one year after the date of grant.
The following table sets forth the value of unexercised stock options held
by the Named Executives. No options were exercised by the Named Executives in
1998.
Option Values at December 31, 1998
<TABLE>
<CAPTION>
Number of Shares Underlying Value of In-The-Money
Options at Year End Options at Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------------------- -------------------------
<S> <C> <C>
James F. Slattery......... 18,125/150,000 $ 60,624/$0
Mike Garretson............ 90,000/0 $ 314,550/$0
Ira Cotler................ 100,000/25,000 $349,500/$18,750
</TABLE>
119
<PAGE>
Employment Agreements
CSC has entered into an employment agreement with Mr. Slattery which expires
February 17, 2001 and provides for minimum annual compensation of $270,000,
cost of living increases, use of an automobile, reimbursement of business
expenses, health insurance, related benefits and a bonus equal to 5% of pre-tax
profits in excess of $1,000,000, such bonus not to exceed $200,000.
Since June 1, 1996, Mr. Speisman has been employed under an agreement which
provides for Mr. Speisman's employment on a part-time basis at an annual salary
of $35,000.
CSC has entered into an employment agreement with Mr. Garretson which
expired January 20, 1999 and provided for minimum annual compensation of
$115,000, annual salary increases, automobile allowances, reimbursement of
business expenses, health or disability insurance, related benefits, a bonus
equal to 3% of pre-tax profits in excess of $1,000,000, such bonus not to
exceed $75,000, and a grant of options to purchase 100,000 shares of CSC common
stock. CSC is currently negotiating a new employment agreement with Mr.
Garretson.
CSC's current employment agreement with Mr. Cotler was extended in July 1997
and has a term of three years with automatic annual renewal provisions. Mr.
Cotler receives minimum annual compensation of $135,000, annual salary
increases, automobile allowances and a bonus equal to 3% of pre-tax profits in
excess of $1,000,000, such bonus not to exceed $75,000. The agreement provides
for the negotiation of Mr. Cotler's annual base salary for the period after
February 24, 1999 at an amount not less than $149,000. In January 1999, as part
of the renegotiation of compensation for the period commencing February 26,
1999, CSC granted Mr. Cotler five year options to purchase 25,000 shares of CSC
common stock at $11.125 per share. These options become exercisable at the
annual rate of 8,333 shares, commencing the date of grant.
In determining the bonuses payable to Messrs. Slattery, Garretson and
Cotler, the calculation of pre-tax profits for 1998 does not give effect to the
early adoption of SOP 98-5.
In October 1989, a subsidiary of CSC entered into an employment agreement
with William Banks. Under this agreement, Mr. Banks was responsible for
developing and implementing community relations projects on behalf of CSC and
for acting as a liaison between CSC and local community and civic groups who
may have concerns about CSC's facilities being established in their
communities, and with government officials throughout the State of New York. As
compensation, Mr. Banks received 3% of the gross revenue from all Federal
Bureau of Prisons, state and local correctional agency contracts within the
State of New York with a guaranteed minimum monthly income of $4,500. In
December 1993, Mr. Banks agreed to become a consultant to CSC upon the same
terms and conditions in order to accurately reflect the level and nature of the
services he provided. In 1996 and 1997, Mr. Banks earned approximately $296,000
and $239,000, respectively.
Key Employees
James Irving is CSC's Vice President, Juvenile Justice Division brings
thirty years of management experience in juvenile justice and corrections
programs to CSC. During his tenure with the Illinois Department of Corrections,
Irving served as Deputy Director for the Juvenile Division for ten years. He
was responsible for 1,400 youths housed in seven institutions ranging from
minimum to maximum security as well as eight parole offices serving an
additional 1,500 youths. As Chairman of the Parole Board, Mr. Irving oversaw
the parole hearings of 1,400 juveniles and 25,000 adults. Over the course of
his exemplary public service career Mr. Irving also served eight years as Chair
of the ACA Standards Committee, Vice Chair of the Commission on corrections,
President of the Illinois Corrections Association and was a member of the
Illinois Children's Commission.
Fred Bagley is CSC's Vice President, Adult Secure Facilities. His experience
in corrections management began during his distinguished career in the United
States Army where he served as Inspector General, Director of Operations, and
Deputy Commander of Criminal Investigation Command. In addition, Mr. Bagley
served as
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<PAGE>
Deputy Warden, for the U.S. Disciplinary Barracks, Fort Leavenworth, Kansas--a
1,400 bed maximum security prison; Warden of the U.S. Army Correctional
Activity Confinement Unit, Fort Riley, Kansas--a medium security facility for
300 inmates; and as Warden of a minimum security training facility-boot camp
for 250 inmates, also at Fort Riley. In his current position, he is responsible
for directing and managing the overall security and support operations of CSC
as well as providing training and oversight for CSC's corporate ethics program.
Franklin Johnson is CSC's Senior Vice President, Community Corrections and
has worked with CSC's principals since 1983. His specialties include the
management areas of social service delivery, community based offender
programming and community relations. Mr. Jackson has directed CSC's New York
area offender community corrections services since 1991. Mr. Jackson, in
addition to directing CSC's community corrections activities, serves as liaison
with the Federal Bureau of Prisons, the New York State Department of
Corrections and various community organizational groups.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CSC subleases a building located at 12-16 East 31st Street, New York, New
York from LeMarquis Operating Corp. ("LMOC"), a corporation owned 25% by Esther
Horn and 8% by James F. Slattery. CSC currently utilizes approximately fifty
percent of the building for the Manhattan Community Corrections and the New
York Community Corrections programs. LMOC leases this building from an
unaffiliated party at a current base monthly rental of approximately $16,074,
plus taxes, currently approximately $14,000, and water and sewer charges,
currently approximately $3,500, for a total monthly rental of approximately
$33,000. CSC has the right to use as much of the building as it requires for
its business subject to the rights of certain residential subtenants to remain
in the building. These rights include the right to housing at a predetermined
rental for an indefinite period of time pursuant to New York State rent
stabilization laws.
As a result of lease negotiations, under a sublease dated as of January 1,
1994, since May 1, 1995, CSC has paid rent of $18,000 per month above the rent
paid by LMOC to the building's owner for a total monthly rent of approximately
$51,420. CSC has, to date, invested $739,000 in leasehold improvements and will
not receive any credit, in terms of a reduction in rent or otherwise, for these
improvements. The terms of this sublease were not negotiated at arm's length
due to the relationship of Mrs. Horn and Mr. Slattery with both CSC and LMOC.
The negotiation of the sublease, including the renewal terms, was requested by
the Representative of the Underwriters of CSC's February 2, 1994 initial public
offering to substantially track the renewal terms of CSC's management contract.
The negotiations were not subject to the board resolution, adopted subsequent
to the negotiations, relating to affiliated transactions, as described below,
although the terms were approved by all of the directors. The initial term of
CSC's sublease expired April 30, 1995, and is currently in its first renewal
term expiring April 30, 2000. The sublease contains two additional successive
five-year renewal options beginning May 1, 2000. The monthly rent above the
rent paid by LMOC to the building's owner will increase to $22,000 per month
during the second renewal term beginning May 1, 2000 and to $26,000 per month
during the third renewal term beginning May 1, 2005. CSC paid $40,000 to LMOC
for the renewal options. These renewal options were separately negotiated
between the Board of Directors of CSC and LMOC. Mr. Slattery participated in
such negotiations. Mrs. Horn and Mr. Slattery will receive their proportionate
shares of rents received by LMOC under the terms of this sublease.
Previously, residential and commercial tenants of this building paid rent to
LeMarquis Enterprises Corp. ("Enterprises"), a company owned 30% by Mrs. Horn,
28% by Mr. Slattery and 25% by Mr. Speisman, and Enterprises paid all expenses
of operating the residential and commercial portions of the building as well as
a portion of the overall expenses of the building. As of February 1994,
however, all of the building's revenues, including rent from the residential
and commercial tenants are now received and expenses paid by CSC. The revenue
from this portion of the building was approximately $193,000 in 1996 and
$184,000 in 1997. CSC anticipates that operating the portion of the building
occupied by residential and commercial tenants will result in a net expense to
CSC of approximately $6,500 per month. Due to New York rent stabilization laws,
CSC is unable to increase the rent paid by the residential tenants in this
building in response to increased rent or expenses incurred by CSC.
CSC leases the entire building located at 988 Myrtle Avenue, Brooklyn, New
York from Myrtle Avenue Family Center, Inc. ("MAFC") pursuant to a lease which
commenced January 1, 1999 and expires December 31, 2003. The lease establishes
a monthly rental of $40,000 and contains two five-year renewal options. The
monthly rental for the first 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, CSC pays taxes, insurance, repairs and maintenance on
this building. MAFC is a corporation owned by Mrs. Horn (27.5%) and Messrs.
Slattery (8%) and Speisman (27.5%). The terms of the lease were not negotiated
at arm's length due to their relationship with MAFC and CSC. Messrs. Slattery
and Speisman participated in such negotiations.
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CSC leases a building located at 2534 Creston Avenue, Bronx, New York from
Creston Realty Associates, L.P. ("CRA"), a corporation owned 10% by Esther
Horn. The lease term is two years commencing October 1, 1996 and has three
additional one year option periods. CSC also pays a base rent of $180,000 per
year which will escalate five percent per year for each of the three year
options if they are exercised. CSC pays taxes, insurance, repairs and
maintenance on this building which will be used to house a community
correctional center. The terms of this lease were not negotiated at arm's
length due to the relationship between CSC, Ms. Horn and CRA.
Stuart M. Gerson, a director of CSC, is a member of Epstein Becker & Green
P.C., CSC's legal counsel. Epstein Becker & Green P.C. will render an opinion
with respect to the validity of the CSC common stock and to the federal income
tax consequences of the merger and has received fees for legal services
rendered to CSC during the last fiscal year.
Pursuant to the terms of a CSC Board resolution adopted in connection with
CSC's initial public offering, all transactions between CSC and any of its
officers, directors or affiliates (except for wholly-owned subsidiaries) must
be approved by a majority of the unaffiliated members of the Board of Directors
and be on terms no less favorable to CSC than could be obtained from
unaffiliated third parties and be in connection with bona fide business
purposes of CSC. In the event CSC makes a loan to an individual affiliate
(other than a short-term advance for travel, business expense, relocation or
similar ordinary operating expenditure), such loan must be approved by a
majority of the unaffiliated directors.
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DESCRIPTION OF CSC COMMON STOCK FOLLOWING THE MERGER
Upon consummation of the merger, the articles of incorporation of the merger
subsidiary will become the articles of incorporation of the surviving
corporation and CSC will issue shares of common stock to holders of YSI common
stock. The shares of YSI common stock outstanding prior to the merger will
automatically become shares of CSC and are referred to in this section as CSC
common stock.
CSC Common Stock
The CSC certificate of incorporation currently authorizes the issuance of
30,000,000 shares of CSC common stock. On the record date, there were shares
of CSC common stock issued and outstanding.
CSC is expected to issue approximately 43 million shares of CSC common stock
to holders of YSI common stock in the merger. Based upon such number and the
number of shares of CSC common stock outstanding on the record date, there
would be approximately million shares of CSC common stock outstanding
immediately following consummation of the merger and transactions contemplated
thereby.
Holders of shares of CSC common stock will be entitled to one vote per share
for the election of directors and for all other matters to be voted on
generally by the stockholders. Holders of shares of CSC common stock have equal
rights to participate in dividends when declared and, in the event of
liquidation, in the net assets of CSC available for distribution to
stockholders.
The shares of CSC common stock, when issued to holders of outstanding shares
of YSI common stock in connection with the merger, will be duly authorized,
validly issued, fully paid and non-assessable. The holders of shares of CSC
common stock have no preemptive rights or preferential rights of subscription
for any shares of CSC common stock or other securities of CSC.
American Stock Transfer & Trust Company is the transfer agent and registrar
for the CSC common stock.
Nasdaq National Market Matters
It is a condition to the consummation of the merger that the shares of CSC
common stock that will be issued in connection with the merger and upon
exercise of certain former YSI employee stock options which shall be converted
into options to purchase CSC common stock be authorized for listing on the
Nasdaq National Market, subject to official notice of issuance. Application has
been made to list the CSC common stock to be issued in the merger or upon
exercise of stock options as described above on the Nasdaq National Market,
subject to official notice of issuance. If the merger is consummated, the YSI
common stock which is currently listed on Nasdaq National Market will cease to
be listed.
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COMPARISON OF RIGHTS OF HOLDERS
OF YSI COMMON STOCK AND CSC COMMON STOCK
YSI is organized under the laws of the State of Maryland and CSC is
organized under the laws of the State of Delaware. The following discussion
summarizes certain material differences between the YSI articles of
incorporation and YSI by-laws and the CSC certificate of incorporation and CSC
by-laws and between certain provisions of the Maryland General Corporation Law
and the Delaware General Corporation Law affecting stockholders' rights. This
summary of the comparative rights of the stockholders of YSI and the
stockholders of CSC does not purport to be complete and is subject to and
qualified in its entirety by reference to the MGCL and the DGCL and also to the
YSI articles of incorporation, YSI by-laws, CSC certificate of incorporation
and CSC by-laws. Copies of the YSI articles of incorporation, YSI by-laws, CSC
certificate of incorporation and CSC by-laws, are available for inspection at
the principal executive offices of CSC and copies will be sent to holders of
YSI common stock upon request.
Number of Directors
Under the YSI by-laws, the number of directors of YSI is determined by the
vote of two-thirds of the entire Board of Directors provided, however, that the
number of directors shall not be less than three nor more than 11. There are
currently five directors serving on the YSI Board of Directors.
Under the CSC by-laws, the CSC Board of Directors shall never be less than
one nor more than 12. There are currently six directors serving on the CSC
Board of Directors.
Removal of Directors
Under the MGCL, except as otherwise provided in a corporation's articles of
incorporation, the stockholders generally may remove any director, with or
without cause, by the vote of a majority of all the votes entitled to be cast
in the election of the directors. The YSI by-laws provide that the
stockholders, by vote of the holders of a majority of the votes cast, in person
or by proxy, may remove with or without cause any director or directors from
office.
Under the DGCL, the affirmative vote of a majority of the shares entitled to
vote for the election of directors is required to remove directors, with or
without cause, except that whenever the holders of a class or series are
entitled to elect one or more directors by the certificate of incorporation,
then with respect to the removal without cause of a director or directors so
elected, the vote of the holders of the outstanding shares of that class or
series and not the vote of the outstanding shares as a whole shall be required.
The CSC by-laws provide that the affirmative vote of the majority of the votes
cast by the holders of shares entitled to vote for the election of CSC
directors is required to remove a director with cause.
Filling Vacancies on the Board of Directors
Under the MGCL, stockholders may elect a successor to fill a vacancy on the
board of directors which results from the removal of a director. A director
elected by the stockholders to fill a vacancy which results from the removal of
a director serves for the balance of the term of the removed director.
Otherwise, the MGCL provides that a majority of the remaining directors may
fill a vacancy, unless it results from an increase in the size of the board.
Any vacancy resulting from an increase in the number of directors may be filled
by a majority of the entire board. A director elected by the board of directors
to fill a vacancy serves until the next annual meeting of stockholders and
until his successor is elected and qualified. There is no provision in the MGCL
providing for the filling of vacancies on the board of directors by Maryland
courts. The YSI by-laws contain substantially the same provisions with respect
to the filling of vacancies of the YSI Board of Directors as the provisions of
the MGCL.
The DGCL provides that vacancies and newly created directorships may be
filled by a majority of the directors then in office or a sole remaining
director, even though less than quorum, unless otherwise provided
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in the certificate of incorporation or by-laws. However, the DGCL also provides
that if the directors then in office constitute less than a majority of the
corporation's whole board of directors, as constituted prior to any such
increase, then, upon application by stockholders representing at least 10% of
outstanding shares entitled to vote for such directors, the Court of Chancery
may order a stockholder election of directors to be held. The CSC by-laws
provide substantially the same provisions with respect to the filling of
vacancies of the CSC Board of Directors as the provisions of the DGCL.
Interested Director Transactions
Under both the MGCL and the DGCL, certain contracts or transactions in which
one or more of a corporation's directors has an interest are not void or
voidable solely because of such interest if such contract or transaction (a) is
ratified by the stockholders (as set forth below) or a majority of
disinterested members of the board of directors or a committee thereof if the
material facts are disclosed or known thereto, or (b) was fair (and under the
MGCL, reasonable) to the corporation at the time it was approved. Under the
MGCL, any ratification of such a contract or transaction by the stockholders
must be made by a majority of the disinterested stockholders. Under the DGCL,
any ratification of such a contract or transaction by the stockholders must be
made by a majority of all stockholders in good faith excluding the vote of
shares held by the interested stockholder.
Amendment to Certificate of Incorporation
Under the MGCL, the affirmative vote of at least two-thirds of the votes
entitled to be cast on the matter is required to amend a corporation's articles
of incorporation; the articles of incorporation of the corporation, however,
may provide for a greater or lesser proportion of the votes entitled to be cast
to approve an amendment to the articles of incorporation as long as the vote is
not less than a majority of the votes entitled to be cast. YSI's articles of
incorporation provide for a majority of the votes entitled to be cast to
approve amendments to YSI's articles of incorporation.
Under the DGCL, the affirmative vote of a majority of the outstanding shares
entitled to vote is required to amend a corporation's certificate of
incorporation. Under the DGCL, the holders of the outstanding shares of a class
shall be entitled to vote as a class upon a proposed amendment, whether or not
entitled to vote thereon by the certificate of incorporation, if the amendment
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or alter
or change the powers, preferences, or special rights of the shares of such
class so as to affect them adversely. If any proposed amendment would alter or
change the powers, preferences, or special rights of one or more series of any
class so as to affect them adversely, but shall not so affect the entire class,
then only the shares of the series so affected by the amendment shall be
considered a separate class for the purposes of this provision.
The YSI articles of incorporation provide that YSI reserves the right to
make, from time to time, any amendments of its articles of incorporation which
may now or hereafter be authorized by law, including any amendments which alter
the contract rights of any class of outstanding stock as expressly set forth in
the articles of incorporation.
The CSC certificate of incorporation provides that the CSC certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws.
Amendment of By-laws
Under the MGCL, the power to adopt, amend, or repeal a corporation's by-laws
is vested in the corporation's stockholders, except to the extent the
corporation's by-laws grant such power to the board of directors. The YSI by-
laws provide that the by-laws may be added to, altered, amended, repealed or
suspended
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by a vote of a majority of the YSI Board of Directors at any regular meeting of
the Board or at any special meeting called for that purpose.
Under the DGCL, a corporation's by-laws may be amended by the action of the
stockholders and, if so provided in the certificate of incorporation, the
directors. The CSC certificate of incorporation provides that the CSC by-laws
may be amended, altered, or repealed by the affirmative vote of a majority of
the CSC Board of Directors or the stockholders at any regular or special
meeting of Directors; provided, however, that any provision for the
classification of directors of the corporation for staggered terms pursuant to
the provisions of subsection (d) of Section 141 of the DGCL shall be set forth
in an initial by-law or in a by-law adopted by the stockholders entitled to
vote.
Stockholder Meetings and Provisions for Notices; Proxies
Under the MGCL and the DGCL, stockholder meetings may be held at any place,
as provided in the bylaws. However, the MGCL requires the meetings to be held
in the United States. The DGCL has no such requirement. Under both the MGCL and
the DGCL, written notice of a stockholders meeting must state the place, date,
and time of the meeting, and for a special meeting, the purpose or purposes for
which the meeting is to be held.
Under the YSI by-laws, written notice of every meeting of the stockholders,
stating the place, day and hour of the meeting and, for special meetings, the
purpose or purposes for which the meeting is called, will be given not less
than 10 nor more than 90 days before the date of the meeting to each
stockholder of record entitled to vote at such meeting. Upon the request in
writing delivered to the Secretary by the stockholders entitled to cast at
least 25% of all the votes entitled to be cast at the meeting, it shall be the
duty of the Secretary to call forthwith a special meeting of the stockholders.
The CSC by-laws provide that written notice of every meeting of the
stockholders, stating the place and hour of the meeting and purpose or purposes
for which the meeting is called, will be given not less than 10 nor more than
60 calendar days before the date of the meeting to each stockholder of record
entitled to vote at such meeting. Special meetings of the stockholders may be
called by the President or the Board of Directors of CSC.
Under the MGCL, proxies are valid for 11 months from their date, unless the
proxy otherwise provides. Under the DGCL, however, stockholder proxies are
valid for three years from their date unless the proxy provides for a longer
period.
Voting by Stockholders
The YSI by-laws provide that each stockholder shall be entitled to one vote
for each share of stock of YSI registered in his or her name upon the books of
YSI on the date the Board of Directors may fix as the date of record for the
determination of stockholders entitled to vote at such meeting.
The DGCL provides that holders of CSC common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders.
Stockholder Action Without a Meeting
Under the MGCL, stockholders may act by written consent only if all
stockholders entitled to vote on the matter that is the subject of the written
consent sign the consent. Under the DGCL, unless otherwise provided in the
certificate of incorporation, actions may be taken by the stockholders of a
Delaware corporation by written consent, provided that the written consent is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take the action at a
meeting at which all shares entitled to vote on the matter were present and
voted. The CSC by-laws provide that stockholder actions may be taken by written
consent of the stockholders which constitutes the minimum
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number of votes necessary to authorize such action at a meeting at which all
stockholders entitled to vote thereon were present and voting.
Business Combinations
Under the MGCL, certain "business combinations," including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities, between a Maryland
corporation and
(i) any person who beneficially owns 10% or more of the voting power of the
corporation's outstanding voting stock,
(ii) an interested stockholder which means an affiliate of such corporation
who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power
of the corporation's outstanding voting stock of the corporation, or
(iii) any affiliate of an interested stockholder,
are prohibited for five years after the most recent date on which the
interested stockholder became an interested stockholder, and thereafter must be
recommended by the board of directors of the Maryland corporation and approved
by the affirmative vote of at least (a) 80% of the votes entitled to be cast by
holders of its outstanding voting shares, and (b) two-thirds of the votes
entitled to be cast by holders of such outstanding voting shares, other than
shares held by the interested stockholder with whom, or with whose affiliate,
the business combination is to be effected unless, among other conditions, the
corporation's stockholders receive a minimum price, as defined in the MGCL, for
their shares and the consideration is received in cash or in the same form as
previously paid by the interested stockholder for its shares. These provisions
of the MGCL do not apply to business combinations that are approved or exempted
by the board of directors of the corporation prior to the time that the
interested stockholder becomes an interested stockholder.
The YSI Board exempted Gilder, Gagnon, Howe & Co. and its affiliates, to the
extent any of them should become an interested stockholder, from the
prohibitions of this law.
CSC is subject to the provisions of Section 203 of the DGCL. In general,
Section 203 prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the time at which such person became an interested stockholder
unless:
(i) prior to such time, the board of directors approved either the business
combination or the transaction in which the stockholder became an
interested stockholder; or
(ii) upon becoming an interested stockholder, the stockholder owned at
least 85% of the corporation's outstanding voting stock other than
shares held by directors who are also officers and certain employee
benefit plans; or
(iii) the business combination is approved by both the board of directors
and by holders of at least 66 2/3% of the corporation's outstanding
voting stock at a meeting and not by written consent, excluding
shares owned by the interested stockholder.
For these purposes, the terms "business combination" includes mergers, asset
sales and other similar transactions with an "interested stockholder," and
"interested stockholder" means a person who, together with its affiliates and
associates, owns or, under certain circumstances, has owned within the prior
three years more than 15% of the outstanding voting stock of the corporation.
Affiliates and associates of an "interested stockholder" are also considered
"interested stockholders" for purposes of Section 203. Although Section 203
permits a corporation to elect not to be governed by its provisions in its
certificate of incorporation, CSC has not made this election.
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Gilder, Gagnon, Howe & Co. is an "interested stockholder" of CSC because it
"beneficially owns" for purposes of Section 203, more than 15% of the voting
stock of CSC. In addition, YSI is an "associate" of Gilder Gagnon, because
Gilder Gagnon "beneficially owns" more than 20% of the voting stock of YSI.
Accordingly, YSI also is deemed to be an "interested stockholder" of CSC. The
merger of a wholly owned subsidiary of CSC with YSI therefore constitutes a
"business combination" under Section 203. However, Section 203 does not apply
to the merger because the Board approved Gilder Gagnon's acquisition of more
than 15% of the voting stock of CSC prior to such acquisition.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power, except solely by
virtue of a revocable proxy, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third;
(ii) one-third or more but less than a majority; or
(iii) a majority of all voting power.
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions, including an undertaking to pay expenses
and delivery of an "acquiring person statement," may compel the corporation's
board of directors to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. If no request
for a meeting is made, the corporation may itself present the question at any
stockholders meeting.
Unless the charter or bylaws provide otherwise, which YSI's do not, if
voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement within 10 days following a control
share acquisition then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares, except those for which
voting rights have previously been approved, for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date
of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved.
Moreover, unless the articles or by-laws provide otherwise, which YSI's do not,
if voting rights for control shares are approved at a stockholders' meeting and
the acquiror becomes entitled to exercise or direct the exercise of a majority
or more of all voting power, other stockholders may exercise appraisal rights.
The fair value of the shares as determined for purposes of such appraisal
rights may not be less than the highest price per share paid by the acquiror in
the control share acquisition.
The control share acquisition does not apply to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation. YSI has not amended its charter to make it exempt from the
applicability of the control share provisions.
The DGCL does not have a comparable statutory provision.
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Appraisal Rights
Pursuant to Section 3-202 of the MGCL, holders of shares of YSI common stock
will not be entitled to appraisal rights under Maryland law with respect to the
merger, which would give them the right to obtain the payment of cash in
exchange for their securities as a result of the merger, because the shares
such holders own on the record date are listed on the Nasdaq National Market
and the consideration such holders will own after the merger will be shares of
CSC and cash in lieu of fractional shares.
Pursuant to Section 262 of the DGCL, holders of CSC common stock will not be
entitled to appraisal rights with respect to the merger because CSC is not one
of the two merging corporations.
Dividends
The MGCL permits a corporation, subject to any provision in its articles of
incorporation, to make a distribution, including dividends, redemptions or
stock repurchases, unless, after such distribution, the corporation would not
be able to pay its debts as they become due in the usual course of business or
the corporation's total assets would be less than the sum of its liabilities
plus, unless the articles of incorporation provide otherwise the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy liquidation preferences of stock senior to the stock
on which the distribution is proposed. For purposes of determining whether a
distribution is lawful, the corporation's assets may be based upon fair value
or any other method of valuation that is reasonable under the circumstances.
The DGCL permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, the DGCL generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation. However, it may
repurchase shares having a preference upon the distribution of any of its
assets or, if no shares entitled to a preference are outstanding, any of its
shares, if it retires such shares upon acquisition and reduces the
corporation's capital in connection therewith, and provided, that after any
reduction in capital made in connection with such retirement of shares, the
corporation's remaining assets are sufficient to pay any debts not otherwise
provided for.
Limitation of Liability and Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its articles of
incorporation a provision limiting the liability of its directors and officers
to the corporation and its stockholders for money damages except for liability
resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The YSI articles of
incorporation contain a provision eliminating such liability to the maximum
extent permitted by Maryland law.
The YSI by-laws authorize YSI to indemnify its currently acting and its
former directors, officers, agents and employees against any and all
liabilities incurred in connection with their services in such capacities to
the maximum extent permitted by Maryland law.
The MGCL requires a corporation, unless its articles of incorporation
provide otherwise, which the YSI articles of incorporation do not to indemnify
a director or officer who has been successful, on the merits or otherwise, in
the defense of any proceeding to which he is made a party by reason of his
service in that capacity. The MGCL permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason
of their service in those or other capacities unless it is established that
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(a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and
(i) was committed in bad faith, or
(ii) was the result of active and deliberate dishonesty,
(b) the director or officer actually received an improper personal benefit
in money, property or services, or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
However, under the MGCL, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only
for expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of
(a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for
indemnification by the corporation, and
(b) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it shall ultimately be determined
that the standard of conduct was not met.
The DGCL generally permits indemnification for expenses incurred in the
defense or settlement of third-party actions or action by or in right of the
corporation, and for judgments in third party actions, provided there is a
determination by directors who were not parties to the action, or if directed
by such directors, by independent legal counsel or by a majority vote of a
quorum of the stockholders, that the person seeking indemnification acted in
good faith and in a manner reasonably believed to be in, or not opposed to, the
best interests of the corporation, or in a criminal proceeding that the person
had no reason to believe his or her conduct to be unlawful. Without court
approval, however, no indemnification may be made in respect of any action by
or in right of the corporation in which such person is adjudged liable. The
DGCL states that the indemnification provided by statute shall not be deemed
exclusive of any rights under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise. In addition, the liability of officers
may not be eliminated or limited under Delaware law.
The CSC certificate of incorporation authorizes CSC to indemnify any and all
persons whom it may have power to indemnify, to the fullest extent permitted by
Delaware law.
Authorized Capital
YSI. The authorized capital stock of YSI consists of 70,000,000 shares of
YSI common stock, of which there were shares outstanding as of the record
date.
CSC. The authorized capital stock of CSC consists of 30,000,000 shares of
CSC common stock, of which there were shares outstanding as of the record
date, and 1,000,000 shares of CSC Preferred Stock, none of which was
outstanding as of the record date.
131
<PAGE>
EXPERTS
The consolidated financial statements and schedules of CSC as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, or included elsewhere in this joint proxy
statement/prospectus for the year ended December 31, 1997, have been audited by
Grant Thornton LLP, independent certified public accountants, as set forth in
their reports thereon included elsewhere herein. The consolidated financial
statements of CSC referred to above are included herein in reliance upon such
reports given upon the authority of said firms as experts in accounting and
auditing.
The consolidated financial statements and schedules of YSI and its
subsidiaries as of December 31, 1997 and 1996, and for the year ended December
31, 1997, the six months ended December 31, 1996 and each of the years ended
June 30, 1996, and 1995 in this joint proxy statement/prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein on reliance upon
the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the federal income tax consequences of
the merger will be passed upon for YSI by Hogan & Hartson L.L.P., YSI's outside
legal counsel. Certain legal matters with respect to the validity of the CSC
common stock and to the federal income tax consequences of the merger will be
passed upon for CSC by Epstein Becker & Green, P.C., CSC's outside legal
counsel. Stuart M. Gerson, a director of CSC, is a member of Epstein Becker &
Green, P.C. and members of the firm own in the aggregate, directly and
indirectly, 3,650 shares of CSC common stock and warrants and options to
purchase 66,155 shares of CSC common stock.
132
<PAGE>
CORRECTIONAL SERVICES CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Report of Independent Certified Public Accountants..................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........... F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995................................................... F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995................................................... F-6
Notes to Consolidated Financial Statements............................. F-7-22
Consolidated Balance Sheets as of September 30, 1988 and December 31,
1997 (unaudited)...................................................... F-23
Consolidated Statements of Income for the nine months ended September
30, 1998 and 1997 (unaudited)......................................... F-24
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited)............................... F-25
Notes to Consolidated Financial Statements (unaudited)................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Correctional Services Corporation
We have audited the accompanying consolidated balance sheets of Correctional
Services Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of CSC'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 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
March 11, 1998
F-2
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................ $ 5,216,106 $20,932,309
Restricted cash...................................... 60,626 --
Accounts receivable, net............................. 10,672,018 4,023,620
Receivable from sale of equipment and leasehold
improvements........................................ 1,380,000 1,476,000
Prepaid expenses and other........................... 964,576 2,001,973
----------- -----------
Total current assets.............................. 18,293,326 28,433,902
BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS--AT
COST, NET............................................ 23,717,172 12,040,149
LONG-TERM RECEIVABLE FROM SALE OF EQUIPMENT AND
LEASEHOLD IMPROVEMENTS............................... 879,082 2,031,882
OTHER ASSETS
Deferred development and start-up costs, net......... 8,043,380 5,817,959
Deferred income taxes................................ -- 1,495,000
Other................................................ 4,933,327 485,157
----------- -----------
$55,866,287 $50,304,049
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities............. $ 7,539,062 $ 4,873,542
Subordinated promissory notes........................ 3,935,760 --
Deferred tax liability............................... 125,000 --
Current portion of long-term debt.................... 1,800 --
----------- -----------
Total current liabilities......................... 11,601,622 4,873,542
LONG-TERM DEBT........................................ 321,491 --
LONG-TERM PORTION OF ACCRUED CLOSURE EXPENSES......... 755,000 1,606,000
SUBORDINATED PROMISSORY NOTES......................... -- 3,899,841
COMMITMENTS AND CONTINGENCIES......................... -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding............. -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 7,693,854 and 7,660,779 shares issued
and outstanding as of 1997 and 1996, respectively... 76,938 76,608
Additional paid-in capital........................... 42,260,247 42,022,593
Accumulated earnings (deficit)....................... 850,989 (2,174,535)
----------- -----------
43,188,174 39,924,666
----------- -----------
$55,866,287 $50,304,049
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Resident fees......................... $58,593,217 $30,866,162 $30,482,683
Other income.......................... 1,342,884 635,496 1,007,343
----------- ----------- -----------
59,936,101 31,501,658 31,490,026
----------- ----------- -----------
Expenses
Operating............................. 43,472,402 21,928,329 19,731,797
General and administrative............ 11,859,399 8,655,628 9,938,344
Facility closure costs................ -- 3,329,000 3,909,700
----------- ----------- -----------
55,331,801 33,912,957 33,579,841
----------- ----------- -----------
Operating income (loss)................. 4,604,300 (2,411,299) (2,089,815)
Interest income (expense)............... 444,077 (481,728) (699,576)
----------- ----------- -----------
Income (loss) before income taxes....... 5,048,377 (2,893,027) (2,789,391)
Income tax expense (benefit)............ 2,022,853 (1,025,000) (1,050,000)
----------- ----------- -----------
NET INCOME (LOSS)....................... $ 3,025,524 $(1,868,027) $(1,739,391)
=========== =========== ===========
Net earnings (loss) per common share:
Basic................................. $ 0.39 $ (0.32) $ (0.38)
Diluted............................... $ 0.37 $ (0.32) $ (0.38)
Number of shares used in per common
share computation:
Basic................................. 7,675,220 5,781,853 4,552,707
Diluted............................... 8,117,922 5,781,853 4,552,707
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit) Total
------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995...... $44,079 $ 5,616,456 $ 1,432,883 $ 7,093,418
Exercise of stock options....... 70 33,250 -- 33,320
Common stock issuance........... 4,968 3,464,730 -- 3,469,698
Issuance of warrants with
subordinated promissory notes.. -- 365,000 -- 365,000
Net loss........................ (1,739,391) (1,739,391)
------- ----------- ----------- -----------
Balance at December 31, 1995.... 49,117 9,479,436 (306,508) 9,222,045
Common stock issuance through
public offering................ 24,375 30,483,681 -- 30,508,056
Exercise of stock options....... 649 411,338 -- 411,987
Exercise of warrants............ 2,467 1,648,138 -- 1,650,605
Net loss........................ (1,868,027) (1,868,027)
------- ----------- ----------- -----------
Balance at December 31, 1996.... 76,608 42,022,593 (2,174,535) 39,924,666
Reduction in stock issuance
cost........................... -- 46,902 -- 46,902
Exercise of stock options....... 26 12,443 -- 12,469
Exercise of warrants............ 304 178,309 -- 178,613
Net income...................... -- -- 3,025,524 3,025,524
------- ----------- ----------- -----------
Balance at December 31, 1997.... $76,938 $42,260,247 $ 850,989 $43,188,174
======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 3,025,524 $(1,868,027) $(1,739,391)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 2,164,110 778,462 1,168,850
Amortization of subordinated note
discount............................. 88,515 173,247 50,695
Amortization of deferred loan costs... 250,836 243,258 127,568
Deferred income tax expense
(benefit)............................ 1,620,000 (375,000) (1,120,000)
Ft. Worth deferred development cost
writedown............................ -- 98,446 --
Ft. Worth and NYCC facilities asset
impairment........................... -- 564,050 --
New Jersey facility asset impairment.. -- -- 2,771,424
New Jersey deferred development costs
writedown............................ -- -- 416,201
Changes in operating assets and
liabilities:
Accounts receivable.................. (6,648,398) (649,391) 1,429,785
Refundable income taxes.............. 562,499 (650,000) --
Prepaid expenses and other current
assets.............................. 474,900 63,333 (774,644)
Accounts payable and accrued
liabilities......................... 2,643,283 377,877 895,650
Reserve for Ft. Worth and NYCC
facilities closure costs............ (828,763) 2,566,504 --
Reserve for New Jersey facility
closure costs....................... -- (300,000) --
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,352,506 1,022,759 3,226,138
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................... (12,648,961) (6,018,195) (6,110,693)
Development and start-up costs......... (3,409,590) (4,317,276) (1,824,268)
(Increase) decrease in restricted
cash--unexpended construction and
maintenance funds..................... (60,626) 750,000 (750,000)
----------- ----------- -----------
Net cash used in investing
activities......................... (16,119,177) (9,585,471) (8,684,961)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock................................. -- 30,508,056 3,469,698
Proceeds from long-term borrowing...... 325,000 -- 1,500,000
Payments on long-term borrowings....... (1,709) (4,000,000) (1,282,715)
Proceeds (payments) on short-term debt,
net................................... -- (1,221,022) 218,333
Issuance of subordinated notes and
warrants.............................. -- -- 5,676,600
Proceeds from sale of equipment and
leasehold improvements................ 1,248,800 -- --
Debt issuance costs.................... (100,000) -- (652,101)
Net proceeds from exercise of stock
options and warrants.................. 185,388 426,890 33,320
Long-term portion of prepaid lease..... (4,335,482) -- --
Other assets........................... (271,529) 24,349 (56,010)
----------- ----------- -----------
Net cash provided by (used in)
financing activities............... (2,949,532) 25,738,273 8,907,125
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (15,716,203) 17,175,561 3,448,302
Cash and cash equivalents at beginning
of period.............................. 20,932,309 3,756,748 308,446
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 5,216,106 $20,932,309 $ 3,756,748
=========== =========== ===========
Supplemental disclosures of cash flows
information:
Cash paid (refunded) during the period
for:
Interest............................... $ 436,178 $ 883,900 $ 602,700
=========== =========== ===========
Income taxes, net...................... $ (211,609) $ (2,200) $ 789,500
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Correctional Services Corporation and subsidiaries operate and manage
detention and correctional facilities for federal, state and local government
agencies. On August 1, 1996, CSC's certificate of incorporation was amended to
change the name of CSC to Correctional Services Corporation from Esmor
Correctional Services Inc., and increased the number of authorized shares of
Common Stock from 10,000,000 to 30,000,000 shares.
1. Principles of Consolidation
The consolidated financial statements as of December 31, 1996 include the
accounts of CSC and its wholly-owned subsidiaries, Esmor, Inc., Correctional
Services 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.
("CSC"). As of December 31, 1996 all of the aforementioned subsidiaries (except
Esmor, Inc. and Esmor New Jersey, Inc.) were merged into CSC. An additional
corporation, CSC Management de Puerto Rico, Inc., was added to CSC's
consolidated group as of July 1, 1997. All significant intercompany balances
and transactions have been eliminated.
2. Use of Estimates in Consolidated Financial Statements
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For
discussion of the realization of Receivable from Sale of Equipment and
Leasehold Improvements and costs pertaining to New York and Fort Worth
closures, see Note L.
3. Revenue Recognition
Revenue is recognized at the time the service is provided. Revenues are
principally derived from contracts with federal, state and local government
agencies.
4. Concentrations of Credit Risk
Accounts receivable are uncollateralized and are due primarily from federal,
state and local government agencies under contracts. CSC evaluates its accounts
receivable under such contracts for collectibility on at least a quarterly
basis and provides an allowance for doubtful assets when a receivable is deemed
uncollectible. Writedown of accounts receivable have been immaterial for all
periods presented.
5. Cash and Cash Equivalents
CSC considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Restricted cash of $60,626 at December 31, 1997 represents a major
maintenance and repair reserve fund established by CSC as required by contracts
in Polk and Pahokee, Florida.
6. Building, Equipment and Leasehold Improvements
Building, equipment and leasehold improvements are carried at cost.
Depreciation of buildings is computed using the straight-line method over
twenty and thirty year periods. Depreciation of equipment is computed using the
straight-line method over a five-year period. Leasehold improvements are being
amortized over the shorter of the life of the asset or the applicable lease
term, ranging from five to twenty years.
7. Capitalized Interest
In accordance with Statement of Financial Accounting Standards No. 34
Capitalization of Interest Costs CSC capitalizes interest on facilities during
construction. During 1997 CSC capitalized interest of $371,500 related to the
construction of the Florence, Arizona facility. During 1996 interest of
$103,576 was capitalized relating to the construction of the Phoenix, Arizona
facility.
F-7
<PAGE>
8. 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 expense but not to exceed five years. Costs of
unsuccessful or abandoned contracts are charged to expense when their recovery
is not considered probable. Facility start-up costs, which include costs of
initial employee training, travel and other direct expenses are incurred after
a contract is awarded in connection with the opening of new facilities. These
costs are capitalized and amortized on a straight-line basis over the term,
including option periods, of the contracts not to exceed five years.
In April 1997, the American Institute of Certified Public Accountants issued
a proposed accounting standard on "Accounting for the Costs of Start-up
Activities." If adopted in 1998, the standard would require CSC to expense
start-up and deferred development costs as incurred. In addition, the standard
may require that all previously capitalized start-up costs be expensed and
reported as a cumulative effect of a change in accounting principle at the time
of the adoption. As of December 31, 1997, unamortized startup costs and
deferred development were $8,043,380.
9. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of
On January 1, 1996, CSC 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. The standards for SFAS No. 121 require that CSC
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 CSC's consolidated financial statements at the net asset value
less cost to sell. The effect, adoption and application of SFAS No. 121 was not
considered material to the consolidated financial statements in 1997 and 1996.
10. Income Taxes
CSC utilizes an asset and liability approach for financial accounting and
reporting for income taxes. The primary objectives of accounting for income
taxes are to (a) recognize the amount of tax payable for the current year and
(b) recognize the amount of deferred tax liability or asset based on
management's assessment of the tax consequences of events that have been
reflected in CSC's consolidated financial statements.
11. Earnings Per Share
In 1997, CSC adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share. The standard requires the disclosure of basic and diluted
earnings per share for periods ending after December 15, 1997 and restatement
of prior periods to conform with the new disclosure format. The computation
under SFAS No. 128 differs from the primary and fully diluted earnings per
share computed under APB Opinion No. 15 primarily in the manner in which
potential common stock is treated. Basic earnings per share is computed by
dividing net income by the weighted-average number of common shares
outstanding. In the computation of diluted earnings per share, the weighted-
average number of common shares outstanding is adjusted for the effect of all
potential common stock and the average share price for the period is used in
all cases when applying the treasury stock method to potentially dilutive
outstanding options. The 1996 and 1995 earnings per share amounts presented
herein have been restated to reflect the adoption of SFAS No. 128.
F-8
<PAGE>
12. Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. With respect to stock options
granted to employees, SFAS No. 123 permits companies to continue using the
accounting method promulgated by the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, to measure compensation or to
adopt the fair value based method prescribed by SFAS No. 123. Management has
not adopted SFAS No. 123's accounting recognition provisions related to stock
options granted to employees and accordingly, will continue following APB No.
25's accounting provisions. All other requirements of SFAS No. 123 were
implemented on January 1, 1996.
13. New Accounting Pronouncements
SFAS No. 130 Reporting Comprehensive Income is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The requirements of this statement
include: (a) classifying items of other comprehensive income by their nature in
a financial statement and (b) displaying the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. CSC plans to adopt SFAS No.
130 for the year ending December 31, 1998 and expects no material impact to
CSC's financial statement presentation.
SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information is effective for fiscal years beginning after December 15, 1997.
This statement supercedes SFAS No. 14 Financing Reporting for Segments of a
Business Enterprise and amends SFAS No. 94 Consolidation of All Majority-Owned
Subsidiaries. This statement requires annual financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach, along with interim reports. The management
approach requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information the
way management organizes the segments for making decisions and assessing
performance. It also eliminates the requirement to disclose additional
information about subsidiaries that were not consolidated. CSC plans to adopt
SFAS No. 131 for the year ending December 31, 1998 impacting only CSC's
disclosure information and not its results of operations.
14. Reclassifications
Certain reclassifications have been made to the 1996 and 1995 balances to
conform to the 1997 presentation.
NOTE B--CONTRACTUAL AGREEMENTS WITH GOVERNMENT AGENCIES
CSC currently operates nineteen secure and non-secure corrections or
detention programs in the states of Arizona, Florida, New Mexico, Mississippi,
New York, Texas and Washington for Federal, state and local government agencies
exclusive of two programs which are expected to wind down in 1998 and for which
a write-down has been provided for the year ended December 31, 1996 (see Note
L). CSC's secure facilities include a detention and processing center for
illegal aliens, intermediate sanction facilities for parole violators and a
shock incarceration facility, which is a military style "boot camp" for
youthful offenders. Non-secure facilities include residential programs such as
community correction facilities for federal and state offenders serving the
last six months of their sentences and non-residential programs such as home
confinement supervision.
CSC is compensated on the basis of the number of offenders held in each of
its facilities. CSC'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 CSC and the government agency or are exercisable by
the government agency alone.
F-9
<PAGE>
NOTE C--FAIR VALUE OF FINANCIAL INSTRUMENTS
For CSC, 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. Accounts Receivable, Accounts Payable and Accrued Expenses
The carrying amount reasonably approximates fair value because of the short-
term maturities of these items.
3. Subordinated Promissory Notes and Long-Term Debt
The fair value of CSC'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 CSC for debt of the same remaining maturities.
As of December 31, 1997 and 1996 the estimated fair values of the subordinated
promissory notes and long-term debt approximated their carrying values.
4. Receivable from Sale of Equipment and Leasehold Improvements
The carrying value of the receivable from sale of equipment and leasehold
improvements at December 31, 1997 and 1996 is $2,259,082 and $3,507,882,
respectively. CSC believes the fair value of the receivable from sale of
equipment and leasehold improvements approximated the carrying amount based on
the interest rates for similar receivables. (See Note L-1(b)).
NOTE D--PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- ----------
<S> <C> <C>
Prepaid insurance....................................... $153,875 $ 214,231
Prepaid real estate taxes............................... 133,110 165,061
Prepaid and refundable income taxes..................... 87,501 819,199
Prepaid rent--current portion........................... 383,333 --
Other................................................... 206,757 803,482
-------- ----------
$964,576 $2,001,973
======== ==========
</TABLE>
NOTE E--BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Building, equipment and leasehold improvements, at cost, consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Buildings and land................................. $21,125,911 $10,072,687
Equipment.......................................... 3,464,003 2,221,427
Leasehold improvements............................. 998,502 645,341
----------- -----------
25,588,416 12,939,455
Less accumulated depreciation...................... (1,871,244) (899,306)
----------- -----------
$23,717,172 $12,040,149
=========== ===========
</TABLE>
F-10
<PAGE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was approximately $972,000, $640,000 and $1,040,000, respectively.
NOTE F--OTHER ASSETS
Deferred development and start-up costs are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Development costs................................... $ 4,343,247 $3,158,242
Start-up costs...................................... 5,301,229 3,079,272
----------- ----------
9,644,476 6,237,514
Less accumulated amortization....................... (1,601,096) (419,555)
----------- ----------
$ 8,043,380 $5,817,959
=========== ==========
</TABLE>
The December 31, 1997 and 1996 balance of $8,043,380 and $5,817,959 includes
development costs of approximately $1,005,500 and $306,300, respectively,
related to unawarded contracts. Deferred development at December 31, 1997 and
1996, includes $637,500 paid to Colorado County, Texas for CSC's contractual
commitment to finance 25% of the facility's construction cost. Colorado County,
Texas is obligated to fund the balance.
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---------- --------
<S> <C> <C>
Deferred refinancing costs, net......................... $ 193,330 $344,167
Deposits................................................ 355,160 106,820
Deferred lease option costs............................. 18,656 26,660
Prepaid rent--net of current portion.................... 4,335,482 --
Other................................................... 30,699 7,510
---------- --------
$4,933,327 $485,157
========== ========
</TABLE>
During the year, CSC entered into a prepaid lease agreement with a facility
located in Frio, Texas. The term of the lease is for twelve years and began in
December 1997. The current portion of the lease payments are included in
prepaid expenses (Note D) and the long-term portion is included above in other
assets.
NOTE G--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Accounts payable..................................... $1,906,454 $1,900,867
Accrued expenses..................................... 2,610,299 1,193,348
Payroll and related taxes............................ 1,523,475 691,540
Construction costs (including retainage)............. 499,250 10,950
Income taxes......................................... -- 116,333
Other................................................ 16,843 --
Accrued closure costs of Fort Worth and New York
Community Corrections............................... 982,741 960,504
---------- ----------
$7,539,062 $4,873,542
========== ==========
</TABLE>
F-11
<PAGE>
NOTE H--DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1996
-------- -----
<S> <C> <C>
Mortgage payable due in semi-annual installments of $17,083
which includes principal plus interest at 10% per annum due
in full October 2006....................................... $323,291 $ --
Less current portion........................................ (1,800) --
-------- -----
$321,491 $ --
======== =====
</TABLE>
Effective December 31, 1995, CSC and NationsBank, N.A. entered into a loan
and security agreement totaling $11.0 million. 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. On September 17, 1996, the outstanding balances of both the term
loan, $4,333,360, and the revolving line, $2,865,108, were repaid in full with
interest from the net proceeds raised from the public offering (see Note K).
Borrowings under the revolver are based, at CSC's option, on .75% over the
bank's prime rate or the London International Bank Rate plus 3.35%. After
September 30, 1996 the interest rate charged under either method is based on
CSC's financial performance as specified in the agreement. Further, CSC is
required to pay an annual commitment fee of .25% of the average unused portion
of the facility. CSC may prepay any borrowings without interest or penalty.
CSC's subsidiaries have guaranteed CSC's obligation under the agreement. CSC
has granted the bank a first priority security interest in all of its assets.
The lending agreement contains certain financial covenants including debt
service coverage ratio and 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 CSC's net earnings
after taxes provided that CSC is in compliance with the above-noted financial
covenants. CSC was in compliance with all financial covenants as of December
31, 1997. There were no bank borrowings at December 31, 1997 and 1996.
On January 14, 1998 CSC extended the term of the revolving credit portion of
its loan agreement until April 3, 1998. CSC is currently in negotiations with
NationsBank for a new and expanded credit and lease agreement.
Through a series of transactions that closed in July, August and September
1995, CSC issued 5,676.6 units at $1,000 per unit, in a private placement of
its securities. Each unit consists of (i) a 10% subordinated promissory note
due July 1, 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. CSC 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 were used to purchase and renovate the Phoenix, Arizona facility.
At December 31, 1997, aggregate maturities of long-term debt were as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998............................................................ $ 1,800
1999............................................................ 2,000
2000............................................................ 2,300
2001............................................................ 2,500
2002............................................................ 2,800
Thereafter...................................................... 311,891
--------
TOTAL............................................................. $323,291
========
</TABLE>
F-12
<PAGE>
NOTE I--RENTAL AGREEMENTS
CSC has operating leases for certain of its facilities and certain machinery
and equipment which expire at various dates through 2002. Substantially all the
facility leases provide for payment by CSC of all property taxes and insurance.
Future minimum rental commitments under non-cancelable leases as of December
31, 1997, are as follows:
<TABLE>
<CAPTION>
Related
Year ending December 31, Total Companies
------------------------ ---------- ----------
<S> <C> <C>
1998................................................. $2,500,000 $1,232,000
1999................................................. 1,818,000 642,000
2000................................................. 1,158,000 222,000
2001................................................. 756,000 --
2002................................................. 543,000 --
Thereafter........................................... 2,739,000 --
---------- ----------
$9,514,000 $2,096,000
========== ==========
</TABLE>
CSC leases one facility from a related party under a sublease arrangement,
which expires April 30, 2000. CSC has a five-year option to renew this sublease
arrangement. Residential and commercial tenants occupy a portion of this
building and annex.
CSC leases a second facility from a related party. The lease commenced
January 1, 1994 and expires December 31, 1998. Thereafter, CSC has three
successive five-year options to renew. In addition to the base rent, CSC pays
taxes, insurance, repairs and maintenance on this facility.
CSC leases a third facility from a related party. The lease commenced
October 1, 1996 and expires September 30, 1998. Thereafter, CSC has three
successive one-year options to renew. In addition to the base rent, CSC pays
taxes, insurance, repairs and maintenance on this facility.
Rental expense for the years ended December 31, 1997, 1996 and 1995
aggregated $1,439,000, $1,549,000 and $1,632,000, respectively, and is included
in general and administrative expenses. Rent expenses for the year ended
December 31, 1997 is net of $539,000 related to rental costs incurred at CSC's
Fort Worth and New York facilities that was written off against accrued closure
costs. (See Note L) Rent to related companies aggregated $1,260,000, $1,090,000
and $1,038,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE J--INCOME TAXES
The income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $ 242,853 $ (695,000) $ (42,000)
State and local....................... 160,000 45,000 112,000
Deferred:
Federal, state and local.............. 1,620,000 (375,000) (1,120,000)
---------- ----------- -----------
$2,022,853 $(1,025,000) $(1,050,000)
========== =========== ===========
</TABLE>
F-13
<PAGE>
The following is a reconciliation of the federal income tax rate and the
effective tax rate as a percentage of pre-tax income:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal rate........................ 34.0% (34.0)% (34.0)%
State taxes, net of federal tax benefit....... 5.0 1.4 5.0
Non-deductible items.......................... 0.9 1.5 1.2
Other......................................... 0.2 (4.3) (9.8)
------- -------- --------
40.1% (35.4)% (37.6)%
======= ======== ========
</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 CSC's deferred tax assets (liabilities) are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Facility closure costs.............................. $ 678,000 $ 969,000
Vacation accrual.................................... 129,000 70,000
Development costs................................... (1,021,000) 111,000
Accrued expenses.................................... 392,000 33,000
Depreciation........................................ (373,000) --
Net operating loss carryforward..................... -- 242,000
Alternative minimum tax credit...................... 70,000 70,000
----------- ----------
(125,000) 1,495,000
Valuation allowance................................. -- --
----------- ----------
$ (125,000) $1,495,000
=========== ==========
</TABLE>
CSC, after considering its pattern of profitability, excluding the New
Jersey, Ft. Worth, and NYCC facility closure charges, and its anticipated
future taxable income, believes it is more likely than not that the deferred
tax assets will be realized.
NOTE K--STOCKHOLDERS' EQUITY
On March 8, 1995, CSC'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 five-
for-four stock split.
During September 1995, CSC completed the private placement of 496,807 shares
of Common Stock at $7.75 per share. CSC received gross proceeds of $3,850,254
and incurred issuance costs of $380,556. The net proceeds were used for its
Phoenix, Arizona facility.
In connection with the 1995 Private Placement, warrants issued with units
totaled 874,198, which are exercisable at $7.75 per share. During the years
ended December 31, 1997 and 1996, 10,800 and 216,703 of such warrants were
exercised simultaneously with the tendering of subordinated notes. At December
31, 1997 and 1996, warrants outstanding totaled 646,695 and 657,495,
respectively. (See Note H).
On February 2, 1994, CSC completed a public offering of 833,333 shares of
Common Stock. The net proceeds received by CSC after deducting applicable
issuance costs and expenses aggregated $4,105,020. In connection with the
public offering, CSC sold to the representative of the underwriters, for a
nominal sum, warrants to purchase from CSC 109,375 shares of Common Stock. The
warrants are exercisable for a period of
F-14
<PAGE>
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. During the year ended December 31, 1997, 7,100 and 16,500 of such
warrants were exercised at an exercise price of $5.43 and $5.77 per share,
respectively. During the year ended December 31, 1996, 30,000 of such warrants
were exercised at an exercise price of $5.43 per share.
On September 12, 1996, CSC completed a public offering of 2,070,000 shares
of common stock at $13.625 per share. The net proceeds of the public offering
after deducting applicable issuance costs and expenses aggregated approximately
$25,790,000. In October, 1996, pursuant to the underwriters' over-allotment
option, CSC sold an additional 367,500 shares of common stock at $13.625 per
share. The net proceeds received from the exercise of the over-allotment option
aggregated approximately $4,716,000. The net proceeds of the public offering
and the over-allotment option were used to repay bank loans of $7,198,468 (See
Note H) and are being used for construction, start-up and related costs of the
Florence, Arizona and Eagle Lake, Texas facilities and for start-up costs of
the Polk and Pahokee, Florida facilities and for general corporate purposes.
NOTE L--COMMITMENTS AND CONTINGENCIES
1(a). Fort Worth and New York Closures
During the fourth quarter of 1996, CSC decided to discontinue the operations
of two programs, one in Fort Worth, Texas and the other in New York, New York.
The decision to discontinue these operations was due to management's belief,
based on the status of negotiations occurring during the fourth quarter of 1996
with the respective contracting agencies, that the New York State contracts
expiring in 1997 would not be renewed. In addition the Fort Worth community was
against the continued housing of inmates at CSC's facility. These factors
resulted in substantially reduced occupancy levels and operating losses being
sustained at two of CSC's community-based halfway houses. As a result, CSC
accrued certain expenses at December 31, 1996, and has written down certain
assets related to each program.
In Fort Worth, CSC notified the contracting agency, Texas Department of
Criminal Justice, that the entire facility will be closed by . All
incremental closure related costs, from April 1, 1997 until the expiration of
the facility's operating lease in May, 1999, have been charged to operations at
December 31, 1996. Such expenses include the write-off of fixed assets,
deferred development and start-up costs, and a provision for rent expense, real
estate taxes, insurance and closure costs. CSC began winding down the
operations of the Program in the first quarter of 1997. Subsequently, CSC was
asked by the TDCJ to leave a portion of the facility open until an alternative
site could be located.
In August of 1997, CSC signed an amendment to its contract with the TDCJ
which significantly lowered the expected population of the facility in addition
to increasing the per diem rate to $33.00 from $29.95. CSC has continued to run
the Program at the reduced levels pending the locating of an alternate site.
Management evaluated the terms of the amended contract with the TDCJ and
determined that it would result in a loss that approximated the unamortized
accrued closure costs associated with its original decision to close the Ft.
Worth facility. CSC operated this facility at a loss in 1997 and estimates that
it will continue to incur a loss in the future based on the terms of the
amended contract with the TDCJ. CSC believes that the remaining balance of the
accrued closure costs reserved at December 31, 1997 totaling $243,150 is
adequate to offset the estimated losses to be incurred under the amended
contract. CSC's decision to continue to operate the facility is based on its
desire to offset the fixed obligations of CSC pertaining to the building. These
obligations will continue regardless of whether or not CSC actually operates
the program.
At CSC's Brooklyn and Manhattan, New York facilities, CSC has written-off a
portion of fixed assets and expenses during the year ended December 31, 1996
related to the program it manages for the New York State Department of
Corrections. Such expenses include rents and related costs of operating each
facility, real estate taxes, insurance and closure costs from April 1, 1997
through the expiration of the facilities' operating leases
F-15
<PAGE>
on December 31, 1998 and April 30, 2000, respectively. Costs and expenses
associated with CSC's ongoing programs in New York with the Federal Bureau of
Prisons have not been written down except for certain costs anticipated at the
Manhattan facility resulting from the closure of the New York program. In the
second quarter of 1997, CSC closed its Manhattan location and placed all of its
remaining residents in its Brooklyn location. Throughout the year, CSC
continued its efforts to ascertain the likelihood of increased population and a
long-term contract. In the third quarter of 1997, CSC understood the State
would be issuing a formal Request for Proposal relating to its Community
Corrections Programs. In addition, the State indicated to CSC that the
population rates would improve. At that time CSC decided to re-open its
Manhattan location and to prepare to bid on the pending RFP. In February of
1998, CSC was awarded contracts to operate two Community Corrections Programs
in its Manhattan location for a total capacity of 130.
Although CSC has recently signed contracts to operate these two programs,
the State has given no minimum occupancy guarantee and did not increase the per
diem rate. It is CSC's belief that the populations in New York will continue to
fluctuate and the New York operations will not produce income for CSC. CSC
believes that the unamortized balance of the accrued closure costs originally
recorded in connection with its decision to discontinue these operations
totaling $1,494,591 is adequate to offset the estimated losses to be incurred
by CSC under these new long term contracts at December 31, 1997. CSC's decision
to operate these programs is based on its desire to offset the fixed
obligations of CSC pertaining to the lease of the buildings. These lease
obligations will continue regardless of whether or not CSC actually operates a
program.
The December 31, 1996 write-down of $3,329,000 represents actual charges to
operations incurred for each program at December 31, 1996 and the present value
of those expenses subsequent to April 1, 1997, attributable to the closure of
each program which total $3,600,000 discounted using an interest rate of 9% per
annum.
The composition of the writedown at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Fixed assets, net................................................ $ 564,050
Deferred development and start-up costs, net..................... 98,446
Accrued closure costs............................................ 2,566,504
Closure related costs incurred in 1996........................... 100,000
----------
$3,329,000
==========
</TABLE>
Fixed assets writedowns consist primarily of leasehold improvements and
certain equipment used specifically at the Ft. Worth and New York facilities.
Accrued closure costs consist primarily of rent and related facility costs--
totaling approximately $1,920,000 that represent fixed obligations of CSC
pertaining to lease of the buildings in Ft. Worth and New York and estimated
operating losses under the Manhattan facility contract based on the terms of
per diem rates and CSC's costs to deliver the programs under the contract
totaling approximately $646,000.
Accrued closure costs are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Accrued closure costs................................. $1,737,741 $2,566,504
Less current portion.................................. 982,741 960,504
---------- ----------
Long-term portion of accrued closure costs............ $ 755,000 $1,606,000
========== ==========
</TABLE>
F-16
<PAGE>
Revenues and operating income (loss) for the Ft. Worth and New York programs
for the years ended December 31, 1997, 1996 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Revenues............................................. $4,911 $7,666 $10,134
Operating income (loss).............................. $ (892) $ (326) $ 1,554
</TABLE>
Operating income (loss) for the year ended December 31, 1997 is net of
amortization of accrued closure costs totaling $828,764.
For each of the aforementioned programs, the operating losses incurred until
the facilities are closed will be reflected in the financial statements
applicable to those periods.
1(b). New Jersey Facility Closure
Due to a disturbance at CSC's Elizabeth, New Jersey facility on June 18,
1995, the facility was closed and the INS moved all detainees located therein
to other facilities. On December 15, 1995, CSC and a publicly-traded company,
which also operates and manages detention and correctional facilities, entered
into an asset purchase agreement pursuant to which that company purchased the
equipment, inventory and supplies, contract rights and records, leasehold and
land improvements of CSC'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 effective January 1997, the month the company commenced
operations of the facility. If the INS re-awards the contract to the company,
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 CSC will record
as income the unpaid balance. On June 13, 1996 CSC, the company and the INS
executed a novation agreement whereby the company became the successor-in-
interest to the contract with the INS. In addition, CSC's lease for the New
Jersey facility was assigned to the company. CSC 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, 1997 and December 31, 1996,
represents the present value of the consideration to be received through August
1999 of $2,259,082 and $3,507,882, respectively, $4,428,000 discounted using an
interest rate of 11.5% per annum reduced by the estimated closing costs (legal
and consulting) and the facility's estimated carrying costs through December
31, 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. During the year ended December 31, 1996 the entire
reserve established at December 31, 1995 for carrying and closing costs was
reduced by approximately $300,000 of payments for rent and other carrying and
closing costs.
2. Legal Matters
In May 1993, a former employee of CSC filed suit in the United States
District Court, Southern District of New York, claiming he was intentionally
assaulted by employees of CSC and claiming $5,000,000 in damages on each of six
causes of action. In January 1996, a lawsuit was filed with the Supreme Court
of New York, County of Kings, by a former employee alleging sexual harassment
and discrimination, physical assault, rape and negligent screening of employees
and claiming damages of $4,000,000 plus attorney fees. CSC is awaiting court
rulings in both of these cases which are expected to result in dismissals of
these actions during 1998.
In March 1996, former inmates at one of CSC's facilities filed suit in the
Supreme Court of the State of New York, County of Bronx on behalf of themselves
and others similarly situated, alleging personal injuries and property damage
purportedly caused by negligence and intentional acts of CSC and claiming
$500,000,000
F-17
<PAGE>
each for compensatory and punitive damages, which suit was transferred to the
United States District Court, Southern District of New York, in April 1996. In
July 1996, seven detainees at one of CSC's facilities, and certain of their
spouses, filed suit in the Superior Court of New Jersey, County of Union,
seeking $10,000,000 each in damages arising from alleged mistreatment of the
detainees, which suit was transferred to the United States District Court,
District of New Jersey, in August 1996. In July 1997, former detainees of CSC's
Elizabeth, New Jersey facility filed suit in the United States District Court
for the District of New Jersey. The suit claims violation of civil rights,
personal injury and property damage allegedly caused by the negligent and
intentional acts of CSC. No monetary damages have been stated. Through
stipulation, all these actions will now be heard in the United States District
Court for the District of New Jersey. This will streamline the discovery
process, minimize costs and avoid inconsistent rulings.
CSC believes the claims made in each of the foregoing actions to be without
merit and will vigorously defend such actions. CSC further believes the outcome
of these actions and all other current legal proceedings to which it is a party
will not have a material adverse effect upon its results of operations,
financial condition or liquidity.
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 CSC 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 CSC's larger contracts is
terminated, it may have a material adverse effect on CSC's operations.
4. Officers' Compensation
Effective February 9, 1994, the President entered into a five-year
employment agreement with CSC that provides annual compensation of $189,000,
annual cost of living increases and an annual bonus of five percent of pre-tax
earnings greater than $1,000,000, not to exceed $200,000.
In January 1996, CSC 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 $75,000 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. Concentrations of Credit Risk
Approximately 97.8%, 98.0% and 96.6% of CSC's revenues for the years ended
December 31, 1997, 1996 and 1995, respectively, relate to amounts earned from
Federal, state and local contracts. CSC's contracts in 1997, 1996 and 1995 with
government agencies where revenues exceeded 10% of CSC's total consolidated
revenues were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Customer/Agency % of Total % of Total % of Total
--------------- ---------- ---------- ----------
<S> <C> <C> <C>
Florida Department of Juvenile Justice.. 37% 10% 4.90%
Immigration Naturalization Service...... 15% 28.27%
Arizona Department of Corrections....... 11% 14%
Various Local Agencies within the State
of Texas............................... 20% 26% 19.63%
Texas Department of Criminal Justice.... 21% 25.40%
Federal Bureau of Prisons............... 25% 27.20%
New York Department of Corrections...... 14% 14.46%
</TABLE>
Concentrations of credit risk related to accounts receivable is reflective
of the related revenues.
F-18
<PAGE>
6. Fiduciary Funds
CSC has acted as a fiduciary disbursing agent on behalf of a governmental
entity whereby certain governmental entity funds are maintained in a separate
bank account. These funds have been paid to the general contractor, which
constructed the government owned facilities. The Company is responsible for
managing the construction process. CSC has no legal rights to the funds nor the
constructed facility, and accordingly, such funds do not appear in the
accompanying financial statements.
7. Construction Commitments
CSC has various construction contracts related to ongoing projects totaling
approximately $1,439,000 as of December 31, 1997.
8. Letter of Credit
In connection with CSC's workmen's compensation insurance coverage
requirements, CSC has obtained a $258,000 Letter of Credit from its bank in
favor of the insurance carrier.
NOTE M--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)....................... $3,025,524 $(1,868,027) $(1,739,391)
========== =========== ===========
Denominator:
Basic earnings per share:
Weighted average shares outstanding..... 7,675,220 5,781,853 4,552,707
Effect of dilutive securities--stock
options and warrants................... 442,702 -- --
---------- ----------- -----------
Denominator for diluted earnings per
share.................................. 8,117,922 5,781,853 4,552,707
========== =========== ===========
Net income (loss) per common share--
basic.................................. $ 0.39 $ (0.32) $ (0.38)
========== =========== ===========
Net income (loss) per common share--
diluted................................ $ 0.37 $ (0.32) $ (0.38)
========== =========== ===========
</TABLE>
The effect of dilutive securities for 1996 and 1995 were not included in the
calculation of diluted net loss per common share as the effect would have been
anti-dilutive.
NOTE N--STOCK OPTIONS
In October 1993, CSC adopted a stock option plan. This plan provides for the
granting of both: (i) incentive stock options to employees and/or officers of
CSC and (ii) non-qualified options to consultants, directors, employees or
officers of CSC. The total number of shares that may be sold pursuant to
options granted under the stock option plan is 500,000. CSC, in June 1994,
adopted a Non-employee Directors Stock Option Plan, which provides for the
grant of non-qualified options to purchase up to 196,875 shares of CSC'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
CSC). Options granted under the Stock Option Plan will expire not more than
five years from the date of grant.
In 1996, CSC granted 215,000 options to two key employees and a director of
CSC. The exercise price of the options is equal to the fair market value of the
Common Stock at the date of the grant. These options vest over a two-year
period and expire five years from the date of grant.
F-19
<PAGE>
CSC has adopted only the disclosure provisions of SFAS No. 123. It applies
APB No. 25 and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock based compensation plans other
than for restricted stock. If CSC had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS No. 123, CSC's net income
(loss) per share would be adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)
As reported.......................... $3,025,524 $(1,868,027) $(1,739,391)
Pro forma (unaudited)................ $2,215,352 $(2,716,910) $(1,972,438)
Income (loss) per common share--basic
As reported.......................... $ 0.39 $ (0.32) $ (0.38)
Pro forma............................ $ 0.29 $ (0.47) $ (0.43)
Income (loss) per common share--di-
luted
As reported.......................... $ 0.37 $ (0.32) $ (0.38)
Pro forma (unaudited)................ $ 0.27 $ (0.47) $ (0.43)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
------- ---------- -------
<S> <C> <C> <C>
Volatility..................................... 70% 72% 72%
Risk free rate................................. 6.00% 5.64% 6.38%
Expected life.................................. 3 years 3.32 years 4 years
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 for which the exercise price equals the market price on the grant date was
$5.65, $5.71 and $8.81, respectively, and the weighted average exercise prices
were $11.32, $10.56 and $15.04, respectively. The weighted average fair value
and weighted average exercise price of options granted in 1995 for which the
exercise price exceeded the market price on the grant date were $10.50 and
20.63, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because CSC's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially effect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-20
<PAGE>
Stock option activity during 1997, 1996 and 1995 is summarized below:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price
------- ----------------
<S> <C> <C>
Balance, January 1, 1995......................... 290,313 $6.19
Granted........................................ 81,875 15.73
Exercised...................................... (7,000) 4.76
Canceled....................................... -- --
------- -----
Balance, December 31, 1995....................... 365,188 8.35
Granted........................................ 293,700 10.56
Exercised...................................... (64,888) 6.37
Canceled....................................... (43,750) 12.67
------- -----
Balance, December 31, 1996....................... 550,250 9.40
Granted........................................ 170,750 11.32
Exercised...................................... (2,625) 4.76
Canceled....................................... (21,950) 16.01
------- -----
Balance, December 31, 1997....................... 696,425 9.75
======= =====
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Range of Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
--------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 4- 8 202,050 1.35 $ 6.06
8-12 312,625 3.35 9.31
12-18 146,750 4.17 13.75
18-21 35,000 2.46 19.29
-------
696,425
=======
<CAPTION>
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- ----------------
<S> <C> <C> <C>
$ 4- 8 202,050 $ 6.06
8-12 240,375 9.08
12-18 51,750 16.50
18-21 35,000 19.29
</TABLE>
NOTE O--EMPLOYEE BENEFIT PLANS
On July 1, 1996, CSC adopted a contributory retirement plan under Section
401(k) of the Internal Revenue Code, for the benefit of all employees meeting
certain minimum service requirements. Eligible employees can contribute up to
15% of their salary but not in excess of $9,500 in 1997 and 1996. CSC's
contribution under the plan amounts to 20% of the employees' contribution. In
1997 and 1996, CSC contributed $62,000 and $15,886, respectively, to the plan.
NOTE P--SELF INSURANCE
During 1996, CSC decided to self-insure for workers' compensation insurance.
CSC has obtained an aggregate excess policy, which limits CSC's exposure to a
maximum of $600,000 and $400,000 as of December 31, 1997 and 1996,
respectively. The estimated insurance liability totaling $451,000 and $120,000
on December 31, 1997 and 1996, respectively is based upon review by CSC and an
independent insurance broker of claims filed and claims incurred but not
reported.
F-21
<PAGE>
On October 1, 1997 CSC entered into a group health plan subject to a self-
insured retention. CSC's maximum annual self-insured retention per employee is
$1,687, which includes fixed costs of $418 and claims costs of $1,269. The
fixed costs include the loss limit charges. The fixed costs are reduced by 5%
upon reaching a threshold of 750 participating employees and by another 5% upon
reaching a threshold of 1,000 participating employees. At December 31, 1997 the
plan had 878 participants and medical insurance liability of $179,000. This
liability represents the maximum claim exposure under the plan less actual
payments made during 1997. In addition, CSC is subject to a maximum terminal
liability of $168 per participating employee and an administrative charge of
$27 per participating employee in the event of termination. Since termination
is not anticipated, no terminal accruals were made at December 31, 1997.
NOTE Q--SUBSEQUENT EVENTS
In February, 1998 CSC formed Correctional Services Corporation (UK) Ltd., a
British company, to pursue correctional projects in the United Kingdom. CSC
intends to build relationships with international joint venture partners to
maximize its capabilities abroad.
In February, 1998 CSC signed contracts with the Juvenile Institutions
Administration of the Commonwealth of Puerto Rico to operate two Juvenile
Treatment Centers and one Juvenile Detention Center. The Salinas Treatment
Center has a 100 bed capacity and will be designed, built, owned and operated
by CSC. It is estimated that the costs of construction will be $11,000,000. It
is expected to become fully operational in the first quarter of 1999. The
Bayamon Treatment Center has a 141 bed capacity and is currently undergoing
renovation. Until the renovations are complete, which is anticipated to be the
first quarter of 1999, the facility will operate at a reduced capacity. CSC
will assume operation of the facility in the second quarter of 1998. The
Bayamon Detention Center has a 120 bed capacity and will begin accepting
residents in the second quarter of 1998. Each of the three contracts has a base
period of 5 years with one 5 year renewal option. Once completed and fully
operational these facilities are expected to contribute approximately $15
million in revenue on an annualized basis.
F-22
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS ------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 2,170 $ 5,216,106
Restricted cash................................... 88,441 60,626
Accounts receivable............................... 24,453,743 10,672,018
Receivable from sale of equipment and leasehold
improvements..................................... 1,339,082 1,380,000
Prepaid expenses and other current assets......... 2,557,483 964,576
----------- -----------
Total current assets............................ 28,440,919 18,293,326
EQUIPMENT AND LEASEHOLD IMPROVEMENTS AT COST, NET... 27,562,150 23,717,172
LONG-TERM RECEIVABLE FROM SALE OF EQUIPMENT AND
LEASEHOLD IMPROVEMENTS............................. -- 879,082
OTHER ASSETS
Deferred development and start-up costs, net...... 15,532,462 8,043,380
Other............................................. 5,116,299 4,933,327
----------- -----------
$76,651,830 $55,866,287
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.......... $17,771,585 $ 7,539,062
Subordinated promissory notes..................... 1,101,378 3,935,760
Deferred tax liability............................ 125,000 125,000
Current portion of mortgage payable............... 1,800 1,800
----------- -----------
Total current liabilities....................... 18,999,763 11,601,622
LONG-TERM DEBT...................................... 9,741,893
LONG-TERM MORTGAGE PAYABLE.......................... 319,608 321,491
LONG-TERM PORTION OF ACCRUED CLOSURE COSTS.......... 356,000 755,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 1,000,000 shares
authorized, none issued and outstanding.......... -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized, 7,791,147 and 7,693,854 shares issued
and outstanding.................................. 77,912 76,938
Additional paid-in capital........................ 43,009,506 42,260,247
Retained earnings................................. 4,147,148 850,989
----------- -----------
Total stockholders' equity...................... 47,234,566 43,188,174
----------- -----------
$76,651,830 $55,866,287
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues.............................................. $67,577,232 $42,520,258
Expenses:
Operating............................................ 48,865,951 30,863,519
General and administrative........................... 12,803,877 8,678,605
----------- -----------
61,669,828 39,542,124
----------- -----------
Operating income...................................... 5,907,404 2,978,134
Interest income (expense), net........................ (458,245) 144,936
----------- -----------
Income before income taxes............................ 5,449,159 3,123,070
Income tax provision.................................. 2,153,000 1,220,000
----------- -----------
Net earnings.......................................... $ 3,296,159 $ 1,903,070
=========== ===========
Net earnings per share:
Basic................................................ $ 0.43 $ 0.25
Diluted.............................................. $ 0.40 $ 0.23
Number of shares used to compute EPS:
Basic................................................ 7,750,947 7,670,310
Diluted.............................................. 8,256,151 8,126,132
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 3,296,159 $ 1,903,070
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.................... 2,785,566 1,874,676
Deferred income tax.............................. -- 200,000
Changes in operating assets and liabilities:
Accounts receivable............................... (13,781,725) (5,326,764)
Prepaid expenses and other current assets......... (1,592,907) 745,705
Accounts payable and accrued liabilities.......... 10,522,653 2,458,903
Reserve for Fort Worth and NYCC facilities
carrying costs................................... (689,130) (563,842)
------------ ------------
Net cash provided by operating activities: 540,616 1,291,748
------------ ------------
Cash flows from investing activities:
Capital expenditures.............................. (5,049,899) (10,757,100)
Development and start-up costs.................... (8,932,169) (3,501,669)
Increase in restricted cash-maintenance fund...... (27,816) --
------------ ------------
Net cash used in investing activities: (14,009,884) (14,258,769)
------------ ------------
Cash flows from financing activities:
Proceeds on short-term and long-term debt, net.... 9,741,893 325,000
Payment on long-term borrowings................... (1,883) (834)
Payment of subordinated debt...................... (2,885,658) --
Proceeds from sale of equipment and leasehold
improvements..................................... 920,000 903,800
Net proceeds from exercise of stock options and
warrants......................................... 750,233 90,223
Debt issuance costs............................... (315,535) --
Other assets...................................... 46,282 (546,952)
------------ ------------
Net cash provided by financing activities: 8,255,232 771,237
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... (5,213,936) (12,195,784)
Cash and cash equivalents at beginning of period... 5,216,106 20,932,309
------------ ------------
Cash and cash equivalents at end of period......... $ 2,170 $ 8,736,525
============ ============
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest......................................... $ 494,701 $ 315,871
============ ============
Income taxes..................................... $ 363,719 $ 460,776
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
In the opinion of management of CSC, the accompanying unaudited condensed
consolidated financial statements as of September 30, 1998 and 1997, and for
the nine months ended September 30, 1998 and 1997, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The statements should be read in conjunction with the
consolidated financial statements and the related notes included in CSC's
consolidated financial statements included elsewhere herein for the year ended
December 31, 1997.
The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2--DEFERRED DEVELOPMENT AND STARTUP 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 expense but not to exceed five years. Costs of
unsuccessful or abandoned contracts are charged to expense when their recovery
is not considered probable. Facility start-up costs, which include costs of
initial employee training, travel and other direct expenses are incurred after
a contract is awarded in connection with the opening of new facilities. These
costs are capitalized and amortized on a straight-line basis over the term,
including option periods, of the contracts not to exceed five years.
In April 1998, the Financial Accounting Standards Board issued Statement of
Position 98-5 on Accounting for the Costs of Start-Up Activities. SOP 98-5
requires the expensing of start-up costs, defined as pre-opening, pre-operating
and pre-contract costs, as incurred and is effective for fiscal years beginning
after December 15, 1998. If adopted by CSC in fiscal 1998, CSC anticipates a
pre-tax write off of existing unamortized start-up costs and deferred costs of
approximately $8.0 million (or $4.9 million after-tax) to record the cumulative
effect of the change in accounting principle.
Also, upon adoption, CSC will reverse start-up amortization expense recorded
during 1998 and expense start-up costs previously deferred during 1998. Pre-tax
income will be negatively impacted to the extent start-up costs exceed reversed
amortization expenses. If adopted in 1998, CSC expects an impact, over and
above the one-time write-off of approximately $8.0 million, of approximately
$9.0 million depending upon the results of start-up activities during the
fourth quarter of 1998.
F-26
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--EARNINGS PER SHARE
CSC adopted SFAS No. 128, "Earnings Per Share" effective December 31, 1997.
The following table sets forth the computation of basic and diluted earnings
per share in accordance with the new standard:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Numerator:
Net income......................................... $3,296,159 $1,903,070
========== ==========
Denominator:
Basic earnings per share:
Weighted average shares outstanding................ 7,750,947 7,670,310
Effect of dilutive securities--stock options and
warrants.......................................... 505,204 455,822
---------- ----------
Denominator for diluted earnings per share........... 8,256,151 8,126,132
========== ==========
Net income per common share--Basic................. $ 0.43 $ 0.25
========== ==========
Net income per common share--Diluted............... $ 0.40 $ 0.23
========== ==========
</TABLE>
NOTE 4--COMPREHENSIVE INCOME
CSC adopted SFAS No. 130, "Reporting Comprehensive Income", effective
January 1, 1998. This statement establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The requirements of this statement include: (a)
classifying items of other comprehensive income by their nature in a financial
statement and (b) displaying the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. CSC's comprehensive income is
substantially equivalent to net income for the nine months ended September 30,
1998 and 1997.
NOTE 5--SUBORDINATED DEBT
On July 1, 1998 CSC's subordinated promissory notes of $3,980,000 became
payable. Management granted note holders the option to extend their notes
through December 31, 1998. A total of $1,101,000 was extended and the balance
was repaid.
NOTE 6--CREDIT FACILITY
In April 1988 CSC finalized a new five year credit facility with a syndicate
of banks led by NationsBank N.A. The syndicated facility provides for up to $30
million in borrowings for working capital, construction and acquisition of
correctional facilities, and general corporate purposes. The line is comprised
of two components, a $10 million revolving credit and $20 million operating
lease facility for the construction, ownership and acquisition of correctional
facilities. The $10 million revolving credit bears interest generally at LIBOR
plus 2.5% CSC incurs rent expense under the $20 million operating lease
facility at an adjusted LIBOR base lease rate as defined in the agreement.
Borrowings under the line are subject to compliance with financial covenants
and borrowing base criteria. As of September 30, 1998 the total amount
outstanding on the revolver was $9,742,000 and the total amount outstanding on
the operating lease facility was $16,537,000.
In August of 1998 CSC initiated an amendment to its current credit agreement
with a syndicate of banks led by NationsBank N.A. Simultaneously CSC engaged
NationsBank Montgomery Securities to serve as a
F-27
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
placement agent in connection with a proposed offering, issue and sale
privately of senior subordinated debt securities. Under the amendment, which
was finalized on October 16, 1998, CSC received an additional $17,500,000
temporary increase in its credit facility. The amendment represents interim
financing until the earlier of the date that CSC receives proceeds from the
senior subordinated debt placement or April 16, 1999. Upon receipt of the
additional subordinated debt, the increase in the credit facility will become
permanent.
NOTE 7--LEGAL PROCEEDINGS
The nature of CSC's business results in numerous claims or litigation
against CSC for damages arising from the conduct of its employees or others.
Under the rules of the Securities and Exchange Commission, CSC is obligated to
disclose lawsuits which involve a claim for damages in excess of 10% of its
current assets notwithstanding CSC's belief as to the merit of the lawsuit and
the existence of adequate insurance coverage.
In May 1993, a former employee of CSC filed suit in the United States
District Court, Southern District of New York, claiming he was intentionally
assaulted by employees of CSC Company and claiming $5,000,000 in damages on
each of six causes of action. A motion to dismiss is pending. In January 1996,
a lawsuit was filed with the Supreme Court of New York, County of Kings, by a
former employee alleging sexual harassment and discrimination, physical
assault, rape and negligent screening of employees and claiming damages of
$4,000,000 plus attorney fees. This case was dismissed in July 1998.
In March 1996, former inmates at one of CSC's facilities filed suit in the
Supreme Court of the State of New York, County of Bronx on behalf of themselves
and others similarly situated, alleging personal injuries and property damage
purportedly caused by negligence and intentional acts of CSC and claiming
$500,000,000 for each compensatory and punitive damages, which suit was
transferred to the United States District Court, Southern District of New York,
in April 1996. In July 1996, seven detainees at one of CSC's facilities, and
certain of their spouses, filed suit in the Superior Court of New Jersey,
County of Union, seeking $10,000,000 each in damages arising from alleged
mistreatment of the detainees, which suit was transferred to the United
States District Court, District of New Jersey, in August 1996. In July 1997
former detainees of CSC's Elizabeth, New Jersey Facility filed suit in the
United States District Court for the District of New Jersey. The suit claims
violations of civil rights, personal injury and property damage allegedly
caused by the negligent and intentional acts of CSC. No monetary damages have
been stated.
CSC believes the claims made in each of the foregoing actions to be without
merit and will vigorously defend such actions. CSC further believes the outcome
of these actions and all other current legal proceedings to which it is a party
will not have a material adverse effect upon its results of operations,
financial condition or liquidity. However, there is an inherent risk in any
litigation and a decision adverse to CSC could be rendered.
F-28
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Independent Certified Public Accountants.................... G-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... G-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.................................................. G-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995..................................... G-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................. G-6
Notes to Consolidated Financial Statements............................ G-7-20
Consolidated Balance Sheets as of September 30, 1998 and 1997
(unaudited).......................................................... G-21
Consolidated Statements of Operations for the nine months ended
September 30, 1998 and 1997 (unaudited).............................. G-22
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited).............................. G-23
Notes to Consolidated Financial Statements (unaudited)................ G-24-25
</TABLE>
G-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Youth Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Youth
Services International, Inc. (a Maryland corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended December 31,
1997, the six months ended December 31, 1996, and the years ended June 30, 1996
and 1995. These financial statements are the responsibility of YSI'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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Youth
Services International, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the year ended
December 31, 1997, the six months ended December 31, 1996, and the years ended
June 30, 1996 and 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen L.L.P.
Baltimore, Maryland
November 13, 1998
G-2
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS (in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................... $ 8,015 $ 3,120
Restricted cash.................................... 264 371
Investments available-for-sale..................... -- 5,204
Accounts receivable, net of allowance for doubtful
accounts of $433 and $1,047, respectively......... 16,589 22,836
Proceeds receivable from sale of behavioral health
Business.......................................... 4,500 --
Receivables from related parties................... 108 1,125
Refundable income taxes............................ -- 1,046
Current portion of notes receivable................ -- 51
Prepaid expenses, supplies and other............... 2,845 3,382
Deferred tax asset................................. 769 110
-------- -------
Total current assets............................... 33,090 37,245
-------- -------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land............................................... 1,976 1,086
Leasehold improvements............................. 9,401 9,823
Program equipment.................................. 1,949 4,021
Buildings.......................................... 8,715 11,724
Office furniture and equipment..................... 3,339 4,250
Vehicles........................................... 1,675 1,624
-------- -------
27,055 32,528
Less--Accumulated depreciation..................... (6,013) (4,951)
-------- -------
Property, equipment and improvements, net.......... 21,042 27,577
-------- -------
OTHER ASSETS:
Deferred debt issue costs, net..................... 1,819 2,511
Goodwill, net...................................... 2,165 20,675
Notes receivable, net of current portion........... 38 3,133
Deferred tax asset................................. 6,512 591
Other assets, net.................................. 1,701 2,401
-------- -------
12,235 29,311
-------- -------
Total assets....................................... $ 66,367 $94,133
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 1,353 $ 2,072
Accrued expenses................................... 6,694 8,385
Deferred revenue................................... 1,243 1,469
Current portion of long-term obligations........... 664 12,059
-------- -------
Total current liabilities......................... 9,954 23,985
CAPITAL LEASE OBLIGATIONS, less current portion..... 5 2,207
7% CONVERTIBLE SUBORDINATED DEBENTURES.............. 32,200 32,200
12% SUBORDINATED DEBENTURES, net of unamortized
original issue discount of $3 and $12,
respectively....................................... 797 988
LONG-TERM DEBT, less current portion................ 76 1,840
-------- -------
Total liabilities................................. 43,032 61,220
-------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
70,000,000 shares authorized, 11,107,970 and
10,181,537 issued and outstanding, respectively... 111 102
Additional paid-in capital......................... 35,055 27,494
Accumulated (deficit) earnings..................... (11,831) 5,375
Unrealized loss on investments available-for-sale.. -- (58)
-------- -------
Total shareholders' equity........................ 23,335 32,913
-------- -------
Total liabilities and shareholders' equity........ $ 66,367 $94,133
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
G-3
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES......................... $116,102 $59,761 $103,642 $53,852
PROGRAM EXPENSES:
Direct operating................ 100,496 50,977 89,421 45,491
Start-up costs.................. 211 189 58 308
-------- ------- -------- -------
Contribution from operations.... 15,395 8,595 14,163 8,053
OTHER OPERATING EXPENSES:
Development costs............... 1,297 666 840 777
General and administrative...... 8,992 3,556 5,467 3,520
CCI Special bonuses............. 1,440 -- -- --
Loss on sale of behavioral
health business................ 20,898 -- -- --
Costs of attempted
acquisitions................... -- -- 569 --
-------- ------- -------- -------
(Loss) income from operations... (17,232) 4,373 7,287 3,756
-------- ------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense................ (3,095) (1,939) (3,209) (284)
Interest income................. 473 502 645 50
Loss on sale of investments..... (203) (45) -- --
Other expense, net.............. (105) (196) (463) (24)
-------- ------- -------- -------
(2,930) (1,678) (3,027) (258)
-------- ------- -------- -------
(Loss) income before income
taxes.......................... (20,162) 2,695 4,260 3,498
Income tax benefit (expense).... 3,085 (946) (1,856) (1,332)
-------- ------- -------- -------
Net (loss) income............... $(17,077) $ 1,749 $ 2,404 $ 2,166
======== ======= ======== =======
(Loss) earnings per common share:
Basic........................... $ (1.57) $ 0.18 $ 0.26 $ 0.25
======== ======= ======== =======
Diluted......................... $ (1.57) $ 0.16 $ 0.24 $ 0.24
======== ======= ======== =======
Weighted average common shares
outstanding:
Basic........................... 10,911 9,981 9,138 8,507
======== ======= ======== =======
Diluted......................... 10,911 10,894 10,134 9,131
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
G-4
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Accumulated Investments Total
Common Paid-in (Deficit) Available- Shareholders'
Stock Capital Earnings for-Sale Equity
------ ---------- ----------- ----------- -------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994.. $ 85 $14,661 $ (944) $ -- $ 13,802
Tax benefit realized
due to exercise of
nonqualified
stock options......... -- 554 -- -- 554
Issuance of 479,067
shares of common stock
under stock
option and stock
purchase plans........ 5 1,116 -- -- 1,121
Net income............. -- -- 2,166 -- 2,166
---- ------- -------- ----- --------
BALANCE, June 30, 1995.. 90 16,331 1,222 -- 17,643
Tax benefit realized
due to exercise of
nonqualified
stock options......... -- 1,029 -- -- 1,029
Issuance of 490,946
shares of common stock
under stock
option and stock
purchase plans........ 5 2,733 -- -- 2,738
Unrealized loss on
investments available-
for-sale, net of
tax effect............ -- -- -- (255) (255)
Net income............. -- -- 2,404 -- 2,404
---- ------- -------- ----- --------
BALANCE, June 30, 1996.. 95 20,093 3,626 (255) 23,559
Tax benefit realized
due to exercise of
nonqualified
stock options......... -- 522 -- -- 522
Issuance of 193,641
shares of common stock
under stock
option and stock
purchase plans........ 2 1,032 -- -- 1,034
Issuance of 7,428
shares of common stock
as compensation....... -- 125 -- -- 125
Stock issuance costs... -- (23) -- -- (23)
Unrealized gain on
investments available-
for-sale, net of
tax effect............ -- -- -- 197 197
Conversion of
subordinated
debentures to common
stock................. 5 5,745 -- -- 5,750
Net income............. -- -- 1,749 -- 1,749
---- ------- -------- ----- --------
BALANCE, December 31,
1996................... 102 27,494 5,375 (58) 32,913
Tax benefit realized
due to exercise of
nonqualified
stock options......... -- 2,805 -- -- 2,805
Issuance of 863,471
shares of common stock
under stock
option and stock
purchase plans........ 9 3,267 -- -- 3,276
Issuance of 8,205
shares of common stock
as compensation....... -- 107 -- -- 107
Transfer of shares as
compensation.......... -- 1,440 -- -- 1,440
Stock issuance costs... -- (58) -- -- (58)
Unrealized gain on
investments available-
for-sale, net of
tax effect............ -- -- -- 58 58
Dividend distribution.. -- -- (129) -- (129)
Net loss............... -- -- (17,077) -- (17,077)
---- ------- -------- ----- --------
BALANCE, December 31,
1997................... $111 $35,055 $(11,831) $ -- $ 23,335
==== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
G-5
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............... $(17,077) $ 1,749 $ 2,404 $ 2,166
Adjustments to reconcile net
(loss) income to net cash
provided by (used in) operating
activities:
(Income) loss on Introspect
operations..................... -- (371) 296 --
Stock granted as compensation... 1,547 125 -- --
Depreciation and amortization... 5,199 3,069 3,452 1,851
Loss on sale of property,
equipment and improvements..... 23 12 105 --
Loss on sale of behavioral
health business................ 20,898 -- -- --
Loss on sale of investments..... 203 45 -- --
Deferred income taxes........... (6,621) (2) (304) 27
Tax benefit realized due to
exercise of nonqualified stock
options........................ 2,805 522 1,029 554
Net change in operating assets
and liabilities................ (2,035) (6,440) (4,798) (8,113)
-------- -------- -------- -------
Net cash provided by (used in)
operating activities............ 4,942 (1,291) 2,184 (3,515)
-------- -------- -------- -------
INVESTING ACTIVITIES:
Purchases of property, equipment
and improvements............... (12,091) (4,284) (5,947) (3,604)
Proceeds from sale of property,
equipment and improvements..... 984 33 674 --
Cash paid for acquired
businesses, net of cash
received....................... (628) (4,023) (6,449) (1,827)
Net proceeds from sale of
behavioral health business..... 14,154 -- -- --
Disbursements for notes
receivable..................... (38) -- (4,271) --
Collection of notes receivable.. 3,184 62 25 --
Purchases of investments........ -- -- (10,223) --
Proceeds from sale of
investments.................... 5,100 4,875 -- --
Other long-term assets.......... (375) (471) (1,816) (551)
-------- -------- -------- -------
Net cash provided by (used in)
investing activities............ 10,290 (3,808) (28,007) (5,982)
-------- -------- -------- -------
FINANCING ACTIVITIES:
Proceeds from short-term
borrowings and long-term debt.. 528 14,326 4,739 5,677
Issuance of 7% convertible
subordinated debentures........ -- -- 37,950 --
Repayments of short-term
borrowings, long-term debt and
capital lease obligations...... (13,954) (14,198) (10,708) (260)
Dividend distribution........... (129) -- -- --
Proceeds from issuance of common
stock under stock option and
stock purchase plans, net...... 3,218 1,011 2,738 1,121
Deferred debt issue costs....... -- -- (2,664) (91)
-------- -------- -------- -------
Net cash (used in) provided by
financing activities............ (10,337) 1,139 32,055 6,447
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH.. 4,895 (3,960) 6,232 (3,050)
CASH, beginning of period........ 3,120 7,080 848 3,898
-------- -------- -------- -------
CASH, end of period.............. 8,015 3,120 7,080 848
======== ======== ======== =======
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF EFFECTS OF
BUSINESS ACQUISITIONS AND
DISPOSITIONS:
Cash held in escrow............. -- -- 2,543 (2,543)
Restricted cash................. 107 131 156 (435)
Accounts receivable............. (1,895) (3,297) (8,452) (4,277)
Receivables from related
parties........................ 1,029 (1,125) -- --
Refundable income taxes......... 1,046 -- (1,006) 137
Prepaid expenses, supplies and
other.......................... 127 (1,392) (666) (948)
Deposits........................ 154 (3) 79 (65)
Management fee receivable....... -- -- 60 --
Accounts payable................ (295) (15) (998) (496)
Accrued expenses................ (2,083) (2,170) 3,513 514
Deferred revenue................ (225) 1,431 (27) --
-------- -------- -------- -------
Net change in operating assets
and liabilities................. $ (2,035) $ (6,440) $ (4,798) $(8,113)
======== ======== ======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest.......... $ 3,086 $ 2,081 $ 970 $ 284
======== ======== ======== =======
Cash paid for taxes............. $ 279 $ 723 $ 2,292 $ 655
======== ======== ======== =======
Capital lease obligation........ $ -- $ -- $ 230 $ --
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
G-6
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Youth Services International, Inc. and its subsidiaries (collectively "YSI")
are organized to privately manage and operate educational, developmental and
rehabilitative programs for troubled youth who have been adjudicated. YSI's
programs are provided in residential and non-residential settings. YSI
commenced the operation of its first program in February 1992. On February 3,
1994, YSI sold 1,950,000 shares in connection with its initial public offering
of common stock at $6.67 per share pursuant to its Registration Statement filed
on Form SB-2 with the Securities and Exchange Commission.
On October 31, 1997, YSI consummated the sale of certain of its subsidiaries
which comprised its behavioral health business. As of December 31, 1997, YSI
managed and operated 18 programs for adjudicated youth and two behavioral
health programs. (See Note 15 for further discussion of the sale.)
Change in Year-end
On April 25, 1997, the Board of Directors approved a resolution to change
YSI's year-end from June 30 to December 31. The accompanying financial
statements include the financial position and results of operations for YSI's
transition period comprised of the six months ended December 31, 1996.
Pooling-of-Interests Business Combination
On June 30, 1998, YSI exchanged 866,772 shares of YSI's common stock for all
of the common stock of Community Corrections, Inc. ("CCI") CCI operates
residential boot camp and detention facilities with a total capacity of 353
beds in Texas and provides aftercare services to adjudicated youth in Georgia.
CCI was a Subchapter S corporation for federal income tax purposes whereby the
earnings of the corporation pass through to the respective owners. It was the
policy of CCI to distribute necessary amounts to the owners on a periodic basis
in order to allow them to fund their personal tax liabilities attributable to
the earnings of CCI. During the year ended December 31, 1997, income tax
dividends were distributed to the owners totaling approximately $129,000.
The above transaction has been accounted for as pooling-of-interests and,
accordingly, the accompanying consolidated financial statements for the periods
presented have been retroactively adjusted to reflect the business combination.
Revenue and net income of the separate companies for the periods preceding
the CCI merger were as follows:
<TABLE>
<CAPTION>
Net Pro Forma
Revenue Income Net Income
-------- -------- ----------
<S> <C> <C> <C>
Year ended December 31, 1997:
YSI, as previously reported................. $108,129 $(15,971) $(15,971)
CCI......................................... 7,973 (1,106) (1,230)
-------- -------- --------
Combined.................................... $116,102 $(17,077) $(17,201)
======== ======== ========
Six Months ended December 31, 1996:
YSI, as previously reported................. $ 57,043 $ 1,534 $ 1,534
CCI......................................... 2,718 215 135
-------- -------- --------
Combined.................................... $ 59,761 $ 1,749 $ 1,669
======== ======== ========
</TABLE>
G-7
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Net Pro Forma
Revenue Income Net Income
-------- ------ ----------
<S> <C> <C> <C>
Year Ended June 30, 1996:
YSI, as previously reported.................... $100,353 $2,271 $2,271
CCI............................................ 3,289 133 83
-------- ------ ------
Combined....................................... $103,642 $2,404 $2,354
======== ====== ======
Year Ended June 30, 1995:
YSI, as previously reported.................... $ 53,087 $2,179 $2,179
CCI............................................ 765 (13) (8)
-------- ------ ------
Combined....................................... $ 53,852 $2,166 $2,171
======== ====== ======
</TABLE>
Pro forma net income reflects adjustments to net income to record an
estimated provision for income taxes for each period presented assuming CCI was
a taxpaying entity.
Principles of Consolidation
As of December 31, 1997, the consolidated financial statements included the
accounts of Youth Services International, Inc. and the following wholly-owned
subsidiaries:
.Youth Services International of Iowa, Inc.
.Youth Services International of Tennessee, Inc.
.Youth Services International of Baltimore, Inc.
.Youth Services International of Maryland, Inc.
.Youth Services International of Northern Iowa, Inc.
.Youth Services International of South Dakota, Inc.
.Youth Services International of Missouri, Inc.
.Youth Services International of Central Iowa, Inc.
.Youth Services International of Texas, Inc.
.Youth Services International of Virginia, Inc.
.Youth Services International of Delaware, Inc.
.Youth Services International Southeastern Programs, Inc.
.Youth Services International of Minnesota, Inc.
.Youth Services International of Illinois, Inc.
.Youth Services International of Michigan, Inc.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
YSI manages and operates certain of its programs pursuant to subcontracts or
similar relationships with not-for-profit entities. These not-for-profit
entities hold contracts directly with state and local governments to provide
rehabilitative services to troubled youth and subcontract management
responsibility to YSI. These not-for-profit entities are each controlled by
independent Boards of Directors which have the right to terminate their
contract with YSI under certain circumstances. The accompanying consolidated
balance sheets include net accounts receivable pursuant to these contracts of
$5,437,000 and $7,407,000 as of December 31, 1997 and 1996, respectively.
Revenue Recognition and Contract Provisions
YSI's programs are typically provided pursuant to contracts directly with
governmental entities or subcontracts with not-for-profit entities that
contract directly with governmental entities. These contracts generally provide
for fixed per diem payments based upon program occupancy. Revenues on fixed per
diem and management contracts are recognized as the services are performed.
G-8
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
One of YSI's significant programs operates under a contract whereby revenues
are recognized as reimbursable costs are incurred through a gross maximum price
cost reimbursement arrangement. This contract has costs, including indirect
costs, subject to audit and adjustment by negotiations with government
representatives. Contract revenues subject to audit relating to this contract
of $13,519,000, $6,835,000, $13,583,000 and $13,561,000 have been recorded for
the year ended December 31, 1997, the six months ended December 31, 1996 and
the years ended June 30, 1996 and 1995, respectively, at amounts which are
expected to be realized. Subsequent adjustments, if any, resulting from the
audit process are recorded when known.
Contract terms with government and not-for-profit entities generally range
from one to five years in duration and expire at various dates through June
2002. Most of these contracts are subject to termination for convenience by the
governmental entity. Management of YSI is not aware of any circumstances that
would cause any governmental entity to terminate any existing agreement.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are due primarily from state
and local governments and not-for-profit entities under contracts.
Property, Equipment and Improvements
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives ranging from 3 to 39 years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
Goodwill
Goodwill representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses is stated at cost and is
amortized over 10 years using the straight-line method.
Amortization expense for the year ended December 31, 1997, the six months
ended December 31, 1996 and the years ended June 30, 1996 and 1995, was
$894,000, $1,011,000, $1,038,000 and $582,000, respectively. Accumulated
amortization at December 31, 1997 and 1996 was $1,656,000 and $2,927,000,
respectively. (See Note 15 for discussion of the loss related to the
disposition of the behavioral health business recognized during the year ended
December 31, 1997.)
Realizability of Long-Lived Assets and Goodwill
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
requires that long-lived assets and certain identifiable intangibles including
goodwill to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. YSI uses an estimate of the
undiscounted cash flows over the remaining life of its long-lived assets and
goodwill in measuring whether the assets to be held and used will be
realizable.
Fair Value of Financial Instruments
YSI determines fair value of their financial instruments held based on
quoted market values where applicable or discounted cash flow analyses. As of
December 31, 1997 and 1996, the carrying value of its financial instruments
approximates fair value.
G-9
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Revenue
Deferred revenue consists of advance payments for services which will be
recognized as revenue as the related services are performed.
Development Costs
Development costs consist primarily of payroll and travel costs of
individuals whose role is to grow YSI by entering new markets.
Income Taxes
YSI accounts for income taxes utilizing the liability method in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes". Under this
method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the rates and laws that are projected to be in effect
when the differences are expected to reverse. Any resulting deferred tax asset
along with the tax benefits related to operating loss and tax credit
carryforwards are recognized if management believes, based on available
evidence, that it is more likely than not they will be realized (see Note 13).
Stock Split
A three-for-two stock split in the form of a stock dividend was effected May
24, 1996, with the issuance of 2,823,544 shares of common stock. All share and
per share amounts in the accompanying consolidated financial statements and
notes thereto have been retroactively restated to reflect this split.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Newly Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
The statement establishes standards for reporting and display of comprehensive
income and its components. YSI plans to adopt this new standard in the fiscal
year beginning January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. The statement establishes revised standards
under which an entity must report business segment information in its financial
statements. YSI plans to adopt this new standard, if applicable, in the fiscal
year ended December 31, 1998.
G-10
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. EARNINGS PER SHARE:
In March 1997, YSI adopted SFAS No. 128, "Earnings Per Share," effective
December 15, 1997. As a result, YSI is required to provide additional
disclosure of basic earnings per share. Despite certain new calculation
criteria, diluted earnings per share, as defined and reported under the new
SFAS, was equivalent to the historically reported fully diluted earnings per
share.
The following illustrates the calculation of basic and diluted (loss)
earnings per share for all years presented:
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
(in thousands except for per share data)
<S> <C> <C> <C> <C>
Net (loss) income.............. $(17,077) $ 1,749 $ 2,404 $2,166
-------- ------- ------- ------
Weighted average common shares
outstanding................... 10,911 9,981 9,138 8,507
Dilutive effects of options and
warrants...................... -- 913 996 624
-------- ------- ------- ------
Weighted average common and
common equivalent shares
outstanding................... 10,911 10,894 10,134 9,131
======== ======= ======= ======
Basic (loss) earnings per
common share.................. $ (1.57) $ 0.18 $ 0.26 $ 0.25
======== ======= ======= ======
Diluted (loss) earnings per
common share.................. $ (1.57) $ 0.16 $ 0.24 $ 0.24
======== ======= ======= ======
</TABLE>
Basic (loss) earnings per common share were computed by dividing net (loss)
income by the weighted average number of common shares outstanding during the
year. Diluted (loss) earnings per common share were computed by dividing net
(loss) income by the weighted average number of common and common equivalent
shares outstanding during the year. YSI's 7% Convertible Subordinated
Debentures (see Note 8) are excluded from the diluted (loss) earnings per
common share calculation due to their anti-dilutive effect. The dilutive
effects of options and warrants were not provided for the year ended December
31, 1997 as losses are not diluted for earnings per share purposes.
3. INVESTMENTS:
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", securities are required to be reported as held-to-maturity,
trading or available-for-sale securities. Securities classified as available-
for-sale are reported at fair value with unrealized gains and losses reported
as a separate component of shareholders' equity.
Amortized cost and approximate fair value of investment securities
available-for-sale as of December 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1996
-------------------------------------
Amortized Gross Approximate
Cost Unrealized Loss Fair Value
--------- --------------- -----------
<S> <C> <C> <C>
Corporate Bond Fund, Class A........... $5,303 $99 $5,204
====== === ======
</TABLE>
There were no investment securities available-for-sale as of December 31,
1997.
G-11
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. NOTES RECEIVABLE:
In connection with its 1996 asset purchase of Tampa Bay Academy, Ltd.
("TBA") (see Note 15), YSI paid a mortgage obligation of TBA of approximately
$3,271,000 thereby creating a note receivable from the former owners of TBA.
The note receivable bore interest at an annually adjustable rate equal to the
10 year Treasury Bond rate plus 285 basis points. On October 31, 1997, the
outstanding principal balance of $3,067,000 was repaid by the former owners of
TBA. The proceeds from the repayment were utilized to partially fund YSI's
acquisition on October 31, 1997 of the land and buildings owned by the former
owners of TBA for $5,000,000.
During the year ended June 30, 1996, YSI entered into a $1,000,000
discretionary line of credit agreement with Introspect HealthCare, Corporation.
The line of credit balance of $1,000,000 was reclassified to goodwill in
connection with YSI's acquisition of Introspect HealthCare, Corporation
effective September 1, 1996 (see Note 15).
5. ACCRUED EXPENSES:
Accrued expenses consist of the following as of December 31, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accrued payroll.................................... $1,384 $1,859
Accrued interest................................... 948 965
Other.............................................. 4,362 5,561
------ ------
$6,694 $8,385
====== ======
</TABLE>
6. SHORT-TERM BORROWINGS:
Lines of Credit
During the year ended June 30, 1995, YSI entered into an operating line of
credit arrangement with a bank, under which it could borrow the lesser of
$5,000,000 or 85% of eligible accounts receivable. Amounts drawn under this
line of credit bore interest at prime plus one-half percent and were payable on
demand. The line was secured by accounts receivable of YSI. This line of credit
was canceled during the year ended June 30, 1996, and replaced with the line of
credit facility included in Note 8.
Lines of credit information for the years ended June 30, 1996 and 1995,
prior to the line of credit facility included in Note 8, is as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Maximum amount outstanding during the year..... $ 70 $3,070
Average outstanding month-end balance during
the year...................................... 70 820
Weighted average interest rate during the
year.......................................... 10.0% 9.4%
</TABLE>
G-12
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. SUBORDINATED DEBENTURES:
12% Subordinated Debentures
During the year ended June 30, 1993, YSI issued 12% Subordinated Debentures
in the principal amount of $1,000,000 due in 10 equal semi-annual installments
beginning June 30, 1998. Debentures in the principal amount of $580,000 were
held by shareholders or their close relatives. The debentures were issued with
an original issue discount of $50,000 which was being amortized over the life
of the debentures using the effective interest method. The 12% Subordinated
Debentures were redeemed by YSI on January 1, 1998 and a loss of $53,000 was
incurred by YSI in connection with this early extinguishment.
In connection with the issuance of the debentures, warrants to purchase
231,900 shares of common stock at an exercise price of $3.23 per share were
issued. These warrants were exercisable beginning in April 1993 and expire at
various dates through November 1999. The warrants have been assigned a value of
$50,000.
7% Convertible Subordinated Debentures
During the year ended June 30, 1996, YSI issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $37,950,000.
Interest is payable semi-annually in arrears. The debentures are convertible
into common stock at the rate of one share for each $12.47 of principal. The 7%
Convertible Subordinated Debentures may be redeemed at the option of YSI, in
whole or in part at any time after February 1, 1999, at a redemption price
equal to that percentage of their principal amount set forth below:
<TABLE>
<CAPTION>
On or after February 1, Premium
----------------------- -------
<S> <C>
1999............................................................ 103%
2000............................................................ 102%
2001............................................................ 101%
2002............................................................ 100%
</TABLE>
YSI incurred approximately $2,500,000 of direct costs in connection with the
issuance of the 7% Convertible Subordinated Debentures. These costs have been
included within deferred debt issue costs in the accompanying consolidated
balance sheets and are being amortized over the life of the related debentures.
In July 1996, holders of an aggregate principal amount of $5,750,000 of 7%
Convertible Subordinated Debentures surrendered such debentures for conversion
and received 461,106 shares of common stock. A conversion premium of $297,000
was paid by YSI. The conversion premium has been included in other expense in
the accompanying consolidated statement of operations for the year ended June
30, 1996.
G-13
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Bank Loans:
Revolving line of credit payable to a bank,
permitted borrowings equal to the lesser of
$20,000,000 or 85% of eligible accounts
receivable plus 95% of cash balances on
deposit, secured by accounts receivable and
cash balances on deposit, bearing interest at
the prime rate or LIBOR plus 2.25%, (7.4% as of
December 31, 1997) due November 1998 .......... $-- $11,124
DBC Purchase Note:
Note payable to a non-affiliated individual, in
the face amount of $450,000 discounted to
$393,000, at an imputed interest rate of 8%,
$225,000 was payable August 1996 and $225,000
was payable
August 1997.................................... -- 189
Mortgage Payable:
Mortgage payable to the City of Springfield,
South Dakota secured by property in the City of
Springfield, South Dakota, bearing interest at
3.5%, principal and interest due in annual
installments through
June 2002...................................... 75 90
Forest Ridge Purchase Note:
Note payable to a non-affiliated individual, in
the face amount of $150,000 discounted to
$117,000, at an imputed interest rate of 10%,
payable in monthly installments beginning March
1993........................................... 5 33
Community Corrections Inc.:
Various notes payable with interest rates
ranging from 9.5% to 13%, interest payable
monthly with principal generally due one year
from the date of issuance...................... 452 439
Other:
Note payable to Finova Capital Corporation,
secured by certain fixed assets, bearing
interest at 11%, payable in monthly
installments through January 2001. Outstanding
balance of $1,722,000 was repaid on
June 30, 1997.................................. -- 1,853
---- -------
532 13,728
Less: Current portion............................ 456 11,888
---- -------
Total............................................ $ 76 $ 1,840
==== =======
</TABLE>
Borrowings information with respect to the revolving line of credit for the
year ended December 31, 1997, the six months ended December 31, 1996, and the
years ended June 30, 1996 and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Maximum amount outstanding
during the year............... $5,310 $11,124 $7,295 $5,300
Average outstanding month-end
balance during the year....... 3,087 5,042 5,295 5,300
Weighted average interest rate
during the year............... 6.7% 7.8% 8.3% 8.3%
</TABLE>
Certain of these agreements require that YSI maintain a minimum current
ratio and level of tangible net worth, as well as meet certain other financial
standards.
G-14
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. OPERATING LEASES:
YSI leases certain operating facilities and computer and office equipment
under operating leases expiring through 2010.
Future minimum lease payments, by year and in the aggregate are as follows
(in thousands):
<TABLE>
<CAPTION>
For the Year
Ending December 31,
-------------------
<S> <C>
1998............................................................. $2,735
1999............................................................. 1,929
2000............................................................. 1,494
2001............................................................. 713
2002............................................................. 113
2003 and thereafter.............................................. 33
------
$7,017
======
</TABLE>
Rent expense for the year ended December 31, 1997, the six months ended
December 31, 1996, and the years ended June 30, 1996, and 1995 was $4,210,000,
$2,270,000, $3,041,000 and $945,000, respectively.
10. EMPLOYEE RETIREMENT PLAN:
Effective July 1, 1992, YSI established the YSI 401(k) Retirement Plan (the
"401(k) Plan") pursuant to Section 401(k) of the Internal Revenue Code. The
401(k) Plan covers all full-time employees of YSI who have satisfied
eligibility requirements. Contributions are made by YSI at its discretion.
During the year ended December 31, 1997, the six months ended December 31, 1996
and the years ended June 30, 1996, and 1995, YSI expensed $42,000, $120,000,
$191,000 and $115,000, respectively, in matching contributions and
administrative fees related to the 401(k) Plan.
11. CONTINGENCIES:
YSI has been named as defendant in various legal proceedings arising from
the performance of its normal activities. It is the opinion of management,
after consultation with legal counsel, that the amount, if any, of YSI's
ultimate liability under all current legal proceedings will not have a material
adverse effect on the financial position, results of operations or cash flows
of YSI.
12. EQUITY PARTICIPATION PLANS:
Stock Option Plans
During the year ended June 30, 1992, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1992 Stock Option Plan
(the "1992 Stock Option Plan"), under which YSI may grant to eligible employees
nonqualified stock options to purchase up to 1,125,000 shares of common stock.
Options granted under the 1992 Stock Option Plan allow for the purchase of
common stock at prices not less than the fair market value of the common stock
at the date of grant, for a term of no more than ten years. At the discretion
of the Board of Directors, the granted options may also be subject to certain
vesting provisions. The majority of the options granted to date contain a
three-year vesting period.
During the year ended June 30, 1994, the Board of Directors and shareholders
approved the establishment of the Youth Services International, Inc. 1995
Employee Stock Option Plan (the "1995 Stock Option Plan") and the Youth
Services International, Inc. 1995 Director Stock Option Plan (the "1995
Director Stock Option Plan"). Under the 1995 Stock Option Plan, YSI may grant
to eligible employees nonqualified stock options to purchase up to 750,000
shares of common stock beginning July 1, 1994. The 1995 Stock Option Plan
provides
G-15
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the purchase of common stock at the fair market value of the common stock
at the date of grant. Under the 1995 Director Stock Option Plan, YSI may grant
options to purchase up to 200,000 shares of common stock to non-employee
members of the Board of Directors. The 1995 Director Stock Option Plan provides
for the automatic granting of 7,500 shares of YSI's common stock each year on
the anniversary date of the appointment of a non-employee director to the Board
of Directors. The 1995 Director Stock Option Plan provides for the purchase of
common stock at the fair market value of the common stock at the date of grant.
During the year ended June 30, 1995, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1996 Employee Stock
Option Plan (the "1996 Stock Option Plan"). Under the 1996 Stock Option Plan,
YSI may grant to eligible employees nonqualified stock options to purchase up
to 450,000 shares of common stock beginning July 1, 1995. The 1996 Stock Option
Plan provides for the purchase of common stock at the fair market value of the
common stock at the date of grant.
During the six months ended December 31, 1996, the Board of Directors
approved the establishment of the Youth Services International, Inc. 1997
Employee Stock Option Plan (the "1997 Stock Option Plan"). Under the 1997 Stock
Option Plan, YSI may grant to eligible employees incentive stock options or
nonqualified stock options to purchase up to 500,000 shares of common stock
beginning July 1, 1996. The 1997 Stock Option Plan provides for the purchase of
common stock at the fair market value of the common stock at the date of grant.
A summary of the status of YSI's stock option plans as of December 31, 1997
and 1996 and June 30, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 June 30, 1996 June 30, 1995
-------------------- -------------------- -------------------- --------------------
Wtd. Wtd. Wtd. Wtd.
Avg. Avg. Avg. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of period.... 1,414,628 $ 6.36 1,444,753 $ 5.17 1,520,646 $ 2.83 1,096,000 $1.13
Granted................. 305,184 11.05 147,500 16.46 373,050 11.06 757,538 5.09
Exercised............... (827,508) 3.27 (177,625) 5.05 (448,943) 2.15 (332,892) 2.37
Forfeited............... (164,006) 8.04 -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ --------- -----
Outstanding, end of
period................. 728,298 $11.46 1,414,628 $ 6.36 1,444,753 $ 5.17 1,520,646 $2.83
========= ====== ========= ====== ========= ====== ========= =====
Exercisable, end of
period................. 333,798 $10.94 1,109,078 $ 4.68 1,226,620 $ 4.59 1,265,480 $2.42
========= ====== ========= ====== ========= ====== ========= =====
</TABLE>
Stock Purchase Plan
During the year ended June 30, 1994, YSI established an Employee Stock
Purchase Plan. Under the Employee Stock Purchase Plan, YSI was authorized to
grant to eligible employees opportunities to purchase 225,000, 300,000 and
450,000 shares of common stock beginning July 1, 1994, 1995 and 1996,
respectively. The Employee Stock Purchase Plan allowed for the purchase of
common stock at 85% of the fair market value of the common stock at the date of
grant. During the six months ended December 31, 1996 and the years ended June
30, 1996 and 1995, employees purchased approximately 7,000, 250,000, and
102,000 shares of common stock, respectively, for proceeds to YSI of
approximately $91,000, $1,917,000, and $427,000, respectively. YSI has
discontinued this Employee Stock Purchase Plan and no shares were issued during
the year ended December 31, 1997.
Accounting For Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting For Stock Based Compensation" ("SFAS No. 123"). This statement
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages but does not require all
G-16
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entities to adopt that method of accounting for all of their employee stock
compensation plans. Entities electing not to make the change in accounting
methods must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting had been applied. YSI has elected
to account for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, YSI's net (loss) income and
(loss) earnings per share would have been (increased) reduced to the following
pro forma amounts for the year ended December 31, 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996 (in thousands, except per
share data):
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
------------ ------------ ----------
<C> <S> <C> <C> <C>
Net (loss) income: As reported....... $(17,077) $1,749 $2,404
======== ====== ======
Pro Forma......... $(18,896) $1,027 $ 544
======== ====== ======
Basic EPS: As reported....... $ (1.57) $ 0.18 $ 0.26
======== ====== ======
Pro Forma......... $ (1.73) $ 0.10 $ 0.06
======== ====== ======
Diluted EPS: As reported....... $ (1.57) $ 0.16 $ 0.24
======== ====== ======
Pro Forma......... $ (1.73) $ 0.09 $ 0.05
======== ====== ======
</TABLE>
Because the SFAS No. 123 method accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair value per option granted during the year ended
December 31, 1997, the six months ended December 31, 1996 and the year ended
June 30, 1996 was $6.73, $10.09, $6.78, respectively.
The above information was calculated utilizing the Black-Scholes option-
pricing model and the following key assumptions:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
------------ ------------ ----------
<S> <C> <C> <C>
Risk-free interest rate................. 6.5% 5.9% 5.9%
Volatility.............................. 75% 60% 60%
Expected life (months).................. 48 24 24
</TABLE>
Stock Compensation
During the year ended December 31, 1997, one executive of CCI transferred
shares to two other members of CCI management for past services rendered. The
transfer of shares has been recorded as compensation of $1,440,000 based upon
the estimated fair value of shares on the date of transfer. This transaction is
reflected in the accompanying Statement of Operations as Special Bonuses.
G-17
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. INCOME TAXES:
The income tax benefit (expense) for the year ended December 31, 1997, the
six months ended December 31, 1996 and the years ended June 30, 1996 and 1995,
included the following components (in thousands):
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Federal income tax benefit
(expense).................... $2,902 $(829) $(1,616) $(1,110)
State income tax benefit
(expense).................... 183 (117) (240) (222)
------ ----- ------- -------
Total....................... $3,085 $(946) $(1,856) $(1,332)
====== ===== ======= =======
Current income tax expense.... $ (731) $(948) $(2,160) $(1,305)
Deferred income tax benefit
(expense).................... 3,816 2 304 (27)
------ ----- ------- -------
Total....................... $3,085 $(946) $(1,856) $(1,332)
====== ===== ======= =======
</TABLE>
A reconciliation between the actual income tax provision (benefit) and the
amount computed by applying the federal statutory tax rate of 34% to the income
before income tax expense is as follows:
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Income tax (benefit) provision
at federal statutory rate.... (34.0)% 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax effect.... (5.0) 5.0 5.0 4.6
Loss on Introspect
operations................... -- (5.1) 2.4 --
Non-deductible goodwill....... 21.1 3.6 1.6 --
Effects of CCI S Corporation
Status....................... .9 (3.0) (1.4) .2
Other......................... 1.7 .6 2.0 (.7)
----- ---- ---- ----
Total....................... (15.3)% 35.1% 43.6% 38.1%
===== ==== ==== ====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Loss carryforwards............................... $5,740 $ 239
Depreciation and amortization.................... 613 321
Accruals and reserves............................ 1,200 546
Start-up losses.................................. 173 130
Prepaid expenses and inventory................... (431) (442)
Unrealized loss on investments available-for-
sale............................................ -- 41
Other............................................ (14) (134)
------ -----
Deferred tax asset............................... $7,281 $ 701
====== =====
</TABLE>
At December 31, 1997, YSI had net operating loss carryforwards of
approximately $10,299,000 and $12,276,000 for federal and state income tax
purposes, respectively, that expire through 2012. At December 31, 1997, YSI
also has a capital loss carryforward of approximately $10,600,000 that expires
in 2002.
G-18
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. RELATED PARTY TRANSACTIONS:
During the six months ended December 31, 1996, YSI entered into an agreement
with International Youth Institute ("IYI"), a company in which an officer and
shareholder is a relative of a former officer and director of YSI. Under this
agreement, YSI outsources the training of its staff workers to IYI. In
connection with this agreement, a number of YSI employees who were trainers of
other YSI employees were hired by IYI. In order to compensate YSI for the
knowledge, training materials and other intellectual property that had been
transferred, IYI paid YSI $700,000 and was not compensated for training
services IYI provided prior to January 1, 1997. The sale amount of $700,000 has
been included in revenues in the accompanying statement of operations for the
six months ended December 31, 1996. YSI and IYI also entered into a training
services agreement pursuant to which IYI will provide certain training services
to YSI for a period of five years at a rate of approximately $34 per month per
full-time employee of YSI.
In connection with the resignation of the Founder of YSI from the Board of
Directors effective July 1, 1997, YSI appointed the Founder as Chairman
Emeritus and entered into a four-year Representation Agreement with him. Under
the Representation Agreement, the Chairman Emeritus agrees to represent YSI's
interest with current and potential customers, governmental bodies and the
public as and to the extent requested by YSI and in exchange, YSI pays him
$20,000 per quarter during the four-year term.
15. DISPOSITION OF BEHAVIORAL HEALTH BUSINESS:
During the period January 1, 1994 through January 1, 1997, YSI acquired the
operating assets or stock of the following companies:
.Western Youth Inc.
.Parc Place, Limited Partnership
.Promise House, Inc.
.Developmental Behavioral Consultants, Inc.
.Desert Hills Center for Youth and Families of New Mexico, Inc.
.Desert Hills of Texas, Inc.
.Tampa Bay Academy, Ltd.
.Youth Quest Inc.
.Introspect HealthCare, Corporation
.Texas Children's Health Services Inc. ("Los Hermanos")
Following their respective acquisitions, YSI operated each of the companies
listed above as distinct businesses. Due to their related nature, however,
these businesses comprised YSI's behavioral health business. The total
acquisition price for these companies, including assumed liabilities and
acquisition costs, was approximately $41.1 million with approximately $19.8
million of the total purchase price being allocated to goodwill in connection
with purchase accounting.
In March 1997, the Board of Directors of YSI approved, and management
committed to, a plan to sell the programs that comprised YSI's behavioral
health business. On October 31, 1997, YSI consummated the sale of the
behavioral health business, other than the College Station and Los Hermanos
programs in Texas, for $20,400,000 resulting in a loss on sale of $20,898,000.
In September 1998, YSI closed the College Station program. Not included in the
accompanying financial statements is a charge of $2,327,000 recognized in
September 1998 which resulted from the closure. YSI continues to operate the
Los Hermanos program.
G-19
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited revenues and contribution from operations for the behavioral
health businesses including the College Station program for the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 June 30, 1996 June 30,1995
----------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $34,733 $24,869 $44,759 $9,304
Contribution from
Operations............. 95 1,659 3,394 694
</TABLE>
16. SIGNIFICANT CUSTOMER:
YSI derives a significant portion of its revenues from two contracts with
one state agency. This state agency provided 22%, 22%, 24% and 46% of total
revenues for the year ended December 31, 1997, the six months ended December
31, 1996 and the years ended June 30, 1996 and 1995, respectively. One of the
two contracts with this state agency will expire on March 31, 1999. YSI has
submitted its proposal to retain the contract and to continue to provide the
services.
17. UNAUDITED FINANCIAL INFORMATION:
The unaudited summary results of operations for the six month period ended
December 31, 1995, including the effects of the CCI, was as follows (in
thousands):
<TABLE>
<S> <C>
Revenues............................................................ $49,240
Program expenses.................................................... 42,227
-------
Contribution from operations...................................... 7,013
Development costs................................................... 526
General and Administrative Expenses................................. 2,775
-------
Income from Operations............................................ 3,712
-------
Income Before Income Tax Expense.................................. 2,255
Income Tax Expense.................................................. 978
-------
Net Income........................................................ $ 1,277
=======
Earnings per Common Share:
Basic............................................................. $ 0.14
=======
Diluted........................................................... $ 0.13
=======
</TABLE>
18. SUBSEQUENT EVENT
On September 24, 1998, YSI announced that it had entered into a definitive
merger agreement with Correctional Services Corporation ("CSC") under which
each outstanding share of YSI common stock will be converted into .375 shares
of CSC common stock. Under the merger agreement, YSI would become a wholly-
owned subsidiary of CSC.
G-20
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................. $ 6,570 $ 8,015
Restricted cash................................... 68 264
Accounts receivable, net.......................... 15,759 15,475
Other receivables................................. 2,056 2,343
Proceeds receivable from sale of behavioral health
business......................................... -- 4,500
Prepaid expenses, supplies and other.............. 3,107 1,724
Deferred tax asset................................ -- 769
-------- --------
Total current assets............................ 27,560 33,090
-------- --------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land.............................................. 2,004 1,976
Leasehold improvements............................ 11,452 9,401
Program equipment................................. 2,474 1,949
Buildings......................................... 10,447 8,715
Office furniture and equipment.................... 3,441 3,339
Vehicles.......................................... 1,930 1,675
-------- --------
31,748 27,055
Accumulated depreciation.......................... (8,036) (6,013)
-------- --------
Property, equipment and improvements, net....... 23,712 21,042
-------- --------
OTHER ASSETS:
Deferred debt issue costs, net.................... 1,633 1,819
Goodwill, net..................................... 1,882 2,165
Deferred tax asset................................ 7,493 6,512
Other assets, net................................. 1,240 1,739
-------- --------
Total other assets.............................. 12,248 12,235
-------- --------
Total assets.................................... $ 63,520 $ 66,367
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............. $ 8,389 $ 8,047
Deferred revenue.................................. 208 1,243
Deferred tax liability............................ 464 --
Current portion of long-term obligations.......... 21 664
-------- --------
Total current liabilities....................... 9,082 9,954
7% CONVERTIBLE SUBORDINATED DEBENTURES.............. 32,200 32,200
LONG-TERM PORTION OF COLLEGE STATION CLOSURE COSTS.. 1,622 --
12% SUBORDINATED DEBENTURES, net of unamortized
discount........................................... -- 797
LONG-TERM DEBT, less current portion................ 75 81
-------- --------
Total liabilities............................... 42,979 43,032
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 70,000,000 shares
authorized, 11,313,727 and 11,107,970 issued and
outstanding, respectively........................ 113 111
Additional paid-in capital........................ 36,417 35,055
Accumulated deficit............................... (15,989) (11,831)
-------- --------
Total shareholders' equity...................... 20,541 23,335
-------- --------
Total liabilities and shareholders' equity...... $ 63,520 $ 66,367
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
G-21
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1997
------- ---------
<S> <C> <C>
REVENUES $67,365 $ 90,685
PROGRAM EXPENSES:
Direct operating...................................... 60,288 78,867
Start-up costs........................................ 494 61
------- ---------
CONTRIBUTION FROM OPERATIONS............................ 6,583 11,757
OTHER OPERATING EXPENSES:
Development costs..................................... 1,570 817
General and administrative............................ 5,785 6,977
College Station shutdown charge....................... 2,327 --
Strategic deal costs.................................. 472 --
CCI special bonuses................................... -- 1,440
Costs related to CCI transaction...................... 306 --
Loss on sale of behavioral health business............ -- 27,000
------- ---------
(LOSS) INCOME FROM OPERATIONS........................... (3,877) (24,477)
INTEREST AND OTHER EXPENSE, net......................... (1,085) (2,290)
------- ---------
(LOSS) INCOME BEFORE TAXES.............................. (4,962) (26,767)
INCOME TAX (BENEFIT) EXPENSE............................ (863) (5,554)
------- ---------
NET (LOSS) INCOME....................................... $(4,099) $ (21,213)
======= =========
(LOSS) EARNINGS PER SHARE:
Basic................................................. $ (0.36) $ (1.96)
======= =========
Diluted............................................... $ (0.36) $ (1.96)
======= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 11,251 10,846
======= =========
Diluted............................................... 11,251 10,846
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
G-22
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
-----------------
1998 1997
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................... $(4,099) $(21,213)
Adjustments to reconcile net loss to net cash provided by
operating activities:
College Station closure charge............................. 2,327 --
Stock granted as compensation.............................. 68 1,515
Depreciation and amortization.............................. 2,802 4,427
Loss on sale of property, equipment and improvements....... 19 23
Loss on sale of behavioral health business................. -- 27,000
Loss on sale of investments................................ -- 203
Write off of other assets.................................. 321 --
Deferred income taxes...................................... 252 (6,840)
Tax benefit realized due to exercise of nonqualified stock
options................................................... 352 --
Net change in operating assets and liabilities............. (2,249) 2,849
------- --------
Net cash (used in) provided by operating activities......... (207) 7,964
------- --------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements.......... (4,786) (4,870)
Proceeds from sale of property, equipment and
improvements.............................................. 24 984
Cash paid for business acquired, net of cash received...... -- (629)
Proceeds from sale of behavioral health business........... 4,500 --
Collections of notes receivable............................ 38 32
Proceeds from sale of investments.......................... -- 5,101
Other long-term assets..................................... (453) (1,369)
------- --------
Net cash used in investing activities....................... (677) (751)
------- --------
FINANCING ACTIVITIES:
Repayments of short-term borrowings, long-term borrowings
and capital lease obligations............................. (1,446) (11,417)
Proceeds from long term borrowings......................... -- 96
Dividend distribution...................................... (59) (12)
Proceeds from issuance of common stock under stock option
and stock purchase plans, net............................. 944 3,007
------- --------
Net cash used in financing activities....................... (561) (8,326)
------- --------
NET INCREASE (DECREASE) IN CASH............................. (1,445) (1,113)
CASH, beginning of period................................... 8,015 3,491
------- --------
CASH, end of period......................................... 6,570 2,378
------- --------
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS
OF BUSINESS ACQUISITIONS AND DISPOSITIONS:
Restricted cash............................................ 196 --
Accounts receivable........................................ (385) 4,648
Other receivables.......................................... 854 --
Prepaid expenses, supplies and other....................... (1,383) 1,130
Deposits................................................... (16) --
Accounts payable and accrued expenses...................... (480) (1,533)
Deferred revenue........................................... (1,035) (1,396)
------- --------
Net change in operating assets and liabilities.............. $(2,249) $ 2,849
======= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest..................................... $ 2,260 $ 2,937
======= ========
Cash paid for taxes, net of refunds........................ $ 270 $ (343)
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
G-23
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION
In the opinion of management of Youth Services International, Inc. ("'YSI")
, the accompanying interim unaudited consolidated financial statements include
all adjustments, consisting only of normal, recurring adjustments, necessary
for a fair presentation of YSI's financial position at September 30, 1998 and
the results of its operations for the nine months ended September 30, 1998 and
1997 and its cash flows for the nine months ended September 30, 1998 and 1997.
The accompanying audited consolidated balance sheet as of December 31, 1997 is
presented herein as set forth in YSI's Form 10-K for the year ended December
31, 1997, after giving effect to certain reclassifications to conform to
current year presentation and the pooling-of-interests business combination
described below. The statements herein are presented in accordance with the
rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in YSI's
consolidated financial statements on Form 10-K have been omitted from these
statements, as permitted under the applicable rules and regulations. Readers of
these statements should refer to the consolidated financial statements and
notes thereto as of December 31, 1997 and 1996 and June 30, 1996 and for the
periods then ended filed with the SEC on Form 10-K.
Operating results for the nine months ended September 30, 1998 and 1997 are
not necessarily indicative of the results that may be expected for a full
fiscal year.
2. POOLING-OF-INTERESTS BUSINESS COMBINATION
On June 30, 1998, YSI exchanged 866,772 shares of YSI's common stock for all
of the common stock of Community Corrections, Inc. ("CCI"). CCI operates
residential boot camp and detention facilities with a total capacity of 353
beds in Texas and provides aftercare services to adjudicated youth in Georgia.
CCI was a Subchapter S corporation for federal income tax purposes whereby the
earnings of the corporation pass through to the respective owners. It was the
policy of CCI to distribute necessary amounts to the owners on a periodic basis
in order to allow them to fund their personal tax liabilities attributable to
the earnings of CCI. During the six months ended June 30, 1998, income tax
dividends were distributed to the owners totaling approximately $59,000. CCI
will be included in YSI's federal income tax return effective June 30, 1998.
The above transaction has been accounted for as pooling-of-interests and,
accordingly, the consolidated financial statements for the periods presented
have been restated to include the accounts of CCI.
Revenue and net income of the separate companies for the periods preceding
the CCI merger were as follows:
<TABLE>
<CAPTION>
Net Pro Forma
Revenue Income Net Income
------- ------- ----------
<S> <C> <C> <C>
Nine months ended September 30, 1998:
YSI............................................ 62,853 (4,382) (4,382)
CCI............................................ 4,512 283 178
------ ------- -------
Combined....................................... 67,365 (4,099) (4,204)
====== ======= =======
Nine months ended September 30, 1997:
YSI, as previously reported.................... 84,802 (20,003) (20,003)
CCI............................................ 5,883 (1,210) (762)
------ ------- -------
Combined....................................... 90,685 (21,213) (20,765)
====== ======= =======
</TABLE>
Pro forma net income reflects adjustments to net income to record an
estimated provision for income taxes for each period presented assuming CCI was
a taxpaying entity.
G-24
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. SALE OF BEHAVIORAL HEALTH BUSINESS
On October 31, 1997, YSI consummated the sale of its behavioral health
business, other than its two behavioral health programs in Texas, for
$20,400,000, resulting in a net loss on sale of $20,898,000. YSI originally
estimated the loss on this sale to be $27,000,000 and recognized a loss of this
amount upon the commitment to sell the business during the quarter ended March
31, 1997. Due to its receipt of sale proceeds in excess of its estimate, YSI
recognized a gain of $6,102,000 at the sale date. Included in the Consolidated
Statement of Operations for the nine months ended September 30, 1998 is
$1,020,000 of revenues related to the behavioral health facilities sold.
4. COLLEGE STATION CLOSURE CHARGE
In late August 1998, YSI decided to close its program in College Station,
Texas. The program was a behavioral health program originally intended to be
sold with the other seven behavioral health programs sold by YSI on October 31,
1997. This program, as well as YSI's Los Hermanos program in Texas, were
excluded from the October 31, 1997 sale and held for sale by YSI during 1998.
The College Station facility closed entirely on September 15, 1998. The results
of operations of the College Station program for the nine months ended
September 30, 1998 and 1997 included in the accompanying Statement of
Operations are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30.
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues............................................ $1,566,000 $1,893,000
Contribution from operations........................ $ (787,000) $ (364,000)
</TABLE>
YSI has also recorded a liability of $2,327,000 to provide for the
anticipated future losses related to the College Station facility. The major
components of the charge are as follows:
<TABLE>
<S> <C>
Future lease payments............................................ $1,250,000
Continuing maintenance and occupancy costs....................... 858,000
Write-down of leasehold improvements and other fixed assets...... 219,000
----------
$2,327,000
==========
</TABLE>
This charge has been recorded as College Station Closure Charge in the
accompanying Statement of Operations. In August 1998, YSI also decided to no
longer hold the Los Hermanos program for sale but to continue to include it in
its operating portfolio.
5. CCI SPECIAL BONUSES
In August 1997, shares of stock with a value of $1,440,000 were granted to
two key executives of CCI for services provided. The value of these stock
grants has been recognized as CCI Special Bonuses in the accompanying Statement
of Operations.
G-25
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
among
YOUTH SERVICES INTERNATIONAL, INC.,
CORRECTIONAL SERVICES CORPORATION
and
PALM MERGER CORP.
Dated as of September 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER..................................................... A-1
1.1. The Merger........................................................ A-1
1.2. Closing........................................................... A-1
1.3. Effective Time.................................................... A-1
ARTICLE II THE SURVIVING CORPORATION .................................... A-2
2.1. The Articles of Incorporation..................................... A-2
2.2. The Bylaws........................................................ A-2
2.3. Directors......................................................... A-2
2.4. Officers.......................................................... A-2
ARTICLE III CONVERSION OF SHARES ........................................ A-2
3.1. Effect on Stock................................................... A-2
3.2. Exchange of Certificates.......................................... A-3
3.3. Appraisal Rights.................................................. A-5
3.4. Adjustments to Prevent Dilution................................... A-5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................ A-5
4.1. Organization, Good Standing and Qualification..................... A-5
4.2. Capitalization.................................................... A-5
4.3 Company Subsidiaries.............................................. A-6
4.4. Corporate Authority; Approval and Fairness........................ A-6
4.5. Governmental Filings; No Violations............................... A-6
4.6. Company Reports; Financial Statement.............................. A-7
4.7. Absence of Certain Changes........................................ A-7
4.8. Litigation and Liabilities........................................ A-8
4.9. Employee Benefits................................................. A-8
4.10. Compliance with Laws; Permits.................................... A-10
4.11. Takeover Statutes................................................ A-10
4.12. Environmental Matters............................................ A-10
4.13. Taxes............................................................ A-11
4.14. Labor Matters.................................................... A-12
4.15. Intellectual Property............................................ A-12
4.16. Title to Property................................................ A-13
4.17. Material Contracts............................................... A-13
4.18. Brokers and Finders.............................................. A-14
4.19. Insurance Matters................................................ A-14
4.20. Affiliated Transactions.......................................... A-14
4.21. Year 2000 Liability.............................................. A-14
4.22. Accounting and Tax Matters....................................... A-14
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER
SUBSIDIARY ............................................................. A-15
5.1. Merger Subsidiary................................................. A-15
5.2. Organization, Good Standing and Qualification..................... A-15
5.3. Capitalization.................................................... A-15
5.4. Corporate Authority; Approval and Fairness........................ A-16
5.5. Governmental Filings; No Violations............................... A-16
5.6. Parent Reports; Financial Statements.............................. A-17
5.7. Absence of Certain Changes........................................ A-17
5.8. Litigation and Liabilities........................................ A-18
5.9. Employee Benefits................................................. A-18
5.10. Compliance with Laws; Permits.................................... A-19
</TABLE>
- i -
<PAGE>
<TABLE>
<S> <C>
5.11. Environmental Matters.............................................. A-20
5.12. Taxes.............................................................. A-20
5.13. Labor Matters..................................................... A-21
5.14. Intellectual Property.............................................. A-21
5.15. Title to Property.................................................. A-22
5.16. Material Contracts................................................. A-22
5.17. Brokers and Finders................................................ A-22
5.18. Insurance Matters.................................................. A-22
5.19. Accounting and Tax Matters......................................... A-23
ARTICLE VI COVENANTS ...................................................... A-23
6.1. Interim Operations of the Company................................... A-23
6.2. Interim Operations of Parent........................................ A-24
6.3. Interim Operations of Merger Subsidiary............................. A-25
6.4. Acquisition Proposals............................................... A-25
6.5. Information Supplied................................................ A-26
6.6. Stockholder Meetings................................................ A-26
6.7. Filings; Other Actions; Notification................................ A-26
6.8. Taxation and Accounting............................................. A-27
6.9. Access.............................................................. A-28
6.10. Affiliates......................................................... A-28
6.11. Stock Exchange Listing............................................. A-29
6.12. Publicity.......................................................... A-29
6.13. Benefits........................................................... A-29
6.14. Expenses........................................................... A-30
6.15. Indemnification; Directors' and Officers' Insurance................ A-30
6.16. Election to Parent's Board of Directors............................ A-31
6.17. Takeover Statute................................................... A-31
6.18. Debentures......................................................... A-31
6.19. Insurance.......................................................... A-31
ARTICLE VII CONDITIONS .................................................... A-31
7.1. Conditions to Each Party's Obligation to Effect the Merger.......... A-31
7.2. Conditions to Obligations of Parent and Merger Subsidiary........... A-32
7.3. Conditions to Obligation of the Company............................. A-33
ARTICLE VIII TERMINATION .................................................. A-34
8.1. Method of Termination............................................... A-34
8.2. Effect of Termination............................................... A-35
ARTICLE IX MISCELLANEOUS AND GENERAL ...................................... A-35
9.1. Survival............................................................ A-35
9.2. Modification or Amendment........................................... A-36
9.3. Waiver of Conditions................................................ A-36
9.4. Counterparts........................................................ A-36
9.5. Governing Law; Waiver of Jury Trial................................. A-36
9.6. Notices............................................................. A-36
9.7. Entire Agreement; No Other Representations.......................... A-37
9.8. No Third Party Beneficiaries........................................ A-37
9.9. Severability........................................................ A-38
9.10. Interpretation..................................................... A-38
9.11. Assignment......................................................... A-38
9.12. Definitions........................................................ A-38
</TABLE>
- ii -
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of September 23, 1998 among Youth Services International, Inc., a
Maryland corporation (the "Company"), Correctional Services Corporation, a
Delaware corporation ("Parent"), and Palm Merger Corp., a Maryland corporation
and a wholly-owned subsidiary of Parent ("Merger Subsidiary").
RECITALS
WHEREAS, the respective boards of directors of each of Parent, Merger
Subsidiary and the Company have determined that the merger of the Merger
Subsidiary with and into the Company (the "Merger") upon the terms and subject
to the conditions set forth in this Agreement has significant strategic
benefits to Parent and the Company, and that the Merger is advisable and have
approved the Merger;
WHEREAS, the Company, Parent and Merger Subsidiary desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement; and
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a pooling of interests.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
The Merger
1.1. The Merger.
Upon the terms and subject to the conditions set forth in this Agreement, at
the Effective Time (as defined in Section 1.3.) the Merger Subsidiary shall be
merged with and into the Company and the separate corporate existence of the
Merger Subsidiary shall thereupon cease. The Company shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation"), and the separate corporate existence of the Company with all its
rights, privileges, immunities, powers and franchises shall continue unaffected
by the Merger except as otherwise provided herein. The Merger shall have the
effects specified in the Maryland General Corporation Law, as amended (the
"MGCL").
1.2. Closing.
The closing of the Merger (the "Closing") shall take place (i) at the
offices of Hogan & Hartson L.L.P., 111 S. Calvert Street, Baltimore, Maryland
21202 at 9:00 A.M. on the first business day after the day on which the last to
be fulfilled or waived of the conditions set forth in Article VII (other than
those conditions that by their nature are to be satisfied at the Closing, but
subject to the fulfillment or waiver of those conditions) shall be satisfied or
waived in accordance with this Agreement or (ii) at such other place and time
and/or on such other date as the Company and Parent may agree in writing (the
"Closing Date").
1.3. Effective Time.
As soon as practicable following the Closing, the Company, Merger Subsidiary
and Parent will cause Articles of Merger (the "Articles of Merger") to be
executed, acknowledged and filed with and accepted for record by the Maryland
State Department of Assessments and Taxation (the "SDAT") as provided in
Section 3-102 of the MGCL. The Merger shall become effective at the time the
Articles of Merger is filed with the SDAT or at such later time agreed by the
Company and Parent and established under the Articles of Merger (the "Effective
Time").
A-1
<PAGE>
ARTICLE II
The Surviving Corporation
2.1. The Articles of Incorporation.
At the Effective Time, Article I of the articles of incorporation of Merger
Subsidiary shall be amended and restated in its entirety as follows: "I. The
name of the Corporation is Youth Services International, Inc." and, as so
amended, the articles of incorporation of the Merger Subsidiary shall be the
articles of incorporation of the Surviving Corporation, until thereafter
amended as provided therein or by applicable law (the "Articles of
Incorporation").
2.2. The Bylaws.
The bylaws of Merger Subsidiary in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation (the "Bylaws"), until thereafter amended as
provided therein, as set forth in the Articles of Incorporation or by
applicable law.
2.3. Directors.
The directors of Merger Subsidiary at the Effective Time shall, from and
after the Effective Time, be the directors of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Articles of
Incorporation and the Bylaws.
2.4. Officers.
The officers of the Merger Subsidiary at the Effective Time shall, from and
after the Effective Time, be the officers of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or termination.
ARTICLE III
Conversion Of Shares
3.1. Effect on Stock.
At the Effective Time, as a result of the Merger and without any action on
the part of the holder of any stock of the Company:
(a) Merger Consideration. Each share of common stock, par value $.01 per
share, of Company ("Company Common Stock"), (each a "Share" or,
collectively, the "Shares") issued and outstanding immediately prior to the
Effective Time (other than any Shares of Company Common Stock to be
canceled pursuant to Section 3.1.(b)) shall be converted into, and become
exchangeable for the right to receive the "Merger Consideration",
consisting of .375 shares of Common Stock, par value $.01 per share, of
Parent (the "Parent Common Stock") (the "Exchange Ratio"). At the Effective
Time, all Shares shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate (a
"Certificate") formerly representing any of such Shares shall thereafter
represent only the right to receive the Merger Consideration, cash in lieu
of fractional shares pursuant to Section 3.2.(e), if any (without
interest), and any distribution or dividend pursuant to Section 3.2.(c)
(without interest).
(b) Cancellation of Shares. Each Share issued and outstanding
immediately prior to the Effective Time and owned by Parent or owned by the
Company or any direct or indirect Subsidiary of Parent or of
A-2
<PAGE>
the Company (in each case other than Shares that are owned on behalf of
third parties), shall, by virtue of the Merger and without any action on
the part of the holder thereof, cease to be outstanding and shall be
canceled and retired without payment of any consideration therefor.
(c) Merger Subsidiary. At the Effective Time, each share of common stock
of Merger Subsidiary issued and outstanding immediately prior to the
Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of common stock, $.01 par value, of the Surviving
Corporation.
3.2. Exchange of Certificates.
(a) Exchange Agent. Promptly after the Effective Time, Parent shall deposit,
or shall cause to be deposited, with American Stock Transfer and Trust Company
to act as exchange agent (the "Exchange Agent"), for the benefit of the holders
of Shares, certificates representing the shares of Parent Common Stock and,
after the Effective Time, if applicable, any cash, dividends or other
distributions with respect to Parent Common Stock to be issued or paid in
accordance with Section 3.1.(a) (including cash in lieu of fractional Shares)
in exchange for Shares outstanding immediately prior to the Effective Time upon
due surrender of the Certificates (or affidavits of loss in lieu thereof)
pursuant to the provisions of this Article III (such certificates for shares of
Parent Common Stock, together with the amount of any dividends or other
distributions payable with respect thereto and any cash in lieu of fractional
Shares, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record of Shares (i) a
letter of transmittal specifying that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates (or affidavits of loss in lieu thereof) to the Exchange Agent,
such letter of transmittal to be in such form and have such other provisions as
Parent and the Company may reasonably agree prior to the Effective Time, and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for (A) certificates representing shares of Parent Common Stock and
(B) any unpaid dividends and other distributions and cash in lieu of fractional
shares. Subject to Section 3.2.(h), upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor (x) a certificate representing that number of whole shares of
Parent Common Stock that such holder is entitled to receive pursuant to this
Article III, (y) a check in the amount (after giving effect to any required tax
withholdings) of any cash in lieu of fractional shares plus any unpaid
dividends or other distributions that such holder has the right to receive
pursuant to the provisions of this Article III, and the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or accrued on
any amount payable upon due surrender of the Certificates. In the event of a
transfer of ownership of Shares that is not registered in the transfer records
of the Company, a certificate representing the proper number of shares of
Parent Common Stock, together with a check for any cash to be paid upon due
surrender of the Certificate and any other dividends or distributions in
respect thereof, may be issued and/or paid to such a transferee if the
Certificate formerly representing such Shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid. If any certificate for shares of Parent Common Stock is to be issued in a
name other than that in which the Certificate surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the Person (as
defined below) requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for shares of Parent Common
Stock in a name other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of Parent or the Exchange
Agent that such tax has been paid or is not applicable. For the purposes of
this Agreement, the term "Person" shall mean any individual, corporation
(including not-for-profit), general or limited partnership, limited liability
company, limited liability partnership, joint venture, estate, trust,
association, organization, governmental entity or other entity of any kind or
nature.
A-3
<PAGE>
(c) Distributions with Respect to Unexchanged Shares; Voting.
(i) All shares of Parent Common Stock to be issued pursuant to the Merger
shall be deemed issued and outstanding as of the Effective Time and whenever a
dividend or other distribution is declared by Parent in respect of Parent
Common Stock, the record date for which is at or after the Effective Time, that
declaration shall include dividends or other distributions in respect of all
shares issuable pursuant to this Agreement. No dividends or other distributions
in respect of Parent Common Stock shall be paid to any holder of any
unsurrendered Certificate until such Certificate is surrendered for exchange in
accordance with this Article III. Subject to the effect of applicable laws,
following surrender of any such Certificate, there shall be issued and/or paid
to the holder of the certificates representing whole shares of Parent Common
Stock issued in exchange therefor, without interest, (A) at the time of such
surrender, the dividends or other distributions with a record date after the
Effective Time and a payment date on or prior to such time of surrender payable
with respect to such whole shares of Parent Common Stock and not paid and (B)
at the appropriate payment date, the dividends or other distributions payable
with respect to such whole shares of Parent Common Stock with a record date
after the Effective Time but with a payment date subsequent to surrender.
(ii) Holders of unsurrendered Certificates who were the registered holders
at the Effective Time shall be entitled to vote after the Effective Time at any
meeting of Parent stockholders (or consent in connection with any consent of
stockholders in lieu of a meeting) the number of whole shares of Parent Common
Stock represented by such Certificates, regardless of whether such holders have
exchanged their Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time.
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional shares of Parent Common Stock will be issued and any
holder of Shares entitled to receive a fractional share of Parent Common Stock
but for this Section 3.2.(e) shall be entitled to receive a cash payment in
lieu thereof, which payment shall equal the amount determined by multiplying
(i) the fraction of a share of Parent Common Stock to which such holder would
otherwise be entitled by (ii) the average closing price of a share of Parent
Common Stock as reported on the NASDAQ National Market Exchange ("NASDAQ") for
the twenty most recent days that Parent Common Stock has traded ending on the
last full trading day prior to the Effective Time. The fractional share
interests of each holder of Company Common Stock shall be aggregated, so that
no such holder shall receive cash in an amount equal to or greater than the
value of one share of Parent Common Stock.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Common Stock)
that remains unclaimed by the stockholders of the Company for 180 days after
the Effective Time shall be paid to Parent. Any stockholders of the Company who
have not theretofore complied with this Article III shall thereafter look only
to Parent for payment of their shares of Parent Common Stock and any cash,
dividends and other distributions in respect thereof payable and/or issuable
pursuant to Section 3.1. and Section 3.2.(c) upon due surrender of their
Certificates (or affidavits of loss in lieu thereof), in each case, without any
interest thereon. Notwithstanding the foregoing, none of Parent, the Surviving
Corporation, the Exchange Agent or any other Person shall be liable to any
former holder of Shares for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making and delivery of an
affidavit of that fact by the Person claiming such Certificate to be lost,
stolen or destroyed and, if required by Parent, the posting by such Person of a
bond in customary amount as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the shares of Parent
Common Stock and any cash payable and any unpaid dividends or other
distributions in respect thereof pursuant to Section 3.2.(c).
(h) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "Affiliate" (as determined
pursuant to Section 6.10.) of the Company shall not be exchanged until Parent
has received a written agreement from such Person as provided in Section 6.10.
hereof.
A-4
<PAGE>
3.3. Appraisal Rights.
In accordance with Section 3-202(c) of the MGCL, no appraisal rights shall
be available to holders of Shares in connection with the Merger.
3.4. Adjustments to Prevent Dilution.
In the event that after the date hereof and prior to the Effective Time the
Company changes the number of Shares or securities convertible or exchangeable
into or exercisable for Shares, or Parent changes the number of shares of
Parent Common Stock or securities convertible or exchangeable into or
exercisable for shares of Parent Common Stock, issued and outstanding prior to
the Effective Time as a result of a reclassification, stock split (including a
reverse split), stock dividend or distribution, recapitalization, merger,
subdivision, issuer tender or exchange offer, or other similar transaction, the
Merger Consideration shall be equitably adjusted.
ARTICLE IV
Representations And Warranties Of The Company
Except as set forth in the corresponding sections or subsections of the
Company disclosure schedule attached to this Agreement (the "Company Disclosure
Schedule"), the Company hereby represents and warrants to Parent and Merger
Subsidiary that:
4.1. Organization, Good Standing and Qualification.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, and each of its Subsidiaries
(as defined in Section 9.12.(b)) is a corporation or other entity duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of organization. Each of the Company and each of its
Subsidiaries has all requisite corporate or similar power and authority to own
and operate its properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good standing in each
jurisdiction where the ownership or operation of its properties or conduct of
its business requires such qualification, except where the failure to be so
qualified or in good standing, when taken together with all other such
failures, is not reasonably likely to have a Company Material Adverse Effect
(as defined in Section 9.12.(b)). The Company has made available to Parent a
complete and correct copy of the Company's and each Subsidiary's charter and
by-laws or other organizational documents, each as amended to and as in effect
as of the date hereof.
4.2. Capitalization.
The authorized capital stock of the Company consists of 70,000,000 Shares,
of which 11,313,957 Shares were outstanding as of the close of business on
September 11, 1998. All of the outstanding Shares have been duly authorized and
are validly issued, fully paid and nonassessable. The Company has no
commitments to issue or deliver Shares except that, as of September 11, 1998,
there were (a) 971,187 Shares subject to issuance pursuant to the Company's
Stock Option Plan, 1995 Employee Stock Option Plan, 1996 Employee Stock Option
Plan, 1997 Employee Stock Option Plan, 1995 Director Stock Option Plan and 1998
Director Stock Option Plan (the "Company Stock Plans"), (b) 28,857 Shares
subject to issuance pursuant to warrants, (c) 2,582,197 Shares subject to
issuance pursuant to the Company's 7% Convertible Subordinated Debentures due
January 29, 2006 (the "Debentures") and (d) shares issuable pursuant to the
Directors' Compensation Plan on terms disclosed on Section 4.2. of the Company
Disclosure Schedule. Section 4.2. of the Company Disclosure Schedule contains a
list, as of the date hereof, of (x) each option to purchase or acquire Shares
under each of the Company Stock Plans (each a "Company Option"), including the
plan, the holder, date of grant, exercise price and number of Shares subject
thereto and (y) each warrant to purchase capital stock of the Company,
including, the holder, date of grant, expiration date, exercise price and
number of Shares subject thereto. Each of the outstanding shares of capital
stock or other securities of each of the Company's
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Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and owned by the Company or a direct or indirect wholly-owned subsidiary of the
Company, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as described in Section 4.2. of the Company Disclosure
Schedule, there are no preemptive or other outstanding rights, options,
warrants, conversion rights, stock appreciation rights, redemption rights,
repurchase rights, agreements, arrangements or commitments to issue or sell any
shares of capital stock or other securities of the Company or any of its
Subsidiaries or any securities or obligations convertible or exchangeable into
or exercisable for, or giving any Person a right to subscribe for or acquire,
any securities of the Company or any of its Subsidiaries, and no securities or
obligations evidencing such rights are authorized, issued or outstanding.
Except as described in Section 4.2. of the Company Disclosure Schedule, the
Company does not have outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or, except as referred
to in this Section 4.2., convertible into or exercisable for securities having
the right to vote) with the stockholders of the Company on any matter.
4.3 Company Subsidiaries.
Except for the Company's Subsidiaries as set forth on Section 4.3. of the
Company Disclosure Schedule, the Company does not directly or indirectly own
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity
that directly or indirectly conducts any activity which is material to the
Company.
4.4. Corporate Authority; Approval and Fairness.
(a) The Company has all requisite corporate power and authority and has
taken all corporate action necessary in order to execute, deliver and perform
its obligations under this Agreement and subject only to approval of the Merger
by the holders of at least a majority of the outstanding Shares (the "Company
Requisite Vote"), to consummate the Merger. This Agreement is a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as enforceability may be limited or affected by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws and equitable principles now or hereafter in effect and
affecting the rights and remedies of creditors generally.
(b) The Board of Directors of the Company (at a meeting duly called and
held) by unanimous vote (i) has approved this Agreement and the Merger and the
other transactions contemplated hereby and (ii) has resolved to submit the
Merger and the other transactions contemplated by this Agreement to, and
recommend approval thereof by, the stockholders of the Company. The Board of
Directors of the Company has received the opinion of its financial advisor
SunTrust Equitable Securities, to the effect that, as of the date of such
opinion, the Exchange Ratio is fair from a financial point of view to the
holders of Shares.
4.5. Governmental Filings; No Violations.
(a) Other than the filings, permits, authorizations, consents, approvals
and/or notices pursuant to or required by (i) Sections 1.3. and 4.5(b) hereof,
(ii) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), (iii) the Securities Exchange Act of 1934 (the "Exchange Act"),
(iv) the Securities Act of 1933, as amended (the "Securities Act"), (v) state
securities or "blue-sky" laws, (vi) NASDAQ, and except as may result from any
facts or circumstances relating solely to Parent or Merger Subsidiary or its
affiliates, in connection with the execution and delivery of this Agreement by
the Company and the consummation by the Company of the Merger and the other
transactions contemplated hereby and thereby, there are no filings,
authorizations, consents, approvals or notices required with or by any Court,
administrative agency, commission, government or regulatory authority, domestic
or foreign, except those that the failure to make or obtain will not,
individually or in the aggregate, have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company to
consummate transactions contemplated by this Agreement.
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(b) Subject to compliance with the filings described in Section 4.5.(a) and
obtaining Private Consents (as defined below) applicable to the Company and its
Subsidiaries, the execution, delivery and performance of this Agreement by the
Company do not, and the consummation by the Company of the Merger and the other
transactions contemplated hereby will not, constitute or result in (i) a breach
or violation of, or a default under, the articles of incorporation or by-laws
of the Company or the comparable governing instruments of any of its
Subsidiaries, (ii) a breach or violation of, or a default under, or the
acceleration of any obligations or the creation of a lien, pledge, security
interest or other encumbrance on the assets of the Company or any of its
Subsidiaries (with or without notice, lapse of time or both) pursuant to, any
agreement, lease, contract, note, mortgage, indenture, arrangement or other
obligation ("Contracts") to which the Company or any of its Subsidiaries is a
party or by which any of its assets or properties are bound or affected, (iii)
any change in the rights or obligations of any party under any of those
Contracts, (iv) the impairment of the Company's or any of the Company's
Subsidiaries' business or adversely affect any licenses or approvals necessary
to enable the Company and its Subsidiaries to carry on their business as
presently conducted, except for any conflict, breach, violation, default,
acceleration, declaration, imposition or impairment that would not reasonably
be expected to have a Company Material Adverse Effect or prevent, materially
delay or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement. Section 4.5.(b) of the Company
Disclosure Schedule sets forth, to the knowledge of the Responsible Executive
Officers of the Company (as defined in Section 9.12.(b)), a list of contracts
(by category and type, where applicable) material to the Company and its
Subsidiaries, taken as a whole, pursuant to which consents or waivers ("Private
Consents") are or may be required prior to consummation of the transactions
contemplated by this Agreement (subject to the exception set forth above).
4.6. Company Reports; Financial Statement.
The Company has delivered or made available to Parent true and complete
copies of each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1997 (the "Company Audit Date"),
including (a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, (b) the Company's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders dated April 22, 1998, and (c) the Company's
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31 and
June 30, 1998, each in the form (including exhibits, annexes and any amendments
thereto) filed with the Securities and Exchange Commission (the "SEC")
(collectively, including any such reports filed subsequent to the date hereof,
the "Company Reports"). As of their respective dates the Company Reports
complied, and any Company reports filed with the SEC subsequent to the date
hereof will comply, as to form in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the SEC. As of their respective dates, the Company Reports did
not, and any Company Reports filed with the SEC subsequent to the date hereof
will not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. Each of the consolidated balance sheets included in or incorporated
by reference into the Company Reports (including the related notes and
schedules) fairly presents, or will fairly present, the consolidated financial
position of the Company and its Subsidiaries as of its date and each of the
consolidated statements of income and statements of cash flows included in or
incorporated by reference into the Company Reports (including any related notes
and schedules) fairly presents, or will fairly present, the consolidated
results of operations, retained earnings and cash flows, as the case may be, of
the Company and its Subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to the absence of notes and normal year-end
audit adjustments that will not be material in amount or effect), in each case
in accordance with generally accepted accounting principles ("GAAP")
consistently applied during the periods involved, except as may be noted
therein or in Section 4.6. of the Company Disclosure Schedule.
4.7. Absence of Certain Changes.
Except as disclosed in the Company Reports filed prior to the date hereof,
in any Company press releases issued prior to the date hereof, or as set forth
on Section 4.7. of the Company Disclosure Schedule and except
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as otherwise provided in or contemplated by this Agreement, since the Company
Audit Date, the Company and its Subsidiaries have conducted their respective
businesses only in, and have not engaged in any material transaction other than
according to, the ordinary and usual course of such businesses and there has
not been: (a) any change in the business, assets, liabilities, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, or any transaction, commitment, dispute or other event or, to the
knowledge of the Responsible Executive Officers of the Company any other
development or combination of developments, that, individually or in the
aggregate, has had or is reasonably likely to result in a Company Material
Adverse Effect; (b) any material damage, destruction or other casualty loss
with respect to any material asset or property owned, leased or otherwise used
by the Company or any of its Subsidiaries, whether or not covered by insurance;
(c) any authorization, declaration, setting aside or payment of any dividend or
other distribution in respect of the stock of the Company, except as permitted
by Section 6.1. hereof; (d) any change by the Company in accounting principles,
practices or methods other than as required by changes in applicable GAAP; (e)
any repurchase or redemption of any Shares; or (f) any material amendment,
modification or termination of any material contract, license or permit to
which the Company is a party or which it holds. Since the Company Audit Date,
except as provided for herein or as disclosed in the Company Reports filed
prior to the date hereof or as set forth on Section 4.7. of the Company
Disclosure Schedule, there has not been any increase in the compensation
payable or that could become payable by the Company or any of its Subsidiaries
to officers at the senior vice president level or above or any amendment of any
of the Company Compensation and Benefit Plans (as defined in Section 4.9.(a)).
4.8. Litigation and Liabilities.
Except as disclosed in the Company Reports filed prior to the date hereof or
as set forth on Section 4.8. of the Company Disclosure Schedule, there are no
(a) civil, criminal or administrative actions, suits, claims, hearings,
investigations, proceedings, judgments, decrees, orders or injunctions
outstanding, pending or, to the knowledge of the Responsible Executive Officers
of the Company, threatened against the Company or any of its Subsidiaries or
(b) obligations or liabilities of any nature, whether or not accrued,
contingent or otherwise and whether or not required to be disclosed, or any
other facts or circumstances of which the Responsible Executive Officers of the
Company have knowledge, that have resulted in or could reasonably be expected
to result in any claims against, or obligations or liabilities of, the Company
or any of the Subsidiaries, except for such actions, suits, claims, hearings,
investigations, proceedings, obligations and liabilities that would not,
individually or in the aggregate, have a Company Material Adverse Effect or
prevent or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
4.9. Employee Benefits.
(a) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
change of control, compensation, medical, health or other employee benefit
plan, agreement, policy or arrangement that covers employees, directors, former
employees or former directors of the Company and its Subsidiaries (the "Company
Compensation and Benefit Plans") and any trust agreement or insurance contract
forming a part of such Company Compensation and Benefit Plans has been made
available to Parent prior to the date hereof. For the three most recent plan
years, all annual reports (Form 5500 series) on each Company Compensation and
Benefit Plan that have been filed with any governmental agency and the current
summary plan description and subsequent summaries of material modifications for
each Company Compensation and Benefit Plan have been made available to Parent
prior to the date hereof. The Compensation and Benefit Plans are listed on
Section 4.9. of the Company Disclosure Schedule.
(b) All Company Compensation and Benefit Plans are in substantial compliance
with all applicable law, including, to the extent applicable, the Internal
Revenue Code of 1986, as amended (the "Code") and the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Each Company Compensation
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and Benefit Plan that is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA (a "Pension Plan") and that is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service (the "IRS"), and the
Company is not aware of any circumstances likely to result in revocation of any
such favorable determination letter. There is no pending or, to the knowledge
of the Responsible Executive Officers of the Company, threatened litigation
relating to the Company Compensation and Benefit Plans. Neither the Company nor
any of its Subsidiaries has engaged in a transaction with respect to any
Company Compensation and Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject the Company or any of
its Subsidiaries to a material tax or penalty imposed by either Section 4975 of
the Code or Section 502 of ERISA.
(c) As of the date hereof, no liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by the Company or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan," within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by any of them, or the single-employer plan of any entity
which is considered one employer with the Company under Section 4001 of ERISA
or Section 414 of the Code (an "ERISA Affiliate"). The Company and its
Subsidiaries have not incurred and do not expect to incur any withdrawal
liability with respect to a multiemployer plan under Subtitle E to Title IV of
ERISA. The Company and its Subsidiaries have not contributed, or been obligated
to contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA at
any time since September 26, 1980. No notice of a "reportable event", within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any Pension Plan or by
any ERISA Affiliate of the Company within the 12-month period ending on the
date hereof or will be required to be filed in connection with the transactions
contemplated by this Agreement.
(d) All contributions required to be made under the terms of any Company
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate of
the Company has an "accumulated funding deficiency" (whether or not waived)
within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither
the Company nor its Subsidiaries has provided, or is required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate of the Company pursuant to Section 401(a)(29) of the Code.
(e) Under each Pension Plan of the Company which is a single-employer plan,
as of the last day of the most recent plan year ended prior to the date hereof,
the actuarially determined present value of all "benefit liabilities", within
the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year. For each Pension
Plan of the Company, the Company has furnished to Parent a true and complete
copy of the actuarial valuation reports issued by the actuaries of that Pension
Plan for the three most recent years, setting forth: (i) the actuarial present
value (based upon the same actuarial assumptions as were used for that period
for funding purposes) of all vested and nonvested accrued benefits under that
Pension Plan; (ii) the actuarial present value (based upon the same actuarial
assumptions, other than turnover assumptions, as were used for that period for
funding purposes) of vested benefits under that Pension Plan; (iii) the net
fair market value of that Pension Plan's assets; and (iv) a detailed
description of the funding method used under that Pension Plan.
(f) Neither the Company nor its Subsidiaries have any obligations for
retiree health and life benefits under any Company Compensation and Benefit
Plan. The Company or its Subsidiaries may amend or terminate any such plan
under the terms of such plan at any time without incurring any material
liability thereunder.
(g) The Merger will not result in any breach or violation of, or a default
under, any of the Company Compensation and Benefit Plans or except as set forth
in Section 4.9. of the Company Disclosure Schedule,
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(i) entitle any employees of the Company or its Subsidiaries to severance pay,
or (ii) accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any
other material obligation pursuant to, any of the Company Compensation and
Benefit Plans.
(h) All Company Compensation and Benefit Plans covering current or former
non-U.S. employees of the Company and its Subsidiaries comply in all material
respects with applicable local law. The Company and its Subsidiaries have no
material unfunded liabilities with respect to any Pension Plan that covers such
non-U.S. employees.
4.10. Compliance with Laws; Permits.
Except as set forth in the Company Reports filed prior to the date hereof or
on Section 4.10. of the Company Disclosure Schedule, the businesses of each of
the Company and its Subsidiaries have been, and are being, conducted in
compliance with all applicable federal, state, local or foreign law, statute,
ordinance, rule, regulation, judgment, order, injunction, decree, arbitration
award, agency requirement, license or permit of any governmental entity
("Laws"), and all notices, reports, documents and other information required to
be filed thereunder within the last three years were properly filed and were in
compliance with such Laws, except in any such case for noncompliance that,
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect or prevent or materially impair the ability of
the Company to consummate the transactions contemplated by this Agreement.
Except as set forth in the Company Reports filed prior to the date hereof or on
Section 4.10. of the Company Disclosure Schedule and except for routine
examinations and audits by state governmental entities charged with supervision
of educational and rehabilitative facilities of the type operated by the
Company and the Subsidiaries ("State Regulators"), no investigation or review
by any governmental entity with respect to the Company or any of its
Subsidiaries is pending or, to the knowledge of the Responsible Executive
Officers of the Company, threatened, nor has any governmental entity indicated
an intention to conduct the same, except for those the outcome of which would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect or prevent or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement. No
material change is required in the Company's or any of its Subsidiaries'
processes, properties or procedures in connection with any such Laws, and the
Company has not received any notice or communication of any noncompliance with
any such Laws that would reasonably be expected to have a Material Adverse
Effect or that has not been cured as of the date hereof. The Company and its
Subsidiaries each has all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals necessary
to conduct its business as presently conducted except those the absence of
which would not, individually or in the aggregate, have a Company Material
Adverse Effect or prevent or materially impair the ability of the Company to
consummate the Merger and the other transactions contemplated by this
Agreement.
4.11. Takeover Statutes.
No restrictive provision of any "fair price," "moratorium," "control share"
or other similar anti-takeover statute or regulation, including, but not
limited to, (S) 3-602 of the MGCL, (each a "Takeover Statute") or restrictive
provision of any applicable anti-takeover provision in the Articles of
Incorporation or Bylaws of the Company, is, or at the Effective Time will be,
applicable to the Company, Parent, the Shares, the Merger or any other
transaction contemplated by this Agreement.
4.12. Environmental Matters.
Except as disclosed in the Company Reports filed prior to the date hereof or
on Section 4.12. of the Company Disclosure Schedule, and except for such
matters that, alone or in the aggregate, would not have a Company Material
Adverse Effect: (a) the Company and its Subsidiaries have complied with all
applicable Environmental Laws (as defined in Section 9.12.(b)); (b) to the
knowledge of the Responsible Executive
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Officers of the Company, the properties currently owned or operated by the
Company (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances (as defined in
Section 9.12.(b)) and do not contain wetlands, dumps, filled in land, PCBs,
asbestos or underground storage tanks; (c) to the knowledge of the Responsible
Executive Officers of the Company, the properties formerly owned or operated by
the Company or any of its Subsidiaries were not contaminated with Hazardous
Substances during the period of ownership or operation by the Company or any of
its Subsidiaries; (d) to the knowledge of the Responsible Executive Officers of
the Company, neither the Company nor any Subsidiary is subject to liability for
any Hazardous Substance disposal or contamination on any third party property;
(e) to the knowledge of the Responsible Executive Officers of the Company, no
Hazardous Substance has been transported from any of the properties owned or
operated by the Company or any of its Subsidiaries other than as permitted
under applicable Environmental Law; (f) neither the Company nor any of its
Subsidiaries has received any written notice, demand, letter, claim or request
for information from any Governmental Entity or third party indicating that the
Company or any of its Subsidiaries may be in violation of or liable under any
Environmental Law; (g) the Company and its Subsidiaries are not subject to any
court order, administrative order or decree arising under any Environmental Law
and are not subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (h) there are no circumstances or conditions involving the
Company or any of its Subsidiaries that could reasonably be expected to result
in any material claims, liability, investigations, costs or restrictions on the
ownership, use, or transfer of any property of the Company pursuant to any
Environmental Law.
4.13. Taxes.
Except as set forth on Section 4.13. of the Company Disclosure Schedule:
(a) the Company and each of its Subsidiaries have (or, in the case of
returns becoming due after the date hereof and on or before the Closing
Date, will have prior to the Closing Date) timely and accurately filed all
Tax Returns (as defined in Section 9.12.(b)) which are required by all
applicable laws to be filed by them, and have paid, or made adequate
provision for the payment of, all Taxes (as defined in Section 9.12.(b))
which have or may become due and payable pursuant to said Tax Returns and
all other Taxes, governmental charges and assessments received to date
other than those Taxes being contested in good faith for which adequate
provision has been made on the most recent balance sheet included in the
Company Reports. The Tax Returns of the Company and its Subsidiaries have
been (or, in the case of returns becoming due after the date hereof and on
or before the Closing Date, will be) prepared, in all material respects, in
accordance with all applicable laws consistently applied;
(b) all Taxes which the Company and its Subsidiaries are required by law
to withhold and collect have been duly withheld and collected, and have
been paid over, in a timely manner, to the proper Taxing Authorities (as
defined in Section 9.12.(b)) to the extent due and payable;
(c) no liens for Taxes exist with respect to any of the assets or
properties of the Company or its Subsidiaries, except for statutory liens
for Taxes not yet due or payable or that are being contested in good faith;
and
(d) all Tax Returns have been examined by the relevant taxing
authorities, or closed without audit by applicable statutes, and all
deficiencies proposed as a result of such examinations have been paid or
settled, for all taxable years prior to and including the taxable year
ended June 30, 1995; and
(e) there is no audit, examination, deficiency, or refund litigation
pending with respect to any Taxes and during the past three years no Taxing
Authority has given written notice of the commencement of any audit,
examination, deficiency or refund litigation, with respect to any Taxes.
(f) Section 4.13 of the Company Disclosure Schedule sets forth the net
operating loss carryover and capital loss carryover available for Federal
income tax purposes to the affiliated group filing consolidated
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Federal income tax returns of which the Company is the common parent
corporation as of the end of the taxable period ended June 30, 1998.
4.14. Labor Matters.
(a) Neither the Company nor any of its Subsidiaries is a party to or
otherwise bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There are
no strikes or work stoppages pending or, to the knowledge of the Responsible
Executive Officers of the Company, threatened with respect to the employees of
the Company or any of its Subsidiaries. There is no representation claim or
petition or complaint pending before the National Labor Relations Board or any
state or local labor agency and, to the knowledge of the Responsible Executive
Officers of the Company, no question concerning representation has been raised
or threatened. Except as set forth on Section 4.14 of the Company Disclosure
Schedule, no charges with respect to or relating to the business of the Company
or any its Subsidiaries are pending before the Equal Employment Opportunity
Commission, or any state or local agency responsible for the prevention of
unlawful employment practices, which would if adversely determined have a
Company Material Adverse Effect.
(b) Section 4.14. of the Company Disclosure Schedule contains a complete and
correct list of all current employment, management or other consulting
agreements with any Persons employed or retained by the Company or any of its
Subsidiaries which are not terminable at will. True, complete and correct
copies of all such written agreements have been delivered to Parent.
4.15. Intellectual Property.
(a) Except as set forth on Section 4.15. of the Company Disclosure Schedule,
the Company and/or each of its Subsidiaries owns, or is licensed or otherwise
possesses rights to use all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, technology, know-how, computer
software programs or applications, and tangible or intangible proprietary
information or materials that are used in the business of the Company and its
Subsidiaries as currently conducted, and all patents, trademarks, trade names,
service marks and copyrights held by the Company and/or its Subsidiaries are
valid and subsisting.
(b) Except as disclosed in Company Reports filed prior to the date hereof or
Section 4.15. of the Company Disclosure Schedule:
(i) the Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder
or as contemplated hereby, in violation of any licenses, sublicenses and
other agreements as to which the Company is a party and pursuant to which
the Company is authorized to use any third-party patents, trademarks,
service marks, and copyrights ("Company Third-Party Intellectual Property
Rights");
(ii) no claims with respect to (A) the patents, registered and
unregistered trademarks and service marks, copyrights, trade names, and any
applications therefor owned by the Company or any its Subsidiaries (the
"Company Intellectual Property Rights"); (B) any trade secret material to
the Company; or (C) Company Third-Party Intellectual Property Rights are
currently pending or threatened by any Person;
(iii) (A) the sale, licensing or use of any product as now used, sold or
licensed or proposed for use, sale or license by the Company or any of its
Subsidiaries, does not infringe in any respect that would have a Company
Material Adverse Effect on any copyright, patent, trademark, service mark
or trade secret; and (B) there are no valid grounds for any material claims
against the use by the Company or any of its Subsidiaries, of any material
trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the
business of the Company or any of its Subsidiaries as currently conducted
challenging the ownership, validity or effectiveness of any of the
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Company Intellectual Property Rights or other trade secret material to the
Company or challenging the license or legally enforceable right to use of
the Company Third-Party Intellectual Rights by the Company or any of its
Subsidiaries; and
(iv) to the knowledge of the Responsible Executive Officers of the
Company, there is no unauthorized use, infringement or misappropriation of
any of the Company Intellectual Property Rights by any third party,
including any employee or former employee of the Company or any of its
Subsidiaries.
(c) Section 4.15. of the Company Disclosure Schedule lists all material (i)
patents, patent applications, registered and unregistered trademarks, trade
names and service marks, registered and unregistered copyrights, and maskworks
included in the Company Intellectual Property Rights and (ii) licenses,
sublicenses and other agreements as to which the Company is a party and
pursuant to which any person is authorized to use any of the Company
Intellectual Property Rights.
4.16. Title to Property.
Except as set forth in the Company Reports or on Section 4.16. of the
Company Disclosure Schedule, the Company and each of its Subsidiaries had good
title to all of their properties and assets as set forth on the June 30, 1998
balance sheet included in the Company Reports, free and clear of all
encumbrances, except liens for taxes not yet due and payable and such
encumbrances or other imperfections of title, if any, as do not materially
detract from the value of or materially interfere with the present use of the
property affected thereby or which would not reasonably be expected to have a
Company Material Adverse Effect, and except for encumbrances which secure
indebtedness reflected in the financial statements included in the Company
Reports. Section 4.16. of the Company Disclosure Schedule sets forth a true and
correct list of all leases, subleases or other agreements under which the
Company or any of its Subsidiaries is lessee or lessor of any material real
property or has any interest in material real property and, except as set forth
in Section 4.16. of the Company Disclosure Schedule, there are no rights or
options held by the Company or any of its Subsidiaries, or any contractual
obligations on its part, to purchase or otherwise acquire (including by way of
lease or sublease) any interest in or use of any material real property, nor
any rights or options granted by the Company or any of its Subsidiaries, or any
contractual obligations entered into by it, to sell or otherwise dispose of
(including by way of lease or sublease) any interest in or use of any material
real property. All such leases, subleases and other agreements are in full
force and effect and, to the knowledge of the Responsible Executive Officers of
the Company, constitute legal, valid and binding obligations of the respective
parties thereto, with no existing or claimed default or event of default, or
event which with notice or lapse of time or both would constitute a default or
event of default, by the Company or any of its Subsidiaries, or, to the
knowledge of the Responsible Executive Officers of the Company, by any other
party thereto, which would materially and adversely affect the Company or any
of its Subsidiaries.
4.17. Material Contracts.
All of the material contracts of the Company and its Subsidiaries that are
required to be described in the Company Reports or to be filed as exhibits
thereto pursuant to Item 601 of Regulation S-K promulgated by the SEC are
described in the Company Reports or filed as exhibits thereto and are in full
force and effect. Section 4.17. of the Company Disclosure Schedule sets forth a
list of all other contracts currently in force between the Company or any
Subsidiary and any agency or other party to place youths in the juvenile
justice programs of the Company or its Subsidiaries. True and complete copies
of all contracts referred to in the previous two sentences (the "Section 4.17.
Contracts") have been made available by the Company to Parent. Neither the
Company nor any of its Subsidiaries nor, to the knowledge of the Responsible
Executive Officers of the Company, any other party, is in breach of or in
default under any Section 4.17. Contract, and to the knowledge of the
Responsible Executive Officers of the Company, no condition exists which with
the lapse of time or notice or both, will result in any such breach or default,
except for such breaches and defaults as individually or in the aggregate have
not had and would not reasonably be expected to have a Company Material Adverse
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Effect. Except as set forth on Section 4.17 of the Company Disclosure Schedule,
to the knowledge of the Responsible Executive Officers of the Company, no third
party to any Section 4.17. Contract is currently seeking to terminate, amend,
modify or fail to renew any such contract which is material to the business of
the Company, whether or not as a result of the Merger nor, to the knowledge of
the Responsible Executive Officers of the Company, is there any development or
combination of developments that are reasonably likely to result in any such
termination, amendment, modification or failure to renew any such contract
which is material to the business of the Company. Neither the Company nor any
of its Subsidiaries is party to any agreement containing any provision or
covenant limiting in any respect that would reasonably be expected to have a
Company Material Adverse Effect the ability of the Company or any of its
Subsidiaries to (a) sell any products or services of or to any other person,
(b) engage in any line of business or (c) compete with or obtain products or
services from any person or limiting the ability of any person to provide
products or services to the Company or any of its Subsidiaries.
4.18. Brokers and Finders.
Neither the Company nor any of its executive officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the Merger or
the other transactions contemplated in this Agreement, except that the Company
has employed SunTrust Equitable Securities as its financial advisor, the
arrangements with respect to which are set forth on Section 4.18. of the
Company Disclosure Schedule.
4.19. Insurance Matters.
The Company has heretofore provided Parent with true, complete and correct
copies of all material fire and casualty, general liability, business
interruption, product liability and other insurance policies maintained by the
Company and its Subsidiaries. All such policies are in full force and effect
and no event has occurred that would give any insurance carrier a right to
terminate any such policy. Neither the Company nor any of its Subsidiaries has
been denied or had any policy of insurance revoked or rescinded. All such
policies are adequate to insure against risks to which the Company and its
properties are exposed in such amounts and subject to such terms as are
commercially reasonable.
4.20. Affiliated Transactions.
The Company has not engaged in any transaction required to be described in
the Company Reports pursuant to Item 404 of Regulation S-K, which has not been
so described in the Company Reports.
4.21. Year 2000 Liability.
To the knowledge of the Responsible Executive Officers of the Company, the
cost of upgrading and enhancing the Company's computer software systems to
recognize years beginning with 2000, will not be material to the Company's
financial position, liquidity or results of operations.
4.22. Accounting and Tax Matters.
(a) As of the date hereof, neither the Company nor any of its Affiliates has
taken or agreed to take any action, nor do the Responsible Executive Officers
of the Company have any knowledge of any fact or circumstance, that would
prevent Parent or the Company from accounting for the business combination to
be effected by the Merger as a "pooling-of-interests" or prevent the Merger and
the other transactions contemplated by this Agreement from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(b) The Company has provided to the Company's and Parent's independent
accountants all information concerning actions taken or agreed to be taken by
the Company or any of its Affiliates on or before the date of this Agreement
that could reasonably be expected to adversely affect the ability of Parent to
account for the business combination to be effected by the Merger as a pooling
of interests.
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ARTICLE V
Representations and Warranties of
Parent and Merger Subsidiary
Except as set forth in the corresponding sections or subsections of the
Parent Disclosure Schedule attached to this Agreement (the "Parent Disclosure
Schedule"), Parent and Merger Subsidiary hereby, jointly and severally,
represent and warrant to the Company that:
5.1. Merger Subsidiary.
(a) Merger Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the State of Maryland.
(b) The authorized capital stock of Merger Subsidiary consists of 1,000
shares of common stock, par value $.01 per share, all of which are validly
issued and outstanding and are, and at the Effective Time will be, owned solely
by Parent, and there are (i) no other voting securities of Merger Subsidiary,
(ii) no securities of Merger Subsidiary convertible into or exchangeable for
shares of common stock or other voting securities of Merger Subsidiary and
(iii) no options or other rights to acquire from Merger Subsidiary, and no
obligations of Merger Subsidiary to issue or deliver, shares of common stock or
other voting securities or securities convertible into or exchangeable for
shares of common stock or other voting securities of Merger Subsidiary.
(c) Merger Subsidiary has not conducted any business prior to the date
hereof and has no, and prior to the Effective Time will have no, assets,
liabilities or obligations of any nature other than those incident to its
formation and pursuant to this Agreement and the Merger and the other
transactions contemplated by this Agreement.
5.2. Organization, Good Standing and Qualification.
Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and each of its Subsidiaries
is a corporation or other entity duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of organization. Each of
Parent and each of its Subsidiaries has all requisite corporate or similar
power and authority to own and operate its properties and assets and to carry
on its business as presently conducted and is qualified to do business and is
in good standing in each jurisdiction where the ownership or operation of its
properties or conduct of its business requires such qualification, except where
the failure to be so qualified or in good standing, when taken together with
all other such failures, is not reasonably likely to have a Parent Material
Adverse Effect (as defined in Section 9.12.(b)). Parent has made available to
the Company a complete and correct copy of Parent's and each Subsidiaries'
charter and by-laws or other organizational documents, each as amended to and
as in effect as of the date hereof.
5.3. Capitalization.
The authorized capital stock of Parent consists of 30,000,000 shares of
Parent Common Stock, par value $.01 per share, of which 7,791,142 shares were
outstanding as of the close of business on September 14, 1998, and 1,000,000
shares of preferred stock, par value $.01 per share (the "Parent Preferred
Shares" and together with Parent Common Stock, the "Parent Shares"), none of
which were outstanding as of the close of business on September 14, 1998. All
of the outstanding Parent Shares have been duly authorized and are validly
issued, fully paid and nonassessable. Parent has no commitments to issue or
deliver Parent Shares, except that (i) as of September 9, 1998, there were
677,925 shares of Parent Common Stock subject to issuance pursuant to Parent's
1993 Stock Option Plan and 1994 Directors' Stock Option plan (the "Parent Stock
Plans") and 205,000 shares of Parent Common Stock subject to issuance pursuant
to other options held by employees and (ii) as of September 23, 1998, there
were 685,066 shares of Parent Common Stock subject to issuance pursuant
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to warrants. Section 5.3. of the Parent Disclosure Schedule contains a list,
which is complete and accurate in all respects as of the date specified
therein, of each outstanding option to purchase or acquire Shares under each of
the Parent Stock Plans (each a "Parent Option"), including the plan, the
holder, date of grant, exercise price and number of Parent Shares subject
thereto. Each of the outstanding shares of capital stock or other securities of
each of Parent's Subsidiaries is duly authorized, validly issued, fully paid
and nonassessable and owned by Parent or a direct or indirect wholly-owned
subsidiary of Parent, free and clear of any lien, pledge, security interest,
claim or other encumbrance. Except as described in Section 5.3. of the Parent
Disclosure Schedule, there are no preemptive or other outstanding rights,
options, warrants, conversion rights, stock appreciation rights, redemption
rights, repurchase rights, agreements, arrangements or commitments to issue or
sell any shares of capital stock or other securities of Parent or any of its
Subsidiaries or any securities or obligations convertible or exchangeable into
or exercisable for, or giving any Person a right to subscribe for or acquire,
any securities of Parent or any of its Subsidiaries, and no securities or
obligations evidencing such rights are authorized, issued or outstanding.
Parent does not have outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or, except as referred
to in this Section 5.3., convertible into or exercisable for securities having
the right to vote) with the stockholders of Parent on any matter.
5.4. Corporate Authority; Approval and Fairness.
(a) Each of Parent and Merger Subsidiary has all requisite corporate power
and authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement, and, with respect to
Parent, subject only to approval of the issuance of Parent Common Stock by the
holders of at least a majority of the outstanding shares of Parent Common Stock
(the "Parent Requisite Vote"), to consummate the Merger. This Agreement is a
valid and binding obligation of each of Parent and Merger Subsidiary, as the
case may be, enforceable against Parent and Merger Subsidiary in accordance
with its terms, except as enforceability may be limited or affected by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other similar laws and equitable principles now or hereafter in effect and
affecting the rights and remedies of creditors generally.
(b) The Board of Directors of Parent (at a meeting duly called and held) by
unanimous vote (i) has approved this Agreement and the Merger and the other
transactions contemplated hereby and thereby and (ii) has resolved to submit
the proposed issuance of Parent Common Stock in the Merger and the other
transactions contemplated by this Agreement to, and recommend approval thereof
by, the stockholders of the Parent. The Parent Common Stock, when issued in
connection with the consummation of the transactions contemplated hereby, will
be validly issued, fully paid and nonassessable, and no stockholder of Parent
will have any preemptive right of subscription or purchase in respect thereof.
The Parent Common Stock, when so issued, will be registered under the
Securities Act and Exchange Act and registered or exempt from registration
under any applicable state securities or "blue sky" laws.
5.5. Governmental Filings; No Violations.
(a) Other than the filings, permits, authorizations, consents, approvals
and/or notices pursuant to or required by (i) Sections 1.3. and 5.5.(b) hereof,
(ii) the HSR Act, (iii) the Exchange Act, (iv) the Securities Act, (v) state
securities or "blue-sky" laws, (vi) NASDAQ and except as may result from any
facts or circumstances relating solely to the Company or its affiliates, in
connection with the execution and delivery of this Agreement by Parent and
Merger Subsidiary and the consummation by Parent and Merger Subsidiary of the
Merger and the other transactions contemplated hereby, there are no filings,
authorizations, consents, approvals or notices required with or by any Court,
administrative agency, commission, government or regulatory authority, domestic
or foreign, except those that the failure to make or obtain would not,
individually or in the aggregate, have a Parent Material Adverse Effect or
prevent, materially delay or materially impair the ability of Parent or Merger
Subsidiary to consummate transactions contemplated by this Agreement.
(b) Subject to compliance with the filings described in Section 5.5.(a) and
obtaining Private Consents applicable to the Parent and its Subsidiaries, the
execution, delivery and performance of this Agreement and by
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Parent and the Merger Subsidiary, as the case may be, does not, and the
consummation by Parent or Merger Subsidiary of the Merger and the other
transactions contemplated hereby or thereby will not, constitute or result in
(i) a breach or violation of, or a default under, the certificate of
incorporation or bylaws of Parent or Merger Subsidiary, or the comparable
governing instruments of any of Parent's other Subsidiaries, (ii) a breach or
violation of, or a default under, the acceleration of any obligations or the
creation of a lien, pledge, security interest or other encumbrance on the
assets of Parent or any of its Subsidiaries (with or without notice, lapse of
time or both) pursuant to, any Contracts to which Parent or any of its
Subsidiaries is a party or by which any of its assets or properties are bound
or affected, (iii) any change in the rights or obligations of any party under
any of those Contracts, (iv) the impairment of Parent's or any of Parent's
Subsidiaries' business or adversely affect any licenses or approvals necessary
to enable Parent and its Subsidiaries to carry on their business as presently
conducted, except for any conflict, breach, violation, default, acceleration,
declaration, imposition or impairment that would not reasonably be expected to
have a Parent Material Adverse Effect or prevent, materially delay or
materially impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement, as the case may be. Section
5.5.(b) of the Parent Disclosure Schedule sets forth, to the knowledge of the
Responsible Executive Officers of Parent (as defined in Section 9.12.(b)) a
list of contracts (by category and type, where applicable) material to Parent
and its Subsidiaries, taken as a whole, pursuant to which Private Consents are
or may be required prior to consummation of the transactions contemplated by
this Agreement (subject to the exception set forth above).
5.6. Parent Reports; Financial Statements.
Parent has delivered or made available to the Company true and complete
copies of each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1997 (the "Parent Audit Date"),
including (a) Parent's Annual Report on Form 10-K for the year ended December
31, 1997, (b) Parent's definitive Proxy Statement for its 1998 Annual Meeting
of Stockholders dated June 18, 1998, and (c) Parent's Quarterly Report on Form
10-Q for the quarterly periods ended March 31 and June 30, 1998, each in the
form (including exhibits, annexes and any amendments thereto) filed with the
SEC (collectively, including any such reports filed subsequent to the date
hereof, the "Parent Reports"). As of their respective dates, the Parent Reports
complied, and any Parent Reports filed with the SEC subsequent to the date
hereof will comply, as to form in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the SEC. As of their respective dates, the Parent Reports did
not, and any Parent Reports filed with the SEC subsequent to the date hereof
will not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading. Each of the consolidated balance sheets included in or incorporated
by reference into the Parent Reports (including the related notes and
schedules) fairly presents, or will fairly present, the consolidated financial
position of Parent and its Subsidiaries as of its date and each of the
consolidated statements of income and of statements of cash flows included in
or incorporated by reference into the Parent Reports (including any related
notes and schedules) fairly presents, or will fairly present, the consolidated
results of operations, retained earnings and cash flows, as the case may be, of
Parent and its Subsidiaries for the periods set forth therein (subject, in the
case of unaudited statements, to the absence of notes and normal year-end audit
adjustments that will not be material in amount or effect), in each case in
accordance with GAAP consistently applied during the periods involved, except
as may be noted therein or in Section 5.6. of the Parent Disclosure Schedule.
5.7. Absence of Certain Changes.
Except as disclosed in the Parent Reports filed prior to the date hereof or
as set forth on Section 5.7. of the Parent Disclosure Schedule and except as
otherwise provided in or contemplated by this Agreement, since the Parent Audit
Date, Parent and its Subsidiaries have conducted their respective businesses
only in, and have not engaged in any material transaction other than according
to, the ordinary and usual course of such businesses and there has not been:
(a) any change in the business, assets, liabilities, condition (financial or
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otherwise) or results of operations of Parent and its Subsidiaries, or any
transaction, commitment, dispute or other event or, to the knowledge of the
Responsible Executive Officers of Parent, any other development or combination
of developments, that, individually or in the aggregate, has had or is
reasonably likely to result in a Parent Material Adverse Effect; (b) any
material damage, destruction or other casualty loss with respect to any
material asset or property owned, leased or otherwise used by Parent or any of
its Subsidiaries, whether or not covered by insurance; (c) any authorization,
declaration, setting aside or payment of any dividend or other distribution in
respect of the stock of Parent, except as permitted by Section 6.2. hereof; (d)
any change by Parent in accounting principles, practices or methods other than
as required by changes in applicable GAAP or statutory accounting principles;
(e) any repurchase or redemption of any shares of Parent Common Stock; or (f)
any material amendment, modification or termination of any material contract,
license or permit to which Parent is a party or which it holds. Since the
Parent Audit Date, except as provided for herein or as disclosed in the Parent
Reports filed prior to the date hereof or as set forth on Section 5.7. of the
Parent Disclosure Schedule, there has not been any increase in the compensation
payable or that could become payable by Parent or any of its Subsidiaries to
officers at the senior vice president level or above or any amendment of any of
the Parent Compensation and Benefit Plans (as defined in Section 5.10.(a)).
5.8. Litigation and Liabilities.
Except as disclosed in the Parent Reports filed prior to the date hereof or
as set forth on Section 5.8. of the Parent Disclosure Schedule, there are no
(a) civil, criminal or administrative actions, suits, claims, hearings,
investigations, proceedings, judgments, decrees, orders or injunctions
outstanding, pending or, to the knowledge of the Responsible Executive Officers
of Parent, threatened against Parent or any of its Subsidiaries or (b)
obligations or liabilities of any nature, whether or not accrued, contingent or
otherwise and whether or not required to be disclosed, or any other facts or
circumstances of which the Responsible Executive Officers of Parent have
knowledge, that have resulted in or could reasonably be expected to result in
any claims against, or obligations or liabilities of, Parent or any of its
Subsidiaries, except for such actions, suits, claims, hearings, investigations,
proceedings, obligations and liabilities that would not, individually or in the
aggregate, have a Parent Material Adverse Effect or prevent or materially
impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement.
5.9. Employee Benefits.
(a) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
change of control, compensation, medical, health or other benefit plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of Parent and its Subsidiaries (the "Parent
Compensation and Benefit Plans") and any trust agreement or insurance contract
forming a part of such Parent Compensation and Benefit Plans has been made
available to the Company prior to the date hereof. For the three most recent
plan years, all annual reports (Form 5500 series) on each Parent Compensation
and Benefit Plan that have been filed with any governmental agency and the
current summary plan description and subsequent summaries of material
modifications for each Parent Compensation and Benefit Plan have been made
available to the Company prior to the date hereof. The Parent Compensation and
Benefit Plans are listed on Section 5.9. of the Parent Disclosure Schedule.
(b) All Parent Compensation and Benefit Plans are in substantial compliance
with all applicable law, including, to the extent applicable, the Code and
ERISA. Each Parent Compensation and Benefit Plan that is a Pension Plan and
that is intended to be qualified under Section 401(a) of the Code has received
a favorable determination letter from the IRS, and Parent is not aware of any
circumstances likely to result in revocation of any such favorable
determination letter. There is no pending or, to the knowledge of the
Responsible Executive Officers of Parent, threatened litigation relating to the
Parent Compensation and Benefit Plans. Neither Parent nor any of its
Subsidiaries has engaged in a transaction with respect to any Parent
Compensation and Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject Parent or any of its
Subsidiaries to a material tax or penalty imposed by either Section 4975 of the
Code or Section 502 of ERISA.
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(c) As of the date hereof, no liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by Parent or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by any of them, or the single-employer plan of any entity
which is considered an ERISA Affiliate of Parent. Parent and its Subsidiaries
have not incurred and do not expect to incur any withdrawal liability with
respect to a multiemployer plan under Subtitle E to Title IV of ERISA. Parent
and its Subsidiaries have not contributed, or been obligated to contribute, to
a multiemployer plan under Subtitle E of Title IV of ERISA at any time since
September 26, 1980. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate of Parent within the 12-month period ending on the date hereof or
will be required to be filed in connection with the transactions contemplated
by this Agreement.
(d) All contributions required to be made under the terms of any Parent
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Parent Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate of
Parent has an "accumulated funding deficiency" (whether or not waived) within
the meaning of Section 412 of the Code or Section 302 of ERISA. Neither Parent
nor its Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate of Parent
pursuant to Section 401(a)(29) of the Code.
(e) Under each Pension Plan of the Parent which is a single-employer plan,
as of the last day of the most recent plan year ended prior to the date hereof,
the actuarially determined present value of all "benefit liabilities", within
the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year. For each Pension
Plan of the Parent, Parent has furnished to the Company a true and complete
copy of the actuarial valuation reports issued by the actuaries of that Pension
Plan for the three most recent years, setting forth: (i) the actuarial present
value (based upon the same actuarial assumptions as were used for that period
for funding purposes) of all vested and nonvested accrued benefits under that
Pension Plan; (ii) the actuarial present value (based upon the same actuarial
assumptions, other than turnover assumptions, as were used for that period for
funding purposes) of vested benefits under that Pension Plan; (iii) the net
fair market value of that Pension Plan's assets; and (iv) a detailed
description of the funding method used under that Pension Plan.
(f) All Parent Compensation and Benefit Plans covering current or former
non-U.S. employees of Parent and its Subsidiaries comply in all material
respects with applicable local law. Parent and its Subsidiaries have no
material unfunded liabilities with respect to any Pension Plan that covers such
non-U.S. employees.
5.10. Compliance with Laws; Permits.
Except as set forth in the Parent Reports filed prior to the date hereof or
on Section 5.10. of the Parent Disclosure Schedule, the businesses of each of
Parent and its Subsidiaries have been, and are being, conducted in compliance
with all applicable Laws, and all notices, reports, documents and other
information required to be filed thereunder within the last three years were
properly filed and were in compliance with such Laws, except in any such case
for noncompliance that, individually or in the aggregate, would not reasonably
be expected to have a Parent Material Adverse Effect or prevent or materially
impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement. Except as set forth in the Parent
Reports filed prior to the date hereof or on Section 5.10. of the Parent
Disclosure Schedule and except for routine examinations by State Regulators, no
investigation or review by any governmental entity with respect to Parent or
any of its Subsidiaries is pending or, to the knowledge of the Responsible
Executive Officers of Parent, threatened, nor has any governmental entity
indicated an intention to conduct the same, except for those the outcome would
not, individually or in the aggregate, reasonably be expected to have a
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Parent Material Adverse Effect or prevent or materially impair the ability of
Parent or Merger Subsidiary to consummate the transactions contemplated by this
Agreement. No material change is required in Parent's or any of its
Subsidiaries' processes, properties or procedures in connection with any such
Laws, and Parent has not received any notice or communication of any material
noncompliance with any such Laws that has not been cured as of the date hereof.
Parent and its Subsidiaries each has all permits, licenses, trademarks,
patents, trade names, copyrights, service marks, franchises, variances,
exemptions, orders and other governmental authorizations, consents and
approvals necessary to conduct its business as presently conducted except those
the absence of which would not, individually or in the aggregate, have a Parent
Material Adverse Effect or prevent or materially impair the ability of Parent
or Merger Subsidiary to consummate the Merger and the other transactions
contemplated by this Agreement.
5.11. Environmental Matters.
Except as disclosed in the Parent Reports filed prior to the date hereof or
in Section 5.11. of the Parent Disclosure Schedule, and except for such matters
that, alone or in the aggregate, would not have a Parent Material Adverse
Effect: (a) Parent and its Subsidiaries have complied with all applicable
Environmental Laws; (b) to the knowledge of the Responsible Executive Officers
of Parent, the properties currently owned or operated by Parent (including
soils, groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances and do not contain wetlands, dumps,
filled in land, PCBs, asbestos or underground storage tanks; (c) to the
knowledge of the Responsible Executive Officers of Parent, the properties
formerly owned or operated by Parent or any of its Subsidiaries were not
contaminated with Hazardous Substances during the period of ownership or
operation by Parent or any of its Subsidiaries; (d) to the knowledge of the
Responsible Executive Officers of Parent, neither Parent nor any Subsidiary is
subject to liability for any Hazardous Substance disposal or contamination on
any third party property; (e) to the knowledge of the Parent Responsible
Executive Officers, no Hazardous Substance has been transported from any of the
properties owned or operated by Parent or any of its Subsidiaries other than as
permitted under applicable Environmental Law; (f) neither Parent nor any of its
Subsidiaries has received any written notice, demand, letter, claim or request
for information from any Governmental Entity or third party indicating that
Parent or any of its Subsidiaries may be in violation of or liable under any
Environmental Law; (g) Parent and its Subsidiaries are not subject to any court
order, administrative order or decree arising under any Environmental Law and
are not subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (h) there are no circumstances or conditions involving Parent
or any of its Subsidiaries that could reasonably be expected to result in any
material claims, liability, investigations, costs or restrictions on the
ownership, use, or transfer of any property of Parent pursuant to any
Environmental Law.
5.12. Taxes.
Except as provided in Section 5.12. of the Parent Disclosure Schedule:
(a) Parent and each of its Subsidiaries have (or, in the case of returns
becoming due after the date hereof and on or before the Closing Date, will
have prior to the Closing Date) timely and accurately filed all Tax Returns
which are required by all applicable laws to be filed by them, and have
paid, or made adequate provision for the payment of, all Taxes which have
or may become due and payable pursuant to said Tax Returns and all other
Taxes, governmental charges and assessments received to date other than
those Taxes being contested in good faith for which adequate provision has
been made on the most recent balance sheet included in the Parent Reports.
The Tax Returns of Parent and its Subsidiaries have been (or, in the case
of returns becoming due after the date hereof and on or before the Closing
Date will be) prepared, in all material respects, in accordance with all
applicable laws consistently applied;
(b) all Taxes which Parent and its Subsidiaries are required by law to
withhold and collect have been duly withheld and collected, and have been
paid over, in a timely manner, to the proper Taxing Authorities to the
extent due and payable;
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(c) no liens for Taxes exist with respect to any of the assets or
properties of Parent or its Subsidiaries, except for statutory liens for
Taxes not yet due or payable or that are being contested in good faith; and
(d) all Tax Returns have been examined by the relevant taxing
authorities, or closed without audit by applicable statutes, and all
deficiencies proposed as a result of such examinations have been paid or
settled, for all taxable years prior to and including the taxable year
ended December 31, 1993; and
(e) there is no audit, examination, deficiency, or refund litigation
pending with respect to any Taxes and during the past three years no Taxing
Authority has given written notice of the commencement of any audit,
examination, deficiency or refund litigation, with respect to any Taxes.
5.13 Labor Matters.
Neither Parent nor any of its Subsidiaries is a party to or otherwise bound
by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization. There are no strikes or
work stoppages pending or, to the knowledge of the Responsible Executive
Officers of Parent, threatened with respect to the employees of Parent or any
of its Subsidiaries. There is no representation claim or petition or complaint
pending before the National Labor Relations Board or any state or local labor
agency and, to the knowledge of the Responsible Executive Officers of Parent,
no question concerning representation has been raised or threatened. No charges
with respect to or relating to the business of Parent or any of its
Subsidiaries are pending before the Equal Employment Opportunity Commission, or
any state or local agency responsible for the prevention of unlawful employment
practices, which would if adversely determined have a Parent Material Adverse
Effect.
5.14. Intellectual Property.
(a) Except as set forth on Section 5.14. of the Parent Disclosure Schedule,
Parent and/or each of its Subsidiaries owns, or is licensed or otherwise
possesses rights to use all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, technology, know-how, computer
software programs or applications, and tangible or intangible proprietary
information or materials that are used in the business of Parent and its
Subsidiaries as currently conducted, and all patents, trademarks, trade names,
service marks and copyrights held by Parent and/or its Subsidiaries are valid
and subsisting.
(b) Except as disclosed in the Parent Reports filed prior to the date hereof
or Section 5.14. of the Parent Disclosure Schedule:
(i) Parent is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder
or as contemplated hereby, in violation of any licenses, sublicenses and
other agreements as to which Parent is a party and pursuant to which Parent
is authorized to use any third-party patents, trademarks, service marks,
and copyrights ("Parent Third-Party Intellectual Property Rights");
(ii) no claims with respect to (A) the patents, registered and
unregistered trademarks and service marks, copyrights, trade names, and any
applications therefor owned by Parent or any of its Subsidiaries (the
"Parent Intellectual Property Rights"); (B) any trade secret material to
Parent; or (C) Parent Third-Party Intellectual Property Rights are
currently pending or threatened by any Person;
(iii) (A) the sale, licensing or use of any product as now used, sold or
licensed or proposed for use, sale or license by Parent or any of its
Subsidiaries, does not infringe in any respect that would have a Parent
Material Adverse Effect on any copyright, patent, trademark, service mark
or trade secret; and (B) there are no valid grounds for any material claims
against the use by Parent or any of its Subsidiaries, of any material
trademarks, trade names, trade secrets, copyrights, patents, technology,
know-how or computer software programs and applications used in the
business of Parent or any of its Subsidiaries as
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currently conducted challenging the ownership, validity or effectiveness of
any of Parent Intellectual Property Rights or other trade secret material
to Parent or challenging the license or legally enforceable right to use of
the Parent Third-Party Intellectual Rights by Parent or any of its
Subsidiaries; and
(iv) to the knowledge of the Responsible Executive Officers of Parent,
there is no unauthorized use, infringement or misappropriation of any of
Parent Intellectual Property Rights by any third party, including any
employee or former employee of Parent or any of its Subsidiaries.
(c) Section 5.14. of the Parent Disclosure Schedule lists all material (i)
patents, patent applications, registered and unregistered trademarks, trade
names and service marks, registered and unregistered copyrights, and maskworks
included in the Parent Intellectual Property Rights, and (ii) licenses,
sublicenses and other agreements as to which the Parent is a party and pursuant
to which any person is authorized to use any of the Parent Intellectual
Property Rights.
5.15. Title to Property.
Except as set forth in the Parent Reports or on Section 5.15. of the Parent
Disclosure Schedule, Parent and each of its Subsidiaries have good title to all
of their properties and assets, free and clear of all encumbrances, except
liens for taxes not yet due and payable and such encumbrances or other
imperfections of title, if any, as do not materially detract from the value of
or materially interfere with the present use of the property affected thereby
or which would not reasonably be expected to have a Parent Material Adverse
Effect, and except for encumbrances which secure indebtedness reflected in the
financial statements included in the Parent Reports.
5.16. Material Contracts.
All of the material contracts of Parent and its Subsidiaries that are
required to be described in the Parent Reports or to be filed as exhibits
thereto pursuant to Item 601 of Regulation S-K promulgated by the SEC are
described in the Parent Reports or filed as exhibits thereto and are in full
force and effect. True and complete copies of all such material contracts have
been made available by Parent to the Company. Neither Parent nor any of its
Subsidiaries nor, to the knowledge of the Responsible Executive Officers of
Parent, any other party is in breach of or in default under any such contract,
except for such breaches and defaults as individually or in the aggregate have
not had and would not reasonably be expected to have a Parent Material Adverse
Effect. Neither Parent nor any of its Subsidiaries is party to any agreement
containing any provision or covenant limiting in any respect that would
reasonably be expected to have a Parent Material Adverse Effect the ability of
Parent or any of its Subsidiaries to (a) sell any products or services of or to
any other person, (b) engage in any line of business or (c) compete with or
obtain products or services from any person or limiting the ability of any
person to provide products or services to Parent or any of its Subsidiaries.
5.17. Brokers and Finders.
Neither Parent nor any of its executive officers, directors or employees has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders fees in connection with the Merger or the other
transactions contemplated in this Agreement, except that Parent has employed
J.C. Bradford as its financial advisors, the arrangements with respect to which
are set forth on Section 5.17. of the Parent Disclosure Schedule.
5.18. Insurance Matters.
Parent has heretofore provided the Company with true, complete and correct
copies of all material fire and casualty, general liability, business
interruption, product liability and other insurance policies maintained by
Parent and its Subsidiaries. All such policies are in full force and effect and
no event has occurred that would give any insurance carrier a right to
terminate any such policy. Neither Parent nor any of its Subsidiaries has been
denied or had any policy of insurance revoked or rescinded. All such policies
are adequate to insure
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against risks to which Parent and its properties are exposed in such amounts
and subject to such terms as are commercially reasonable.
5.19. Accounting and Tax Matters.
(a) As of the date hereof, neither Parent nor any of its Affiliates has
taken or agreed to take any action, nor do the Responsible Executive Officers
of Parent have any knowledge of any fact or circumstance, that would prevent
Parent or the Company from accounting for the business combination to be
effected by the Merger as a "pooling-of-interests" or prevent the Merger and
the other transactions contemplated by this Agreement from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(b) Parent has provided to Parent's and the Company's independent
accountants all information concerning actions taken or agreed to be taken by
Parent or any of its Affiliates on or before the date of this Agreement that
could reasonably be expected to adversely affect the ability of Parent to
account for the business combination to be effected by the Merger as a pooling
of interests.
ARTICLE VI
Covenants
6.1. Interim Operations of the Company.
The Company covenants and agrees as to itself and its Subsidiaries that,
after the date hereof and prior to the Effective Time (except as otherwise
expressly contemplated by this Agreement or as set forth in Section 6.1. of the
Company Disclosure Schedule), without the prior written consent of Parent,
which consent shall not be unreasonably withheld or delayed:
(a) its and its Subsidiaries' businesses shall be conducted in all
material respects in the ordinary and usual course;
(b) it and its Subsidiaries shall use their reasonable best efforts to
preserve intact in all material respects their present business
organizations, to keep available the services of its key officers and
employees, to maintain its assets and properties in good working order and
condition, ordinary wear and tear excepted, to maintain insurance on its
tangible assets and businesses in such amounts and against such risks and
losses as are currently in effect, to maintain existing relations and
goodwill with contract parties, customers, suppliers, distributors,
creditors, lessors, employees and business associates, and to comply in all
material respects with all Laws;
(c) it shall not (i) issue, sell, pledge, dispose of or encumber any
capital stock owned by it in any of its Subsidiaries; (ii) amend its
articles of incorporation or by-laws; (iii) split, combine or reclassify
its outstanding shares of stock; (iv) authorize, declare, set aside or pay
any dividend payable in cash, stock or property in respect of any capital
stock other than intercompany transactions in the ordinary course of
business consistent with past practice; or (v) repurchase, redeem or
otherwise acquire, except in connection with any of the Company Stock
Plans, or permit any of its Subsidiaries to purchase or otherwise acquire,
any shares of its stock or any securities convertible into or exchangeable
or exercisable for any shares of its stock;
(d) neither it nor any of its Subsidiaries shall: (i) except as
permitted under Section 6.1.(e), issue, sell, pledge, dispose of or
encumber any (A) shares of, or securities convertible into or exchangeable
or exercisable for, or options, warrants, calls, commitments or rights of
any kind to acquire any shares of, its capital stock of any class or (B)
securities convertible into or exchangeable for any other property or
assets (other than Shares issuable pursuant to options outstanding on the
date hereof under any of the Company Stock Plans and Shares issuable upon
exercise of warrants); (ii) other than in the ordinary and usual course of
business, transfer, lease, license, guarantee, sell, mortgage, pledge,
dispose of or encumber any other
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material property or assets or take any action to incur or modify any
material indebtedness; (iii) make or authorize or commit for any capital
expenditures other than in amounts less than $500,000 in the aggregate;
(iv) enter into or terminate any material contract, license or permit if
such action is not in the ordinary and usual course of business consistent
with past practices, (v) amend or modify in any materially adverse way any
material contract, license or permit, (vi) enter into any agreement with
any Affiliate of the Company if such action is not on an arm's length
basis, or (vii) make any acquisition of, or investment in, the assets or
stock of any other Person or entity (other than a Subsidiary) except for
ordinary course investment activities or as otherwise permitted by Section
6.1.(a);
(e) neither it nor any of its Subsidiaries shall terminate, establish,
adopt, enter into, make any new grants or awards under, amend or otherwise
modify, any Company Compensation and Benefit Plans or increase the salary,
wage, bonus or other compensation of any employees except increases for
employees of the Company occurring in the ordinary and usual course of
business (which shall be limited to, (i) regular grants of options and
shares of capital stock under the Company Stock Plans and the Directors'
Compensation Plan pursuant to the terms of such plans, the number of
Company Options subject to and the recipient of each such grant to be
determined in consultation with Parent; provided that the maximum number of
Shares issuable pursuant to such options shall be calculated in accordance
with past practice and the terms of the Company Stock Plans and shall not
exceed 25,000 Shares, (ii) grants and payment of awards under any
management incentive plans in accordance with the terms of such plans, and
(iii) salary increases for those employees who have a rank of vice
president or higher in accordance with the Company's normal salary
guidelines and salary increases for other employees which do not exceed, in
the aggregate, 4.0% of their aggregate current salaries), except as
necessary to comply with Section 6.13.(a)(i) and provided, however, that
the Company reserves the right to make payments in connection with the
retention of key employees, which payments shall not exceeed $200,000 in
the aggregate (it being understood that the Company will adjust such
bonuses, to the extent reasonable, to take into account Parent's desires to
retain certain employees permanently and certain employees for a period
beyond closing);
(f) neither it nor any of its Subsidiaries shall pay, discharge, settle
or satisfy any claims, liabilities or obligations except (i) in the
ordinary course of business and consistent with past practice or (ii)
ordinary course repayment of indebtedness or payment of contractual
obligations when due;
(g) neither it nor any of its Subsidiaries shall make or change any Tax
election, settle any material audit or file any material amended tax
returns;
(h) neither it nor any of its Subsidiaries shall enter into any
agreement containing any provision or covenant limiting in any material
respect the ability of the Company or any Subsidiary or affiliate to (i)
sell any products or services of or to any other person, (ii) engage in any
line of business or (iii) compete with or to obtain products or services
from any person or limiting the ability of any person to provide products
or services to the Company or any of its Subsidiaries or Affiliates;
(i) neither it nor any of its Subsidiaries shall take any action that
would cause any of its representations and warranties herein to become
untrue in any material respect; and
(j) neither it nor any of its Subsidiaries will authorize or enter into
an agreement to do any of the foregoing.
6.2. Interim Operations of Parent.
Parent covenants and agrees as to itself and its Subsidiaries that, after
the date hereof and prior to the Effective Time (except as otherwise expressly
contemplated by this Agreement or as set forth in Section 6.2. of the Parent
Disclosure Schedule), without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed:
(a) its and its Subsidiaries' businesses shall be conducted in all
material respects in the ordinary and usual course;
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(b) it and its Subsidiaries shall use their reasonable best efforts to
preserve intact in all material respects their present business
organizations, to maintain existing relations and goodwill with contract
parties, customers, suppliers, distributors, creditors, lessors, employees
and business associates, and to comply in all material respects with all
Laws;
(c) it shall not (i) amend its certificate of incorporation or bylaws in
any respect that would require a shareholder vote or adversely affect the
rights of shareholders; (ii) authorize, declare, set aside or pay any
dividend payable in cash, stock or property in respect of any capital
stock; or (iii) repurchase, redeem or otherwise acquire, except in
connection with any of the Parent Stock Plans, or permit any of its
Subsidiaries to purchase or otherwise acquire, any shares of its stock or
any securities convertible into or exchangeable or exercisable for any
shares of its stock;
(d) neither it nor any of its Subsidiaries shall: (i) issue, sell,
pledge, dispose of or encumber any (A) shares of, or securities convertible
into or exchangeable or exercisable for, or options, warrants, calls,
commitments or rights of any kind to acquire any shares of, its capital
stock of any class or (B) securities convertible into or exchangeable for
any other property or assets (other than shares of Parent Common Stock
issuable pursuant to options outstanding on the date hereof, or options
granted in the ordinary course, under any of the Parent Stock Plans or
securities issued in any transaction or series of transactions for
consideration determined by the Board of Directors of Parent in good faith
to constitute fair market value); (ii) other than in the ordinary and usual
course of business or in any transaction or series of transactions for
consideration determined by the Board of Directors of Parent in good faith
to constitute fair market value, transfer, lease, license, guarantee, sell,
mortgage, pledge, dispose of or encumber any other material property or
assets (including capital stock of any of its Subsidiaries) or take any
action to incur or modify any material indebtedness or other material
liability; or (iii) make any acquisition of, or investment in, the assets
or stock of any other Person or entity (other than a Subsidiary) except for
ordinary course investment activities or in any transaction or series of
transactions for consideration determined by the Board of Directors of
Parent in good faith to constitute fair market value, or as otherwise
permitted by Section 6.2.(a);
(e) neither it nor any of its Subsidiaries shall take any action that
would cause any of its representations and warranties herein to become
untrue in any material respect; and
(f) neither it nor any of its Subsidiaries will authorize or enter into
an agreement to do any of the foregoing.
6.3. Interim Operations of Merger Subsidiary.
During the period from the date of this Agreement to the Effective Time,
Merger Subsidiary shall not engage in any activities of any nature except as
provided in or contemplated by this Agreement.
6.4. Acquisition Proposals.
From the date hereof until the termination hereof and except as expressly
permitted by the following provisions of this Section 6.4., the Company shall
not, and the Company shall not authorize or permit any officer, director or
employee of, or any financial advisor, attorney, accountant or other advisor or
representative retained by, the Company to, solicit, initiate, encourage
(including by way of furnishing information), endorse or enter into any
agreement with respect to, or take any other action to knowingly facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Acquisition Proposal (as hereafter defined). The
Company shall as soon as reasonably practicable advise Parent of any
Acquisition Proposal or any inquiries or discussions with respect thereto,
including the name of the proposed acquiror and the material terms of the
Acquisition Proposal. Subject to the rights of the Company under Article VIII
of this Agreement, neither the Board of Directors of the Company nor any
committee thereof shall (a) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Parent the approval or recommendation by the
Board of Directors of the Company of the Merger or this Agreement or (b)
approve or recommend, or
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propose to approve or recommend, any Acquisition Proposal other than pursuant
to the Merger or this Agreement. Notwithstanding the foregoing, nothing
contained in this Agreement shall prevent the Board of Directors of the Company
from (i) furnishing information to or entering into discussions or negotiations
with any person or entity if and only to the extent that the Board of Directors
of the Company shall have determined in good faith that such action is required
in the exercise of its fiduciary duties, based upon the advice of outside
counsel, (ii) complying with Rules 14d-9 and 14e-2 promulgated under the
Exchange Act, (iii) making any disclosure to the Company's stockholders if the
Board of Directors shall have determined, after consultation with outside
counsel, that failure to make such disclosures would be inconsistent with
applicable law or regulation of any national securities exchange or interdealer
quotation system or (iv) withdrawing or modifying its approval or
recommendation of the Merger or this Agreement, if and only to the extent that
the Board of Directors of the Company shall have determined in good faith that
such action is required in the exercise of its fiduciary duties, based upon the
advice of outside counsel. The Company will as soon as reasonably practicable
notify Parent if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with the Company and inform Parent of the
status of any such Acquisition Proposal from time to time. As used in this
Agreement, "Acquisition Proposal" shall mean any tender or exchange offer, or
proposal, other than a proposal by Parent or any of its affiliates, for a
merger, share exchange or other business combination involving the Company or
any proposal or offer to acquire in any manner a substantial equity interest in
the Company or a substantial portion of the assets of the Company.
6.5. Information Supplied.
Each of the Company and Parent agree, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it or its
Subsidiaries for inclusion or incorporation by reference in (a) the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
(including the joint proxy statement and prospectus (the "Prospectus/Proxy
Statement") constituting a part thereof) (the "S-4 Registration Statement")
will, at the time the S-4 Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, not misleading, and (b) the Prospectus/Proxy Statement and
any amendment or supplement thereto will, at the date of mailing to
stockholders and at the times of the meetings of stockholders of the Company
and Parent to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
6.6. Stockholder Meetings.
The Company will take, in accordance with its articles of incorporation and
bylaws, all action necessary to convene a meeting of holders of Shares (the
"Stockholders Meeting"), to be held as promptly as practicable after the S-4
Registration Statement is declared effective, to consider and vote upon the
approval of the Merger, and the Company's board of directors, subject to
fiduciary obligations under applicable law as referred to in Section 6.4., will
recommend such approval by its stockholders, will not withdraw or modify such
recommendation and shall take all lawful action to solicit such approval.
Parent will take, in accordance with its certificate of incorporation and
bylaws, all action necessary to convene a meeting of holders of Parent Common
Stock (the "Parent Stockholders Meeting"), to be held as promptly as
practicable after the S-4 Registration Statement is declared effective, to
consider and vote upon the approval of the issuance of Parent Common Stock in
the Merger, and Parent's board of directors, subject to fiduciary obligations
under applicable law, will recommend such approval by its stockholders, will
not withdraw or modify such recommendation and will take all lawful action to
solicit such approval.
6.7. Filings; Other Actions; Notification.
(a) Parent and the Company shall promptly prepare and file with the SEC the
Prospectus/Proxy Statement, and Parent shall prepare and file with the SEC the
S-4 Registration Statement as promptly as practicable. Parent
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and the Company each shall use its reasonable best efforts to have the S-4
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing, and promptly thereafter mail the
Prospectus/Proxy Statement to the respective stockholders of each of the
Company and Parent. Parent shall also use its reasonable best efforts to obtain
prior to the effective date of the S-4 Registration Statement all necessary
state securities law or "blue sky" permits and approvals required in connection
with the Merger and to consummate the other transactions contemplated by this
Agreement and will pay all expenses incident thereto.
(b) The Company and Parent each shall use all reasonable efforts to cause to
be delivered to the other party and its directors a letter of its independent
auditors, dated (i) the date on which the S-4 Registration Statement shall
become effective and (ii) the Closing Date, and addressed to the other party
and its directors, in form and substance customary for "comfort" letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement.
(c) The Company and Parent each shall from the date hereof until the
Effective Time cooperate with the other and use (and shall cause their
respective Subsidiaries to use) its reasonable best efforts to cause to be done
all things necessary, proper or advisable on its part under this Agreement and
applicable Laws to consummate and make effective the Merger and the other
transactions contemplated by this Agreement as soon as practicable, including
preparing and filing as promptly as practicable all documentation to effect all
necessary notices, reports and other filings and to obtain as promptly as
practicable all consents, registrations, approvals, permits and authorizations
necessary or advisable to be obtained from any third party and/or any
governmental entity in order to consummate the Merger or any of the other
transactions contemplated by this Agreement.
(d) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
executive officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/Proxy Statement, the
S-4 Registration Statement or any other statement, filing, notice or
application made by or on behalf of Parent, the Company or any of their
respective Subsidiaries to any third party and/or any governmental entity in
connection with the Merger and the transactions contemplated by this Agreement.
(e) The Company and Parent each shall keep the other apprised of the status
of matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of notice or other
communications received by Parent or the Company, as the case may be, or any of
its Subsidiaries, from any third party and/or any governmental entity with
respect to the Merger and the other transactions contemplated by this
Agreement. The Company and Parent each shall give prompt notice to the other of
any change that is reasonably likely to result in a Company Material Adverse
Effect or Parent Material Adverse Effect, respectively.
6.8. Taxation and Accounting.
(a) Neither Parent nor the Company shall, nor shall they permit either of
their respective Subsidiaries or Affiliates to, take or cause to be taken any
action, whether before or after the Effective Time, that would disqualify the
Merger as a "pooling of interests" for accounting purposes or as a
"reorganization" within the meaning of Section 368(a) of the Code. Each of
Parent and the Company agrees to use its reasonable best efforts to cure any
impediment to the qualification of the Merger as a "pooling of interests" for
accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Code.
(b) The Company shall instruct its accountants, Arthur Andersen LLP, to
deliver and shall use its reasonable best efforts to cause such accountants to
deliver to Parent letters dated as of the Closing Date, addressed to Parent,
containing both (i) its concurrence with the conclusion of the Company's
management that no conditions exist with respect to the Company that would
preclude accounting for the Merger as a "pooling of interests," which letter
shall be in customary form; and (ii) such matters as are customarily contained
in
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auditors' letters regarding information about the Company included in the
Proxy/Registration Statement, which auditors' letters shall be in form and
substance reasonably satisfactory to Parent. Parent shall use its reasonable
best efforts to cause its accountants, Grant Thornton LLP, to deliver to the
Company letters at such times to the effect that Parent satisfies the tests
applicable to it such that the Merger can be accounted for as a "pooling of
interests", which letter shall be in customary form.
(c) Parent shall use its reasonable best efforts to publish combined
financial statements of Parent and the Company for the 30 day period
immediately following Closing as soon as practicable after the completion of
such 30 day period.
(d) The Company shall prepare and file the consolidated Federal income tax
return for the tax year ended June 30, 1998, for the affiliated group of which
the Company is the common parent corporation, prior to the Closing Date and in
a manner consistent (including elections and accounting methods and
conventions) with such return for the prior tax year, except as otherwise
required by applicable law or agreed to by the Parent, and shall provide Parent
with a copy of such return prior to the filing of such return.
6.9. Access.
Upon reasonable notice, and except as may otherwise be required by
applicable law, the Company and Parent each shall (and shall cause its
Subsidiaries to) afford the other's executive officers, employees, counsel,
accountants and other authorized representatives ("Representatives") access,
during normal business hours throughout the period prior to the Effective Time,
to its properties, books, contracts and records and, during such period, each
shall (and shall cause its Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as may reasonably
be requested, provided that no investigation pursuant to this Section shall
affect or be deemed to modify any representation or warranty made by the
Company, Parent or Merger Subsidiary, and provided, further, that the foregoing
shall not require the Company or Parent to permit any inspection, or to
disclose any information, that (i) in the reasonable judgment of the Company or
Parent, as the case may be, would result in the disclosure of any trade secrets
of third parties or violate any of its obligations with respect to
confidentiality if the Company or Parent, as the case may be, shall have used
all reasonable efforts to obtain the consent of such third party to such
inspection or disclosure or (ii) would violate any attorney-client privilege of
the Company or Parent, as the case may be. All requests for information made
pursuant to this Section 6.9. shall be directed to such Person as may be
designated by the Company and Parent, as the case may be, pursuant to Section
9.6. hereof. All such information shall be governed by the terms of the
Confidentiality Agreement (as hereinafter defined).
6.10. Affiliates.
(a) Attached hereto as Exhibit A-1 is a list of names and addresses of those
Persons who are, in the opinion of the Company (after consultation with outside
legal counsel), "Affiliates" of the Company within the meaning of Rule 145
under the Securities Act and for the purposes of applicable interpretations
regarding the pooling-of-interests method of accounting. The Company shall
exercise its best efforts to deliver or cause to be delivered to Parent, at
least 35 days prior to the Effective Time, from each affiliate of the Company
identified in the foregoing list, a letter in the form attached as Exhibit A-2
(the "Company Affiliates Letter"). The certificates representing Parent Common
Stock received by such Affiliates shall bear a customary legend regarding
applicable Securities Act restrictions and "pooling restrictions."
(b) At least 35 days prior to the Effective Time, Parent shall deliver to
the Company a list of names and addresses of those Persons who are, in the
opinion of Parent (after consultation with outside legal counsel), "Affiliates"
of Parent for the purposes of applicable interpretations regarding the pooling-
of-interests method of accounting. Parent shall exercise its best efforts to
deliver or cause to be delivered to the Company, at least 35 days prior to the
Effective Time, from each Affiliate of Parent identified in the foregoing list,
a letter in the form attached as Exhibit A-3 (the "Parent Affiliates Letter").
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6.11 Stock Exchange Listing.
Parent shall use its best efforts to cause the shares of Parent Common Stock
to be issued in the Merger to be approved for listing on the NASDAQ subject to
official notice of issuance, prior to the Closing Date.
6.12. Publicity.
The Company and Parent shall consult with each other prior to issuing, and
will provide each other with a meaningful opportunity to review, comment upon
and concur with, any press releases or otherwise making public announcements
with respect to the Merger and the other transactions contemplated by this
Agreement, and prior to making any filings with any third party and/or any
governmental entity with respect thereto, except as may be required by law,
court process or by obligations pursuant to any listing agreement with or rules
of any national securities exchange or interdealer quotation service.
6.13. Benefits.
(a) Stock Options.
(i) At the Effective Time, each Company Option whether vested or unvested,
without any action on the part of the holder, shall be deemed to constitute an
option to acquire, on the same terms and conditions as were applicable under
such Company Option, a number of shares of Parent Common Stock equivalent to
(A) the number of Shares that could have been purchased immediately prior to
the Effective Time under such Company Option multiplied by (B) the Exchange
Ratio (rounded down to the nearest whole number), at a price per share of
Parent Common Stock (rounded up to the nearest whole cent) equal to the
exercise price per share pursuant to such Company Option immediately prior to
the Effective Time divided by the Exchange Ratio; provided, however, that the
foregoing provisions shall be subject to such adjustments as are necessary in
order to satisfy the requirements of Section 424(a) of the Code in the case of
any Company Option to which Section 422 of the Code applies. At or prior to the
Effective Time, the Company shall make all necessary arrangements with respect
to the Company Stock Plans to permit the assumption of the unexercised Company
Options by Parent pursuant to this Section 6.13.
(ii) Effective at the Effective Time, Parent shall assume each Company
Option in accordance with the terms of the relevant Company Stock Plan under
which it was issued and the stock option agreement by which it is evidenced. At
or prior to the Effective Time, Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Parent
Common Stock for delivery upon exercise of Company Options assumed by it in
accordance with this Section. As soon as practicable, and in no event later
than 10 days after the Effective Time, Parent shall file a registration
statement on Form S-8, (or any successor or other appropriate forms) (or shall
cause such Company Option to be deemed to be issued pursuant to a Parent Stock
Plan for which shares of Parent Common Stock have previously been registered
pursuant to an appropriate registration form) with respect to Parent Common
Stock subject to such Company Options.
(b) Employee Benefits. Subject to this Section 6.13.(b), Parent agrees that
all employees of the Company and its Subsidiaries who are provided with
benefits under employee benefit plans of the Company (other than plans
involving the issuance of Shares) (the "Company Benefit Plans") shall continue
to be covered under the Company Benefit Plans after the Effective Time.
Notwithstanding the foregoing, Parent may terminate all of the Company Benefit
Plans, provided that: (i) each Company employee and each employee of the
Company's Subsidiaries is provided coverage under Parent employee benefit plans
(other than plans involving the issuance of shares) (the "Parent Benefit
Plans") on the same terms and conditions as similarly situated Parent
employees; (ii) Parent causes each Parent Benefit Plan covering employees of
the Company or its Subsidiaries to recognize prior service and accrued vacation
of such employees with the Company or its Subsidiaries as service and accrued
vacation with Parent and its Subsidiaries (A) for purposes of any waiting
period, eligibility requirements and benefit accruals under any Parent Benefit
Plan that is not a "pension plan" (as defined in Section 3(2) of ERISA), and
(B) for purposes of eligibility (including eligibility for early retirement
benefits)
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and vesting (but not benefit accrual) under any Parent Benefit Plan that is a
"pension plan" (as defined in Section 3(2) of ERISA); (iii) Parent causes
coverage to be immediately available for employees of the Company and its
Subsidiaries under the comparable Parent Benefit Plan, if any, at the time
coverage ceases under any Company Benefit Plan sought to be terminated; and
(iv) to the extent Parent elects to terminate any Company Benefit Plan, it will
terminate the other Company Benefit Plans in accordance herewith as soon as
practicable after the termination of such Company Benefit Plan. Notwithstanding
the foregoing, nothing herein shall require Parent to offer benefits under the
Parent Benefit Plans comparable to those offered under the Company Benefit
Plans. Following the Effective Time, Parent shall honor, or shall cause the
Surviving Company to honor, all individual employment or severance agreements
in effect for employees (or former employees) of the Company as of the date
hereof to the extent that such individual agreements are listed in Section
4.14.(b) of the Company Disclosure Schedule; provided, however, that nothing
contained herein shall prevent Parent from amending or terminating any such
agreement in accordance with its terms.
6.14. Expenses.
Except as otherwise provided in Section 8.2.(b), whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement, and the Merger and the other transactions contemplated hereby and
thereby shall be paid by the party incurring such expense, except that expenses
incurred in connection with the filing fee for the S-4 Registration Statement
and printing and mailing the Prospectus/Proxy Statement shall be divided
equally between Parent and the Company.
6.15. Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time for a period of six years, Parent
agrees that it will indemnify and hold harmless each present and former
director and officer of the Company, (when acting in such capacity) determined
as of the Effective Time (each, an Indemnified Party and, collectively, the
"Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees and expenses), judgments, fines, losses, amounts paid in
settlement claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, actual or
threatened, whether civil, criminal, administrative or investigative, in whole
or in part based on or arising in whole or in part out of matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent that the Company
would have been permitted under Maryland law and its articles of incorporation
or bylaws in effect on the date hereof to indemnify such Person (and Parent
shall also advance expenses as incurred to the fullest extent permitted under
applicable law provided the Person to whom expenses are advanced provides (i) a
written affirmation of his or her good faith belief that the standard of
conduct necessary for indemnification has been met, and (ii) an undertaking to
repay such advances if it is ultimately determined that such Person is not
entitled to indemnification).
(b) Parent shall cause to be maintained, for a period of not less than six
years from the Effective Time, the Company's current directors' and officers'
liability insurance policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") for all present and
former directors and officers of the Company or any subsidiary thereof, so long
as the annual premium therefor would not be in excess of 150% of the last
annual premium paid for the D&O Insurance prior to the date of this Agreement
(150% of such premium, the "Maximum Premium"); provided that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, cause no
less favorable coverage to be provided under any policy maintained for the
benefit of the directors and officers of Parent or a separate policy provided
by the same insurer. If the existing D&O Insurance expires, is terminated or
canceled by the insurer or if the annual premium would exceed the Maximum
Premium during such period, Parent shall obtain, in lieu of such D&O Insurance,
such comparable directors' and officers' liability insurance as can be obtained
for the remainder of such period for an annualized premium not in excess of the
Maximum Premium and on terms and conditions no less advantageous than the
existing D&O Insurance.
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(c) The provisions of this Section are in addition to the rights that an
Indemnified Party may have under the articles of incorporation, bylaws or
agreements of or with the Company or any of its Subsidiaries or under
applicable law. Parent agrees to pay all costs and expenses (including fees and
expenses of counsel) that may be incurred by any Indemnified Party in
successfully enforcing the indemnity or other obligations under this Section.
The provisions of this Section shall survive the Merger and are intended to be
for the benefit of, and shall be enforceable by, each of the Indemnified
Parties, their heirs and their representatives.
6.16. Election to Parent's Board of Directors.
Promptly after the Effective Time of the Merger, Parent shall cause one
person designated prior to the Effective Time by the Company with Parent's
consent (not to be unreasonably withheld) to be appointed to the Parent Board
of Directors.
6.17. Takeover Statute.
If any Takeover Statute is or may become applicable to the Merger or the
other transactions contemplated by this Agreement, each of Parent and the
Company and its board of directors shall grant such approvals and take such
actions as are necessary so that such transactions may be consummated as
promptly as practicable on the terms contemplated by this Agreement or by the
Merger and otherwise act to eliminate or minimize the effects of such statute
or regulation on such transactions.
6.18. Debentures.
At the Effective Time, Parent shall execute and deliver (a) an Amendment to
the Company's Indenture dated as of October 15, 1996 to the Chase Manhattan
Bank, as Trustee, acknowledging the Parent's obligation to issue Parent Common
Stock to the holders of the Debentures not electing redemption of their
Debentures on the Holder Redemption Date (as defined therein) and (b) an
Amendment to the Company's Fiscal and Paying Agency Agreement dated as of
January 29, 1996 to the Chase Manhattan Bank, as Fiscal Agent, acknowledging
the Parent's obligation to issue Parent Common Stock to the holders of the
Debentures not electing redemption of their Debentures on the Holder Redemption
Date (as defined therein).
6.19. Insurance.
The Company shall cooperate with the Parent and the Company's insurers to
arrange for the purchase, prior to the Effective Time, of tail period insurance
coverage for the benefit of the Surviving Corporation.
ARTICLE VII
Conditions
7.1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. The Merger shall have been duly approved by
holders of Shares constituting the Company Requisite Vote and shall have
been duly approved by the sole member of Merger Subsidiary in accordance
with applicable law, and the issuance of Parent Common Stock pursuant to
the Merger shall have been duly approved by the holders of Parent Common
Stock constituting the Parent Requisite Vote.
(b) NASDAQ Listing. The shares of Parent Common Stock issuable to the
Company stockholders pursuant to this Agreement shall have been authorized
for listing on the NASDAQ upon official notice of issuance.
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(c) Regulatory Consents. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated. Other than the filing provided for in Section 1.3., all other
notices, reports and other filings required to be made prior to the
Effective Time by the Company or Parent or any of their respective
Subsidiaries with, and all consents, registrations, approvals, permits and
authorizations required to be obtained prior to the Effective Time by the
Company or Parent or any of their respective Subsidiaries from, any
governmental entity (collectively, "Governmental Consents"), in connection
with the execution and delivery of this Agreement and the consummation of
the Merger and the other transactions contemplated by this Agreement shall
have been made or obtained, except where the failure to make any such
filings or obtain any such Governmental Consents would not have a material
adverse effect on either Parent, the Company and their respective
Subsidiaries in all jurisdictions requiring such filings or Governmental
Consents in the event such filings are not made or such Consents are not
obtained.
(d) Litigation. No court or governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any law, statute, ordinance, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) that is in
effect and restrains, enjoins or otherwise prohibits consummation of the
Merger (collectively, an "Order") and no governmental entity shall have
instituted any proceeding which continues to be pending seeking any such
Order.
(e) S-4. The S-4 Registration Statement shall have become effective
under the Securities Act. No stop order suspending the effectiveness of the
S-4 Registration Statement shall have been issued, and no proceeding for
that purpose shall have been initiated or be threatened, by the SEC.
(f) Company Fairness Opinion. The Company shall have received an opinion
from SunTrust Equitable Securities, its financial advisor, dated as of the
date of the mailing to stockholders of the Company of the Prospectus/Proxy
Statement included within the S-4 Registration Statement confirming the
opinion referred to in Section 4.4(b) hereof.
(g) Parent Fairness Opinion. Parent shall have received an opinion from
J.C. Bradford, its financial advisor, dated as of the date of the mailing
to stockholders of Parent of the Prospectus/Proxy Statement included in the
S-4 Registration Statement, to the effect that, as of the date of such
opinion, the Exchange Ratio is fair from a financial point of view to the
Parent's stockholders.
7.2. Conditions to Obligations of Parent and Merger Subsidiary.
The obligations of Parent and Merger Subsidiary to effect the Merger are
also subject to the satisfaction or waiver by Parent at or prior to the
Effective Time of the following conditions:
(a) Representations and Warranties. (i) Except as provided in (ii)
below, the representations and warranties of the Company set forth in this
Agreement that are qualified as to materiality shall be true and correct as
of the Closing Date and those not so qualified by materiality shall be true
and correct in all material respects as of the Closing Date; and (ii) the
representations and warranties of the Company set forth in this Agreement
made as of a specified date earlier than the Closing Date shall be true and
correct as of such date, except as affected by the transactions
contemplated by this Agreement; and Parent shall have received a
certificate signed on behalf of the Company by an executive officer of the
Company to the effect stated in the foregoing clauses (i) and (ii).
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Closing Date, and Parent
shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to such effect.
(c) There shall have been no changes that have had or are reasonably
likely to have a Company Material Adverse Effect since the date of this
Agreement, except for changes contemplated by this Agreement.
(d) Consents. The Company shall have obtained all Private Consents
referred to in Section 4.5.(b).
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(e) Tax Opinion. Parent shall have received the opinion of Epstein
Becker & Green, P.C., counsel to Parent, in the form of Exhibit B dated the
Closing Date, to the effect that the Merger will not result in taxation to
the Parent or the Merger Subsidiary under the Code. In rendering such
opinion, Epstein Becker & Green, P.C. shall require delivery of and rely
upon the representations letters delivered by Parent, Merger Subsidiary and
the Company substantially in the forms of Exhibit C and Exhibit D hereto.
(f) Pooling Letters; Accountant Letters. Parent shall have received (i)
at least 35 days prior to the Effective Time, the Company Affiliates
Letters from all persons identified on Exhibit A-1 and any other person who
Parent reasonably believes to be an affiliate of the Company and (ii)
Parent shall have received, in form and substance reasonably satisfactory
to Parent, from Arthur Andersen LLP, the Company's accountants (or its
successor) and Grant Thornton LLP, the Parent's accountants (or its
successor) favorable letters dated the Closing Date, regarding the
appropriateness of "pooling-of-interests" accounting treatment for the
Merger.
(g) Comfort Letters. Parent shall have received letters from Arthur
Andersen LLP dated as of the effective date of the S-4 Registration
Statement and as of the Closing Date, in each case addressed to Parent
containing such matters as are customarily contained in auditors' letters
regarding the Company financial information provided expressly for
inclusion in such S-4 Registration Statement, in form and substance
reasonably satisfactory to Parent.
(h) Audited Nine Month Financial Statements. Parent shall have received
a copy of an audited consolidated balance sheet of the Company dated as of
September 30, 1998 and the audited consolidated statement of income and
cash flows of the Company for the nine-month period then ended, accompanied
by the related report of Arthur Andersen LLP to the Company.
7.3. Conditions to Obligation of the Company.
The obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. (i) Except as provided in (ii)
below, the representations and warranties of Parent set forth in this
Agreement that are qualified as to materiality shall be true and correct as
of the Closing Date and those not so qualified by materiality shall be true
and correct in all material respects as of the Closing Date; and (ii) the
representations and warranties of Parent set forth in this Agreement made
as of a specified date earlier than the Closing Date shall be true and
correct as of such date, except as affected by the transactions
contemplated by this Agreement; and the Company shall have received a
certificate signed on behalf of Parent by an executive officer of Parent
and on behalf of Merger Subsidiary by an executive officer of Merger
Subsidiary to the effect stated in the foregoing clauses (i) and (ii).
(b) Performance of Obligations of Parent and Merger Subsidiary. Each of
Parent and Merger Subsidiary shall have performed in all material respects
all obligations required to be performed by it under this Agreement at or
prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of Parent by an executive officer of Parent
and on behalf of Merger Subsidiary by an executive officer of Merger
Subsidiary to such effect.
(c) There shall have been no changes that have had or are reasonably
likely to have a Parent Material Adverse Effect since the date of this
Agreement, except for changes contemplated by this Agreement.
(d) Consents Under Agreements. Parent shall have obtained the consent
or approval of each Person whose consent or approval shall be required in
order to consummate the transactions contemplated by this Agreement under
any Contract to which Parent or any of its Subsidiaries is a party, except
those for which failure to obtain such consents and approvals, individually
or in the aggregate, is not reasonably likely to have a Parent Material
Adverse Effect or is not reasonably likely to prevent or to materially
burden or materially impair the ability of Parent to consummate the
transactions contemplated by this Agreement.
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(d) Tax Opinion. The Company shall have received the opinion of Hogan &
Hartson L.L.P., counsel to the Company, in the form of Exhibit E, dated the
Closing Date, to the effect that neither the Company nor the holders of
Shares will recognize income for federal income tax purposes as a result of
the Merger. In rendering such opinion, Hogan & Hartson L.L.P. shall require
delivery of and rely upon the representations letters delivered by Parent,
Merger Subsidiary and the Company substantially in the forms of Exhibit C
and Exhibit D hereto.
(e) Accountant Letters. The Company shall have received, in form and
substance reasonably satisfactory to the Company, from Arthur Andersen LLP,
the Company's accountants (or its successor) and Grant Thornton LLP, the
Parent's accountants (or its successor) favorable letters dated the Closing
Date, regarding the appropriateness of "pooling-of-interests" accounting
treatment for the Merger.
ARTICLE VIII
Termination
8.1. Method of Termination.
This Agreement may be terminated or abandoned only as follows:
(a) By the mutual consent of Company and Parent, notwithstanding prior
approval by the stockholders of any or all of such corporations;
(b) By Company or Parent if the other party shall have failed to comply
in any material respect with any of its covenants or agreements contained
in this Agreement required to be complied with prior to the date of such
termination (in the case of Parent, including any failure to comply by
Merger Subsidiary), which failure to comply has not been cured within
thirty (30) business days following receipt by such party of written notice
from the non-breaching party of such failure to comply;
(c) By Company or Parent if there has been (i) a breach by the other
party (in the case of Parent, including any material breach by Merger
Subsidiary) or any representation or warranty that is not qualified by
materiality which has the effect of making such representation or warranty
not true and correct in all material respects or (ii) a breach by the other
party (in the case of Parent, including any material breach by Merger
Subsidiary) of any representation or warranty that is qualified as to
materiality, in each case which breach has not been cured within thirty
(30) business days following receipt by the breaching party from the non-
breaching party of written notice of the breach;
(d) By Company after January 31, 1999, if any of the conditions set
forth in Article VII hereof, to which the Company's obligations are
subject, have not been fulfilled or waived, unless such fulfillment has
been frustrated or made impossible by any act or failure to act of the
Company;
(e) By Parent after January 31, 1999, if any of the conditions set forth
in Article VII hereof, to which the Parent and the Merger Subsidiary are
subject, have not been fulfilled or waived, unless such fulfillment has
been frustrated or made impossible by any act or failure to act of Parent
or the Merger Subsidiary;
(f) By Parent or the Company if holders of Shares constituting the
Company Requisite Vote do not approve the Merger at the Stockholders
Meeting, (provided that the Company may not terminate this Agreement under
this Section 8.1.(f) if the Company is in breach of Section 6.6.);
(g) By Parent or the Company if holders of shares of Parent Common Stock
constituting the Parent Requisite Vote do not approve the issuance of
shares of Parent Common Stock at the Parent stockholders meeting called for
that purpose (provided that Parent may not terminate this Agreement under
this Section 8.1.(g) if Parent is in breach of Section 6.6.);
(h) By the Company or Parent if a court or governmental entity of
competent jurisdiction institutes an Order prohibiting the consummation of
the transactions contemplated by this Agreement, provided that the order is
not the result of an action or proceeding instituted by the terminating
party;
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(i) By the Company if in the exercise of its good faith determination,
as set forth in Section 6.4., as to its fiduciary duties to the Company's
stockholders imposed by law, the Board of Directors of the Company decides
that such termination is required;
(j) By Parent if the Board of Directors of the Company shall have
withdrawn or modified in any manner adverse to Parent its approval or
recommendation of the Merger or this Agreement; and
(k) By the Company if the Board of Directors of Parent shall have
withdrawn or modified in any manner adverse to Company its approval or
recommendation of the issuance of Parent Common Stock in the Merger.
8.2. Effect of Termination.
(a) Except as provided in Sections 6.14. and 8.2.(b), and except as provided
in the immediately succeeding sentence, in the event of a termination of this
Agreement pursuant to Section 8.1. hereof, each party shall pay the costs and
expenses incurred by it in connection with this Agreement, and no party (or any
of its officers, directors, employees, agents, representatives or stockholders)
shall be liable to any other party for any costs, expenses, damage or loss of
anticipated profits hereunder. Subject to Section 8.2.(b) hereof, in the event
of any termination of this Agreement, all provisions of this Agreement except
for Section 6.14. and this Section 8.2. shall forthwith become void and have no
effect, without any liability hereunder on the part of any party or its
directors, officers or stockholders, provided, however, that nothing in this
Section 8.2. shall relieve any party to this Agreement of liability for any
willful or intentional breach of this Agreement.
(b) In the event this Agreement is terminated by the Company in accordance
with Section 8.1.(i) or by Parent in accordance with Section 8.1.(j) (but in
any case only if (i) an Acquisition Proposal is made by a third party prior to
the date of termination and the Board of Directors of the Company determines to
recommend such Acquisition Proposal, or (ii) this Agreement is terminated
following a withdrawl or modification of approval or recommendation of the
Merger or this Agreement by the Board of Directors of the Company if such
withdrawl or modification is due primarily to a decline in the market price of
the Parent Common Stock prior to the Effective Time and the Company within 12
months thereafter enters into an agreement with a third party regarding an
Acquisition Proposal), the Company shall promptly pay (i) all reasonable costs
and expenses of Parent and Merger Subsidiary incurred in connection with the
negotiation and performance of this Agreement including without limitation fees
and expenses of counsel, fees and expenses of independent public accountants,
printing expenses and registration fees, in an amount not to exceed $500,000
and (ii) to Parent a fee in the amount of $1,500,000. In the case of any
termination of this Agreement triggering payment of the amounts specified in
the preceding sentence and provided the Company has not breached any of the
covenants provided for in Section 6.4. or 6.6. hereof, payment of the amount
specified in the preceding sentence shall constitute liquidated damages and
shall be the sole and exclusive remedy of Parent and the Merger Subsidiary for
any and all damages arising under or in connection with this Agreement, and,
upon payment of the amount specified in the preceding sentence, neither the
Company nor any officers, directors, employees, agents, representatives or
stockholders of the Company shall have any liability or further obligation to
the Parent or the Merger Subsidiary under or in connection with this Agreement
or any such termination hereof.
ARTICLE IX
Miscellaneous and General
9.1. Survival.
This Article IX and the agreements of the Company, Parent and Merger
Subsidiary contained in Sections 6.8. (Taxation and Accounting), Sections 6.13.
(Benefits), 6.15. (Indemnification; Directors' and Officers' Insurance) 6.16.
(Election to Parent's Board of Directors) and 6.18. (Debentures) shall survive
the consummation of the Merger. This Article IX and the agreements of the
Company, Parent and Merger Subsidiary contained in Sections 6.14. (Expenses),
and Section 8.2. (Effect of Termination) shall survive the
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termination of this Agreement. All other representations, warranties, covenants
and agreements in this Agreement shall not survive the consummation of the
Merger or the termination of this Agreement.
9.2. Modification or Amendment.
Subject to the provisions of the applicable law, at any time prior to the
Effective Time, the parties hereto may modify or amend this Agreement, by
written agreement executed and delivered by duly authorized officers of the
respective parties.
9.3. Waiver of Conditions.
The conditions to each of the parties' obligations to consummate the Merger
are for the sole benefit of such party and may be waived by such party in whole
or in part to the extent permitted by applicable law.
9.4. Counterparts.
This Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
9.5. Governing Law; Waiver of Jury Trial.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF MARYLAND WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
9.6. Notices.
Any notice, request, instruction or other document to be given hereunder by
any party to the others shall be in writing and delivered personally or sent by
registered or certified mail, postage prepaid, or by facsimile:
if to Parent or Merger Subsidiary:
James Slattery
Correctional Services Corporation
1819 Main Street
Suite 1000
Sarasota, Florida 34236
fax: 941-953-9198
A-36
<PAGE>
and
General Counsel
Correctional Services Corporation
1819 Main Street
Suite 1000
Sarasota, Florida 34236
fax: 941-953-9198
Copy to:
Sidney Todres, Esq.
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177-0077
fax: (212) 651-0989
if to the Company:
Mark S. Demilio
General Counsel
Youth Services International, Inc.
2 Park Center Court
Suite 200 Owings Mills, MD 21117
fax: (410) 654-3934
Copy to:
Michael J. Silver, Esq.,
Hogan & Hartson L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
fax: (410) 539-6981
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. Entire Agreement; No Other Representations.
This Agreement (including any exhibits hereto), the Company Disclosure
Schedule, the Parent Disclosure Schedule, the Confidentiality Agreement dated
June 26, 1998, between Parent and the Company (the "Confidentiality Agreement")
and the Nondisclosure Agreement between Parent and the Company dated August 7,
1998 (the "Nondisclosure Agreement) constitute the entire agreement, and
supersede all other prior agreements, understandings, representations and
warranties both written and oral, among the parties, with respect to the
subject matter hereof. The parties hereto agree that the Confidentiality
Agreement and the Nondisclosure Agreement shall each be hereby amended to
provide that any provision therein which in any manner would be inconsistent
with this Agreement or the transactions contemplated hereby or thereby shall
terminate as of the date hereof; provided, however, that such provisions of the
Confidentiality Agreement and the Nondisclosure Agreement shall be reinstated
in the event of any termination of this Agreement.
9.8. No Third Party Beneficiaries.
Except as provided in Section 6.13. (Benefits), Section 6.15.
(Indemnification; Directors' and Officers' Insurance), Section 6.16. (Election
to Parent's Board of Directors) and Section 6.18. (Debentures) this Agreement
is not intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder.
A-37
<PAGE>
9.9. Severability.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity
or enforceability or the other provisions hereof. If any provision of this
Agreement, or the application thereof to any Person or any circumstance, is
invalid or unenforceable, (a) a suitable and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (b) the remainder of this Agreement and the application of such provision
to other Persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application thereof, in
any other jurisdiction.
9.10. Interpretation.
The table of contents and headings herein are for convenience of reference
only, do not constitute part of this Agreement and shall not be deemed to limit
or otherwise affect any of the provisions hereof. Where a reference in this
Agreement is made to a Section or Exhibit, such reference shall be to a Section
of or Exhibit to this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
9.11. Assignment.
This Agreement shall not be assignable by operation of law or otherwise;
provided, however, that Parent may designate, by written notice to the Company,
another wholly-owned direct or indirect Subsidiary to be a party to the Merger
in lieu of Merger Subsidiary, in which event all references herein to Merger
Subsidiary shall be deemed references to such other Subsidiary, except that all
representations and warranties made herein with respect to Merger Subsidiary as
of the date of this Agreement shall be deemed representations and warranties
made with respect to such other Subsidiary as of the date of such designation.
9.12. Definitions
(a) Location of Certain Definitions.
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Acquisition Proposal................................................ 6.4
Affiliate........................................................... 6.10
Agreement........................................................... Preamble
Articles of Incorporation........................................... 2.1
Articles of Merger.................................................. 1.3
Bylaws.............................................................. 2.2
Certificate......................................................... 3.1(a)
Closing............................................................. 1.2
Closing Date........................................................ 1.2
Code................................................................ 4.9(b)
Company............................................................. Preamble
Company Affiliates Letter........................................... 6.10(a)
Company Audit Date.................................................. 4.6
Company Benefit Plans............................................... 6.13(b)
Company Common Stock................................................ 3.1(a)
Company Compensation and Benefit Plans.............................. 4.9(a)
Company Disclosure Schedule......................................... Preamble to
Article IV
Company Intellectual Property Rights................................ 4.15(b)(ii)
Company Material Adverse Effect..................................... 9.12(b)
Company Reports..................................................... 4.6
</TABLE>
A-38
<PAGE>
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Company Requisite Vote.............................................. 4.4(a)
Company Stock Plans................................................. 4.2
Company Third-Party Intellectual Property Rights.................... 4.15(b)(i)
Confidentiality Agreement........................................... 9.7
Contracts........................................................... 4.5(b)
Costs............................................................... 6.15(a)
Debentures.......................................................... 4.2
D&O Insurance....................................................... 6.15(b)
Effective Time...................................................... 1.3
Environmental Law................................................... 9.12(b)
ERISA............................................................... 4.9(b)
ERISA Affiliate..................................................... 4.9(c)
Exchange Act........................................................ 4.5(a)
Exchange Agent...................................................... 3.2(a)
Exchange Fund....................................................... 3.2(a)
Exchange Ratio...................................................... 3.1(a)
GAAP................................................................ 4.6
Governmental Consents............................................... 7.1(c)
Hazardous Substance................................................. 9.12(b)
HSR Act............................................................. 4.5(a)
Indemnified Parties................................................. 6.15(a)
IRS................................................................. 4.9(b)
Laws................................................................ 4.10
MGCL................................................................ 1.1
Maximum Premium..................................................... 6.15(b)
Merger.............................................................. Recitals
Merger Consideration................................................ 3.1(a)
Merger Subsidiary................................................... Preamble
NASDAQ.............................................................. 3.2(e)
Order............................................................... 7.1(d)
Parent.............................................................. Preamble
Parent Affiliates Letter............................................ 6.10(b)
Parent Audit Date................................................... 5.7(a)
Parent Benefit Plans................................................ 6.13(b)
Parent Common Stock................................................. 3.1(a)
Parent Compensation and Benefit Plan................................ 5.9(a)
Parent Disclosure Schedule.......................................... Preamble to
Article V
Parent Intellectual Property Rights................................. 5.14(b)(ii)
Parent Material Adverse Effect...................................... 9.12(b)
Parent Preferred Shares............................................. 5.3
Parent Reports...................................................... 5.6
Parent Requisite Vote............................................... 5.4(a)
Parent Rights Agreement............................................. 5.3
Parent Shares....................................................... 5.3
Parent Stockholders Meeting......................................... 6.6
Parent Stock Plans.................................................. 5.3
Parent Third-Party Intellectual Property Rights..................... 5.14(b)(i)
Pension Plan........................................................ 4.9(b)
Person.............................................................. 3.2(b)
Private Consents.................................................... 4.5(b)
</TABLE>
A-39
<PAGE>
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Prospectus/Proxy Statement............................................. 6.5
Representatives........................................................ 6.9
Responsible Executive Officers of Parent............................... 9.12(b)
Responsible Executive Officers of the Company.......................... 9.12(b)
S-4 Registration Statement............................................. 6.5
SEC.................................................................... 4.6
SDAT................................................................... 1.3
Securities Act......................................................... 4.5(a)
Share, Shares.......................................................... 3.1(a)
State Regulators....................................................... 4.10
Stockholders Meeting................................................... 6.6
Subsidiary............................................................. 9.12(b)
Surviving Corporation.................................................. 1.1
Takeover Statute....................................................... 4.11
Tax, Taxes, Taxable.................................................... 9.12(b)
Taxing Authority....................................................... 9.12(b)
Tax Return............................................................. 9.12(b)
</TABLE>
(b) Certain Other Definitions
"Company Material Adverse Effect" means any event, change, or effect that
individually or when taken together with all other such events, changes or
effects is or could reasonably be expected (as far as can be foreseen at the
time) to be materially adverse to the business, assets, liabilities, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries taken as a whole, other than effects caused by changes in general
economic conditions or conditions generally affecting the types of businesses
in which the Company and its Subsidiaries are engaged.
"Environmental Law" means any federal, state, local or foreign law, statute,
ordinance, regulation, judgment, order, decree, arbitration award, agency
requirement, license, permit, authorization or opinion, relating to: (i) the
protection, investigation or restoration of the environment, health and safety,
or natural resources, (ii) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (iii) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property, including but not limited to the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 USC (S)(S) 9601 et. sec.
"Hazardous Substance" means any substance or waste that is: (i) listed,
classified or regulated pursuant to any Environmental Law; (ii) any petroleum
product or by-product, asbestos-containing material, lead-containing paint or
plumbing, polychlorinated biphenyls, radioactive materials or radon; or (iii)
any other substance or waste which may be the subject of regulatory action by
any Government Authority pursuant to any Environmental Law.
"Knowledge" of any individual means actual knowledge of such individual.
"Parent Material Adverse Effect" means any event, change, or effect that
individually or when taken together with all other such events, changes or
effects is or could reasonably be expected (as far as can be foreseen at the
time) to be materially adverse to the business, assets, liabilities, condition
(financial or otherwise) or results of operations of Parent and its
Subsidiaries taken as a whole, other than effects caused by changes in general
economic conditions or conditions generally affecting the types of businesses
in which the Parent and its Subsidiaries are engaged.
"Responsible Executive Officers of the Company" shall mean the persons
designated as such in the preamble to the Company Disclosure Schedule.
A-40
<PAGE>
"Responsible Executive Officers of Parent" shall mean the persons designated
as such in the preamble to the Parent Disclosure Schedule.
"Subsidiary" means, with respect to the Company, Parent or Merger
Subsidiary, as the case may be, any entity, whether incorporated or
unincorporated, of which at least a majority of the securities or ownership
interests having by their terms ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions is
directly or indirectly owned or controlled by such party or by one or more of
its respective Subsidiaries or by such party and any one or more of its
respective Subsidiaries.
"Tax" (including, with correlative meaning, the terms "Taxes" and "Taxable")
shall mean, with respect to any Person, (i) all taxes, domestic or foreign,
including without limitation any income (net, gross or other, including
recapture of any tax items such as investment tax credits), alternative or add-
on minimum tax, gross income, gross receipts, gains, sales, use, leasing,
lease, user, ad valorem, transfer, recording, franchise, profits, property
(real or personal, tangible or intangible), fuel, license, withholding on
amounts paid to or by such Person, payroll, employment, unemployment, social
security, excise, severance, stamp, occupation, premium, environmental or
windfall profit tax, custom, duty or other tax, or other like assessment or
charge of any kind whatsoever, together with any interest, levies, assessments,
charges, penalties, additions to tax or additional amounts imposed by any
Taxing Authority, (ii) any joint or several liability of such Person with any
other Person for the payment of any amounts of the type described in (a) of
this definition and (iii) any liability of such Person for the payment of any
amounts of the type described in (i) as a result of any express or implied
obligation to indemnify any other Person.
"Tax Return(s)" shall mean all returns, consolidated or otherwise (including
without limitation informational returns), required to be filed with any Taxing
Authority.
"Taxing Authority" shall mean any authority responsible for the imposition
of any Tax.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers or managers of the parties hereto as of the date
first written above.
Youth Services International, Inc.
/s/ Timothy P. Cole
By: _________________________________
Timothy P. Cole
Chairman and Chief Executive
Officer
Correctional Services Corporation
/s/ James F. Slattery
By: _________________________________
James F. Slattery
President
Palm Merger Corp.
/s/ James F. Slattery
By: _________________________________
James F. Slattery
President
A-41
<PAGE>
FIRST AMENDMENT
TO AGREEMENT AND PLAN OF MERGER
This First Amendment ("Amendment") to the Agreement and Plan of Merger
dated as of September 23, 1998 (the "Merger Agreement") by and among Youth
Services International, Inc. ("YSI"), Correctional Services Corporation ("CSC")
and Palm Merger Corp., is entered into as of this 12th day of January, 1999.
WHEREAS, the parties desire to amend the Merger Agreement to address
certain issues;
NOW THEREFORE, in consideration of the covenants and agreements
contained herein, the Merger Agreement is hereby amended as set forth below.
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Merger Agreement.
1. Section 3.5. A new Section 3.5. shall be added as follows:
-----------
"3.5. Assumption of Warrants.
----------------------
(a) At the Effective Time, each warrant to purchase Company Common
Stock described in Section 4.2 of the Company Disclosure Schedule (each, a
"Company Warrant"), whether then exerciseable or not, without any action on
the part of the holder, shall be deemed to constitute a warrant to acquire,
on the same terms and conditions as were applicable under such Company
Warrant, a number of shares of Parent Common Stock equivalent to (A) the
number of Shares that could have been purchased immediately prior to the
Effective Time under such Company Warrant multiplied by (B) the Exchange
Ratio (rounded down to the nearest whole number), at a price per share of
Parent Common Stock (rounded up to the nearest whole cent) equal to the
exercise price per share pursuant to such Company Warrant immediately prior
to the Effective Time divided by the Exchange Ratio. At or prior to the
Effective Time, the Company shall make all necessary arrangements with
respect to the Company Warrants to permit the assumption of the unexercised
Company Warrants by Parent pursuant to this Section 3.5.
(b) Effective at the Effective Time, Parent shall assume each
Company Warrant. At or prior to the Effective Time, Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of
shares of Parent Common Stock for delivery upon exercise of Company
Warrants assumed by it in accordance with this Section."
2. Section 6.10.(a). The second and third sentences of Section 6.10.(a) shall
----------------
be deleted in their entirety and the following sentence shall be inserted
in their place:
"The Company shall exercise its best efforts to deliver or cause to be
delivered to Parent, at least 35 days prior to the Effective Time, from
each Affiliate of the Company identified
<PAGE>
in the foregoing list and any other person who Parent or the Company
reasonably believes to be an Affiliate of the Company, a letter in the form
attached as Exhibit A-2 (the "Company Affiliates Letter.")"
3. Section 6.10.(c). A new Section 6.10.(c) shall be added as follows:
----------------
"(c) In order to preserve pooling-of-interests accounting treatment of the
Merger, the Company shall be entitled, with regard to Shares held by a
Person deemed by the Company to be an "Affiliate" of the Company
(within the meaning of Rule 145 under the Securities Act and for
purposes of applicable interpretations regarding the pooling-of-
interests method of accounting, and regardless of whether or not such
person is listed on Exhibit A-1), and Parent shall be entitled, with
regard to shares of Parent Common Stock held by a Person deemed by
Parent to be an "Affiliate" of Parent (within the meaning of Rule 145
under the Securities Act and for purposes of applicable
interpretations regarding the pooling-of-interests method of
accounting, and regardless of whether or not such person is listed on
the list delivered to the Company by Parent pursuant to Section
6.10.(b)), or shares of Parent Common Stock to be issued pursuant to
the terms of this Agreement to a Person deemed by Parent to be an
Affiliate of the Company (under the definition given above), to place
appropriate legends on the certificates for such Shares or shares of
Parent Common Stock, as the case may be, and to issue appropriate stop
transfer instructions to the transfer agent for the Shares or the
Parent Common Stock, as the case may be, and shall be entitled to
impose restrictions on any such Shares or shares of Parent Common
Stock, to the effect that such Shares or shares of Parent Common Stock
may only be sold, transferred or otherwise conveyed, and the holder
thereof may only reduce his interest in or risks relating to such
Shares or shares of Parent Common Stock, pursuant to an effective
registration statement under the Securities Act or in accordance with
the provisions Rule 145(d) promulgated under the Securities Act or
pursuant to an exemption from registration under the Securities Act
and, in any event, only after financial results covering at least 30
days of combined operations of the Company and Parent after the
Effective Time shall have been published. The foregoing restrictions
relating to the transferability of the shares of Parent Common Stock
to be issued to any deemed Affiliate pursuant to this Agreement shall
apply to all purported sales, transfers and other conveyances of such
shares of Parent Common Stock and to all purported reductions in the
interest in or risks relating to such shares of Parent Common Stock,
whether or not such deemed Affiliate has exchanged the certificates
previously evidencing such deemed Affiliate's Shares for certificates
evidencing shares of Parent Common Stock into which such Shares were
converted, and whether or not such deemed Affiliate has executed and
delivered a Company Affiliates Letter or a Parent Affiliates Letter."
4. Sections 8.1.(d) and 8.1.(e). The references to "January 31, 1999" in
----------------------------
Sections 8.1.(d) and 8.1.(e) shall be deleted and replaced with references
to "March 31, 1999."
2
<PAGE>
5. Exhibit A-1. Exhibit A-1 shall be deleted in its entirety and Exhibit A-1
-----------
to this Amendment shall be inserted in its place.
6. Exhibits C and D. Exhibits C and D shall be amended to reflect that they
----------------
will be addressed to both Hogan & Hartson L.L.P. and Epstein Becker &
Green, P.C.
7. Exhibit E. Exhibit E shall be deleted in its entirety and Exhibit E to
---------
this Amendment shall be inserted in its place.
8. Company Disclosure Schedule. Section 4.14.(b) of the Company Disclosure
---------------------------
Schedule shall be amended to include the following:
"Services Agreement dated as of March 18, 1998 between Youth Services
International, Inc. and P. William Mackley
Advisory Services Agreement dated as of November 1, 1997 between Youth
Services International, Inc. and Larry J. Overton & Associates, Inc."
9. Counterparts. This Amendment may be executed in counterparts, each of
------------
which shall constitute one agreement, binding on the parties, and each
party hereby covenants and agrees to execute all duplicates or replacement
counterparts of this Amendment as may be required.
10. Merger Agreement. The terms and provisions of the Merger Agreement, as
----------------
amended hereby, shall remain in full force and effect. All references to
the Merger Agreement contained therein shall refer to the Merger Agreement
as amended hereby.
3
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ Mark S. Demilio
--------------------------------------------
Name: Mark S. Demilio
Title: Senior Vice President, General Counsel
and Acting Chief Financial Officer
CORRECTIONAL SERVICES CORPORATION
By: /s/ James F. Slattery
--------------------------------------------
Name: James F. Slattery
Title: President
PALM MERGER CORP.
By: /s/ James F. Slattery
--------------------------------------------
Name: James F. Slattery
Title: President
4
<PAGE>
PART II
Information Not Required in Prospectus
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law grants corporations the
power to indemnify their directors, officers, employees and agents in
accordance with the provisions thereof. Article Tenth of the Registrant's
Certificate of Incorporation and Paragraph 11.6(a) of Registrant's by-laws
provide for indemnification of Registrant's directors, officers, agents and
employees to the fullest extent permissible under Section 145 of the Delaware
General Corporation Law. Registrant presently maintains directors' and
officers' liability insurance coverage with an aggregate policy limit of
$10,000,000 for each policy year.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
2.1 Agreement and Plan of Merger, dated as of September 23, 1998, among
YSI, CSC and Palm Merger Corp.(28)
<C> <S>
2.2 First Amendment, dated as of January 12, 1999, to the Agreement and
Plan of Merger, dated as of September 23, 1998, among YSI, CSC and Palm
Merger Corp.(29)
3.1 Certificate of Incorporation of CSC dated October 28, 1993.(1)
3.1.1 Copy of Certificate of Amendment of Certificate of Incorporation of CSC
dated July 29, 1996.(4)
3.2 CSC's By-Laws.(33)
4.2 Form of Underwriter's Warrant between CSC and Janney Montgomery Scott
Inc.(1)
4.3 YSI's 12% Subordinated Debenture Due December 31, 2002.(11)
4.4 Form of YSI's 7% Convertible Subordinated Debentures Due February 1,
2006.(12)
4.5 Fiscal and Paying Agency Agreement dated January 29, 1996 by and among
YSI, The Chase Manhattan Bank, N.A., New York, The Chase Manhattan
Bank, N.A., London and Chase Manhattan Bank Luxembourg S.A.(26)
4.6 Indenture, dated October 15, 1996, by and between YSI and the Chase
Manhattan Bank, as trustee(27)
*4.7 Form of letter agreement executed by certain debenture holders agreeing
to receive proceeds from redemption of their debentures one year
following the effective date of the merger.
*5 Opinion of Epstein Becker & Green, P.C. regarding the legality of the
common stock being registered hereby.
*8.1 Opinion of Epstein Becker & Green, P.C., counsel to CSC, regarding the
federal income tax consequences of the merger.
*8.2 Opinion of Hogan & Hartson L.L.P., counsel to YSI, regarding the
federal income tax consequences of the merger.
10.1 CSC's 1993 Stock Option Plan, as amended.(33)
10.5.1 Employment Agreement between CSC and James F. Slattery dated February
17, 1998.(9)
10.6 Employment Agreement between CSC and Aaron Speisman.(1)
10.6.1 Modification to the Employment Agreement between CSC and Aaron
Speisman, dated June 13, 1996.(4)
10.8.3 Exercise of third option of the contract for operation of a facility in
New York, New York for women through June 30, 1995.(2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
10.9 Contract between CSC and the U.S. Department of Justice, Federal
Bureau of Prisons for operation of a facility in Brooklyn, New York,
dated November 13, 1990.(1)
<C> <S>
10.9.1 Letter dated September 23, 1993 from the U.S. Department of Justice,
Federal Bureau expressing its intent to exercise the third option year
of the contract.(1)
10.9.2 Exercise of third option year of the contract for operation of a
facility in Brooklyn, New York.(1)
10.9.3 Extension of contract for operation of a facility in Brooklyn, New
York through March 31, 1995.(2)
10.10.1 Contract Amendment between CSC and the U.S. Immigration and
Naturalization service for operation of the Seattle Processing Center,
dated October 1, 1996.(4)
10.11.3 Operations Agreement for the Tarrant County Community Correctional
Facility, Mansfield, Texas, dated September 1, 1998.(10)
10.12 Contract between CSC and the New York State Department of Corrections,
dated July 17, 1992.(1)
10.12.1 Extension of Contract between CSC and the New York State Department of
Corrections.(3)
10.13 Contract between CSC and the Texas Department of Criminal Justice,
Pardons and Paroles Division.(1)
10.13.1 Extension to the contract between CSC and the Texas Department of
Criminal Justice, Pardons and Paroles Division for operation of the
South Texas Intermediate Sanction Facility.(2)
10.13.2 Contract between CSC and the Texas Department of Criminal Justice for
operation of the South Texas Intermediate Sanction Facility.(3)
10.15 Agreement between CSC and William Banks, dated October 31, 1989.(1)
10.15.1 Letter dated December 9, 1993 from William Banks to CSC.(1)
10.16 Form of Sub-Lease between CSC and LeMarquis Operating Corporation.(1)
10.17 Form of Lease between CSC and Myrtle Avenue Family Center, Inc.(1)
10.18 Lease between CSC and T. NY (USA).(1)
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.(2)
10.22 Contract between CSC and the U.S. Department of Justice, Immigration
and Naturalization Service for operation of the Seattle Processing
Center, effective August 1, 1994.(2)
10.23 Lease between Esmor Fort Worth, Inc. and Region Enterprises, Inc.(2)
10.24.1 Renewal of the Revolving Line of Credit Note dated January 15,
1998.(7)
10.25 CSC 1994 Non-Employee Director Stock Option Plan.(3)
10.26 Loan and Security Agreement with NationsBank, N.A. (South) dated as of
December 31, 1995.(3)
10.26.2 Deed of Trust Modification Agreement dated January 14, 1998.(7)
10.26.3 Third Amendment to Loan Agreement dated January 5, 1998.(7)
10.26.4 Fourth Amendment to Loan Agreement dated January 14, 1998.(7)
10.29 Contract between CSC and the State of Florida, Correctional
Privatization Commission dated October 6, 1995 for operation of the
Pahokee Youth Facility.(3)
10.30 Contract between CSC and the State of Florida, Correctional
Privatization Commission dated October 6, 1995 for operation of the
Polk City Youth Facility.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.31 Contract between CSC and the State of Arizona, Department of
Corrections for operation of the Arizona DWI Facility in Phoenix,
Arizona dated July 1995.(3)
10.31.1 Amendment Number One to the contract between CSC and the State of
Arizona, Department of Corrections for the operation of the Arizona
DWI Facility in Phoenix, Arizona dated April 1997.(7)
10.31.2 Amendment Number Two to the contract between CSC and the State of
Arizona, Department of Corrections for the operation of the Arizona
DWI Facility in Phoenix, Arizona dated December 1997.(7)
10.34 Asset Purchase Agreement dated as of December 15, 1995 between CSC and
Corrections Corporation of America.(3)
10.38 Contract between CSC and the U.S. Department of Justice, Federal
Bureau of Prisons for operation of a facility in Brooklyn, New
York.(3)
10.41 Contract between CSC and the State of Arizona for operation of the DWI
Secure Prison in Phoenix, Arizona dated January 1997.(4)
10.42 Contract between CSC and McKinley County New Mexico for operation of
the McKinley County, New Mexico Adult Detention Facility, dated
October 3, 1996.(4)
10.43 Contract between CSC and Colorado County, Texas for the operation of
the Colorado County, Texas Juvenile Residential Facility.(4)
10.44 Lease Agreement between CSC and Creston Realty Associates, L.P., dated
October 1, 1996.(4)
10.45 Lease between CSC and Elberon Development Company.(1)
10.45.1 Assignment of Lease between CSC and Elberon Development Company.(4)
10.46 Contract between CSC and Bell County Texas for operation of the Bell
County Juvenile Residential Facility.(4)
10.46.1 Addendum A, dated November 4, 1997, to Management Agreement for the
Operation of the Bell County Juvenile Residential Facility.(8)
10.46.2 Amendment, dated April 1, 1998, to Management Agreement for the
Operation of the Bell County Juvenile Residential Facility.(8)
10.47.1 Amended Employment Agreement between CSC and Ira M. Cotler dated July
9, 1997.(5)
10.48 Employment Agreement between CSC and Michael C. Garretson, dated
January 21, 1996.(4)
10.49 Contract between CSC and Okaloosa County, Florida for the Design,
Build and Operation of a Moderate Risk Residential Program and a High
Risk Residential Program dated June 13, 1997.(5)
10.49.1 Amendment to Contract between CSC and Okaloosa County, Florida for the
Design, Build and Operation of a Moderate Risk Residential Program and
a High Risk Residential Program dated June 16, 1997.(5)
10.50 Contract between CSC and Grenada County, Mississippi for the Operation
and Management of a 200 bed jail dated September 1, 1997.(6)
10.50.1 Lease Agreement between CSC and Grenada County dated September 1,
1997.(6)
10.51.1 First Amendment to Asset Purchase Agreement between CSC and Dove
Development Corporation, Consolidated Financial Resources/Crystal
City, Inc., dated August 27, 1997.(6)
10.52 Contract between CSC and McKinley County, New Mexico for the Operation
and Management of the McKinley County Adult Detention Facility in
Gallup, New Mexico, executed August 21, 1997.(6)
</TABLE>
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10.54 Lease Agreement between CSC and Frio County dated November 26,
1997.(7)
10.55 Contract between CSC Management de Puerto Rico and the Juvenile
Institutions Administration of the Commonwealth of Puerto Rico dated
December 22, 1997 for the operation and management of a secure
residential treatment program for youths at the Salinas facility in
Puerto Rico.(7)
10.56 Contract between CSC and the Juvenile Institutions Administration
dated February 6, 1998 for operation of the Metropolitan Juvenile
Detention Center in Puerto Rico.(7)
10.57 Contract between CSC and the Juvenile Institutions Administration
dated February 6, 1998 for operation of the Metropolitan Juvenile
Treatment Center in Puerto Rico.(7)
10.58 Contract between CSC and the New York State Department of Corrections
for Community Reintegration Services dated March 1, 1998.(7)
10.58.1 Contract between CSC and New York State Department of Corrections for
Community Reintegration Services, dated September 1, 1998.(10)
10.60 Credit facility with NationsBank and a syndicate of banks for up to
$30 million dated April, 1998.(8)
10.60.1 Amendment No. 1 to credit facility with NationsBank and a syndicate
of banks, dated October 16, 1998.(10)
10.61 Sublease for Sarasota, Florida office space dated April 9, 1998
between Lucent Technologies, Inc. and CSC and Landlord Consent to
Sublease.(8)
10.62 Contract between CSC, Dallas County, Texas and the Dallas County
Juvenile Board for the Implementation and Operation of the Dallas
County Secure Post-Adjudication Residential Facility dated April 14,
1998.(8)
10.62.1 License Agreement dated June, 1998 between CSC, Dallas County, Texas
and the Dallas County Juvenile Board for the Operation and Management
of the Dallas County Secure Post-Adjudication Residential
Facility.(34)
10.63 Management Services Agreement May 26, 1998 between CSC and Jefferson
County, Texas for the Operation and Management of the Jefferson
County Detention Facility in Beaumont, Texas.(9)
10.64 Management Agreement between CSC and Dominion Management, Inc. dated
June 5, 1998 for the Operation of the Central Oklahoma Correctional
Facility.(9)
10.65 Operations and Management Agreement between CSC and South Fulton
Municipal Regional Jail Authority dated June 23, 1998 for Operation
and Management of the South Fulton Municipal Regional Jail
Facility.(9)
10.66 Operations and Management Agreement between CSC and Newton County,
Texas dated June 12, 1998 for the Operation and Management of the
Newton County Correctional Center.(9)
10.67 Asset Purchase Agreement between CSC and the County of Dickens, Texas
dated July 14, 1998 for the purchase of the Dickens County
Correctional Facility.(9)
10.68 Service Agreement for the Paulding, Georgia, Regional Youth Detention
Center, dated July 21, 1998.(10)
10.69 Contract for Operation and Programming of a 96 Bed Secure Juvenile
Facility in Dallas, TX, dated August 26, 1998.(10)
10.70 Temporary Management Subcontract, dated October 16, 1998, for
Operation of the Crowley County Correctional Facility.(10)
10.70.1 Subcontract, Facility Use Agreement, and Asset Purchase by and among
CSC, Trans-American Development Associates, Inc. and FBA, L.L.C.
dated December 14, 1998.
*10.70.2 Exchange Agent Agreement between CSC and American Stock Transfer &
Trust Company.
10.71 YSI's Stock Option Plan.(11)
10.72 YSI's Board of Directors Compensation Plan.(13)
</TABLE>
II-4
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10.73 Warrant to Purchase Common Stock of YSI.(11)
10.74 YSI's 1995 Employee Stock Option Plan.(14)
10.75 YSI's 1996 Employee Stock Option Plan.(15)
10.76 YSI's Fiscal Year 1997 Employee Stock Purchase Plan.(16)
10.80 YSI's 1995 Director Stock Option Plan.(32)
10.81 Loan and Security Agreement, dated as of June 20, 1995, by and among
YSI, each of its subsidiaries and Signet Bank/Maryland.(30)
10.94 Consulting Services Agreement, dated August 30, 1995, between ATSG,
Inc. and Youth Services International, Inc.(20)
10.96 Employment Agreement, dated as of July 16, 1996, by and between
Timothy P. Cole and Youth Services International, Inc.(21)
10.97 First Amendment to Loan and Security Agreement dated December 12,
1996 by Signet Bank and YSI and certain of its subsidiaries.(22)
10.98 Amended and Restated Master Revolving Promissory Note from YSI and
certain of its subsidiaries to Signet Bank dated December 12,
1996.(22)
10.99 Memorandum of understanding, between Youth Services International,
Inc. and International Youth Institute.(22)
*10.99.1 Training Services Agreement between YSI and International Youth
Institute, dated as of .
*10.99.2 Amended and Restated Training Services Agreement between YSI and
International Youth Institute, dated as of January 1, 1997.
*10.99.3 Agreement for the Transfer and Assignment of intellectual property by
and between YSI and International Youth Institute, dated as of March
6, 1997.
*10.99.4 License Agreement between YSI and International Youth Institute,
dated as of March 6, 1997.
10.100 Stock Purchase Agreement By and Among Youth and Family Centered
Services, Inc., Youth Services International Holdings, Inc. and Youth
Services International, Inc. dated as of July 22, 1997.(23)
10.101 Amendment No. 1 to Stock Purchase Agreement By and Among Youth and
Family Centered Services, Inc., Youth Services International
Holdings, Inc. and Youth Services International, Inc. dated as of
October 31, 1997.(24)
10.102 YSI's 1997 Employee Stock Option Plan.(25)
10.103 Change in Control Agreement between YSI and Mark S. Demilio dated
March 10, 1997.(31)
*10.104 Letter agreement between CSC and Mark S. Demilio dated September 23,
1998 clarifying the Change in Control Agreement between YSI and Mark
S. Demilio dated March 10, 1997 and providing non-compete
obligations.
10.105 Change in Control Agreement between YSI and Timothy P. Cole dated
August 6, 1996.(31)
*10.106 Second Amendment to Loan and Security Agreement, dated as of October
31, 1997 by and among YSI, each of its subsidiaries and Signet Bank.
*10.107 First Allonge to Amended and Restated Master Revolving Promissory
Note from YSI and certain of its subsidiaries to Signet Bank dated as
of October 31, 1997.
*10.108 Contract Buyout Agreement, dated as of December 21, 1998, by and
between YSI and Golden Eagle Education Training Inc. (formerly
International Youth Institute).
</TABLE>
II-5
<PAGE>
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*10.109 Letter agreement between CSC and Timothy P. Cole dated September 23,
1998 clarifying the Change in Control Agreement between YSI and
Timothy P. Cole dated August 6, 1996 and providing non-compete
obligations.
*10.110 Third Amendment to Loan and Security Agreement, by and among YSI, each
of its subsidiaries and Signet Bank/Maryland
*10.111 Second Allonge to Amended and Restated Master Revolving Promissory
Note from YSI and certain of its subsidiaries to Signet Bank dated as
of November 30, 1998
*10.112 Assumption Agreement dated as of November 30, 1998 by and among YSI,
certain of its subsidiaries and First Union National Bank
11 Computation of Per Share Earnings
23.1 Consent of Grant Thornton L.L.P., CSC's independent public
accountants.
23.2 Consent of Arthur Andersen LLP, YSI's independent public accountants.
*23.3 Consent of Epstein Becker & Green, P.C., counsel to YSI and CSC
(Included as part of Exhibits 5.1 and 8.1)
*23.4 Consent of Hogan & Hartson L.L.P., (Included as part of Exhibit 8.2)
24 Power of Attorney (Included as part of Signature Page)
99.1 Form of proxy card to be mailed to holders of CSC common stock.
99.2 Form of proxy card to be mailed to holders of YSI common stock.
99.3 Consent of Bobbie Huskey, pursuant to Rule 438 of the Securities Act.
</TABLE>
- --------
* To be filed by Amendment.
(1) Incorporated by reference to exhibit of same number filed with CSC's
Registration Statement on Form SB-2 (Registration No. 33-71314-NY).
(2) Incorporated by reference to exhibit of same number filed with CSC's
Annual Report on Form-10-KSB for the year ended December 31, 1994.
(3) Incorporated by reference to exhibit of same number filed with the
initial filing of CSC's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
(4) Incorporated by reference to exhibit of same number filed with CSC's
Annual Report on Form-10-KSB for the year ended December 31, 1996.
(5) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the six months ended June 30, 1997.
(6) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the nine months ended September 30, 1997.
(7) Incorporated by reference to exhibit of same number filed with CSC's
Annual Report on Form-10-K for the year ended December 31, 1997
(8) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the three months ended March 31, 1998
(9) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the six months ended June 30, 1998
(10) Incorporated by reference to exhibit of same number filed with CSC's Form
10-Q for the nine months ended September 30, 1998
(11) Incorporated by reference to YSI's Registration Statement (Registration
Number 33-71958).
II-6
<PAGE>
(12) Incorporated by reference to Exhibit 3.2 of YSI's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1996
(13) Incorporated by reference to Exhibit 4 to YSI's Registration Statement on
Form S-8 (Registration Number 33-99500).
(14) Incorporated by reference to Exhibit 4 to YSI's Registration Statement on
Form S-8 (Registration Number 33-84934).
(15) Incorporated by reference to Exhibit 4 to YSI's Registration Statement on
Form S-8 (Registration Number 33-99498).
(16) Incorporated by reference to Exhibit 4 to YSI's Registration Statement on
Form S-8 (Registration Number 333-07157).
(20) Incorporated by reference to Exhibit 10.1 to YSI's Form 10-Q, for the
three months ended September 30, 1995.
(21) Incorporated by reference to Exhibit 10 to YSI's Form 10-Q, for the three
months ended September 30, 1996.
(22) Incorporated by reference to Exhibit 10(2) to YSI's Form 10-Q, for the
three months ended September 30, 1997.
(23) Incorporated by reference to Exhibit 2 to YSI's Current Report on Form 8-
K, filed with the SEC on August 6, 1997.
(24) Incorporated by reference to Exhibit 2 to YSI's Form 10-Q, filed with the
SEC on November 13, 1997
(25) Incorporated by reference to Exhibit to YSI's Registration Statement on
Form S-8 (Registration Number 333-47305).
(26) Incorporated by reference to Exhibit 10.4 to YSI's Form 10-Q for the
quarter ended December 31, 1995
(27) Incorporated by reference to Exhibit 4(d) to YSI's Registration Statement
on Form S-3 (Registration No. 333-09089).
(28) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
the SEC on September 25, 1998
(29) Incorporated by reference to CSC's Current Report on Form 8-K, filed with
the SEC on January 21, 1999.
(30) Incorporated by reference to Exhibit 10.43 to YSI's Annual Report on Form
10-KSB for the year ended June 30, 1995.
(31) Incorporated by reference to YSI's Schedule 14A, filed with the SEC on
April 23, 1998.
(32) Incorporated by reference to YSI's Registration Statement on Form S-8
(Registration Number 33-84938) filed with the SEC on October 11, 1994.
(33) Incorporated by reference to exhibit of same number filed with CSC's
Registration Statement on Form S-1 (Registration Number 333-6457).
(34) Incorporated by reference to Exhibit 10.62 filed with CSC's Form 10-Q for
the six months ended June 30, 1998.
- --------
(b) Financial Statement Schedules:
Schedules have been omitted for the reason that they are not required or are
not applicable or because the required information is included in the financial
statements or the notes thereto.
(c) Report, Opinion or Appraisal
The fairness opinions of J.C. Bradford & Co., and SunTrust Equitable
Securities Corporation, the financial advisors of the Registrant and YSI,
respectively, are included as Annexes B and C of the Joint Proxy
Statement/Prospectus which forms a part of this Registration Statement.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by an person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
II-7
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint James F. Slattery and Ira M. Cotler,
and each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same,
as fully, for all intents and purposes, as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sarasota, State of
Florida, on the 8 day of February, 1999.
CORRECTIONAL SERVICES CORPORATION
/s/ James F. Slattery
By: _________________________________
James F. Slattery
President, Chief Executive Office
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ James F. Slattery President, Chief February 8,
- ------------------------------------- Executive Officer, 1999
James F. Slattery Chairman of the
Board and Director
(Principal
Executive Officer)
/s/ Ira M. Cotler Chief, Financial February 8,
- ------------------------------------- Officer (Principal 1999
Ira M. Cotler Financial and
Accounting Officer)
- ------------------------------------- Director February ,
Aaron Speisman 1999
/s/ Richard P. Staley Director February 8,
- ------------------------------------- 1999
Richard P. Staley
/s/ Stuart M. Gerson Director February 8,
- ------------------------------------- 1999
Stuart M. Gerson
/s/ Shimmie Horn Director February 8,
- ------------------------------------- 1999
Shimmie Horn
/s/ Melvin T. Stith Director February 8,
- ------------------------------------- 1999
Melvin T. Stith
II-9
<PAGE>
EXHIBIT 10.70.1
SUBCONTRACT,
FACILITY USE AGREEMENT,
AND ASSET PURCHASE
THIS AGREEMENT made this ____ day of December, 1998, by and among
Correctional Services Corporation ("CSC"), a Florida corporation, Trans-American
Development Associates, Inc. ("TADA"), a Louisiana corporation and FBA, L.L.C.
("FBA"), a Louisiana limited liability company. This Agreement shall have an
effective date of December 14, 1998 (the "Effective Date").
RECITALS
--------
WHEREAS, pursuant to that certain Cooperative Endeavor Agreement dated
February 24, 1994, and as amended by Amendment Nos. 1, 2, 3, 4, 5, 6, 7 and 8
(collectively referred to as the "Cooperative Endeavor Agreement") entered into
by and between the State of Louisiana Department of Public Safety and
Corrections ("DOC") and the City of Tallulah (the "City"), the City agreed to
construct, or cause to be constructed, a juvenile detention facility located on
the real property and improvements more particularly described on Exhibit "A"
attached hereto and incorporated herein by reference (the "TCCY Facility") for
the public purpose of providing housing and programmatic services to juveniles
adjudicated to the custody of the DOC, and, in consideration therefor, the DOC
agree to pay certain per diem payment to the City (the "Department Payments"),
with respect to the TCCY, on the terms and conditions provided in the
Cooperative Endeavor Agreement; and
WHEREAS, pursuant to a certain management services agreement dated February
16, 1994, and amended on June 1, 1995 (collectively "Management Services
Agreement"), between TADA and the City, TADA undertook to perform the City's
obligations under the Cooperative Endeavor Agreement to construct, operate and
maintain the TCCY Facility and to provide programmatic services to the juveniles
adjudicated to the custody of the DOC in consideration of the assignment of the
Department Payments; and
WHEREAS, pursuant to that certain agreement dated March 30, 1995 ("City
Assignment"), the City, as assignor, assigned to TADA, as assignee, all of the
City's rights, title and interest under and with respect to that certain
Cooperative Endeavor Agreement, including without limitation, the right to
receive the Department Payments and all rights of the City to take such
proceeding, legal, equitable, or otherwise to compel timely payment therefor
(the "Assigned Rights") as such are provided for in the Cooperative Endeavor
Agreement; and
WHEREAS, on January 27, 1997, for good and valuable consideration, TADA
sold to FBA, any and all interest that TADA had in the TCCY Facility, but not
the duty to perform the obligations obtained under the City Assignment to
operate the TCCY Facility and to provide programmatic services to the juveniles
adjudicated to the custody of the DOC; and
1
<PAGE>
WHEREAS, pursuant to that certain assignment dated May 29, 1998 (the "TADA
Assignment"), TADA, as assignor, assigned to FBA, as assignee, without recourse,
all of TADA's right, title and interest in and to the Cooperative Endeavor
Agreement, including without limitation, the right to receive the Department
Payments and the Assigned Rights, as well as the immediate and continuing right
to receive and collect all insurance proceeds, condemnation awards and all other
payments and amounts due thereunder or with respect to the TCCY Facility, except
that FBA was not made responsible or liable for any of the operational and/or
management duties and obligations of TADA under the Management Services
Agreement, which were specifically retained by TADA; and
WHEREAS, pursuant to that Absolute Assignment Agreement dated May 29, 1998
(the "FBA Assignment"), FBA, as assignor, assigned all its right, title and
interest in and to the Cooperative Endeavor Agreement, including without
limitation the right to receive Department Payments and the Assigned Rights to
First Tennessee Bank National Association (the "Trustee"), as assignee, as
Trustee for the benefit of the holders of those certain Privately-Placed Taxable
Revenue Beneficial Interest Certificates (the "Certificates"); and
WHEREAS, the Trustee executed and delivered the Certificates pursuant to
that certain Trust Indenture, dated May 29, 1998, by and among Trustee, FBA and
TADA; and
WHEREAS, pursuant to a facility use agreement dated May 29, 1998 (the
"Facility Use Agreement"), FBA permitted TADA to use the TCCY Facility for the
purpose of fulfilling TADA's operational and/or management duties and
obligations to the City and to DOC under the Management Services Agreement, the
City Assignment and the Cooperative Endeavor Agreement.
NOW THEREFORE, in consideration of the covenants and agreements hereinafter
set forth and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, CSC, TADA and FBA, intending to be
bound, agree as follows:
I. INCORPORATION BY REFERENCE
The recitals set forth above are hereby incorporated herein for all
purposes as if fully set forth below in their entirety.
The Cooperative Endeavor Agreement, the Management Services Agreement, the
City Assignment, the TADA Assignment, the FBA Assignment, the Indenture and the
Facility Use Agreement are attached hereto as Exhibits B, C, D, E, F, G and H,
respectively, and are incorporated herein for all purposes as if set forth in
their entirety. CSC makes the following representations and agreements subject
to the terms and provisions of each of the documents listed above and
incorporated herein. Unless otherwise indicated herein, the Cooperative Endeavor
Agreement, the Management Services Agreement, the City Agreement, the TADA
Assignment, the FBA Assignment, the Indenture and the Facility Use Agreement,
and each of their respective exhibits, attachments, schedules, each remain
effective and in force pursuant to its respective terms.
2
<PAGE>
II. SUBCONTRACT
2.1 Purpose. TADA subcontracts with CSC, and FBA hereby consents to such
-------
subcontract, to have CSC fulfill all of TADA's obligations in connection with
operating and maintaining the TCCY Facility, as well as providing programmatic
services to the juveniles adjudicated thereto by the DOC, as required by the
provisions of the Cooperative Endeavor Agreement, Management Services Agreement
and the City Assignment.
2.2 Term. This Subcontract shall commence as of the Effective Date and
----
shall continue for so long as the Facility Use Agreement remains in effect
between TADA and FBA, unless terminated earlier as provided below. As provided
in the Facility Use Agreement, FBA has the sole right to terminate the Facility
Use Agreement for any reason upon thirty (30) days prior written notice
delivered to TADA. By its execution hereon, FBA agrees to provide written notice
of any such termination to CSC simultaneously with the provisions of written
notice of such termination to TADA.
Notwithstanding the foregoing, FBA hereby covenants to TADA and CSC that it
will only exercise its sole right to terminate the Facility Use Agreement in
instances such as the following: 1) the DOC terminates the Cooperative Endeavor
Agreement pursuant to its terms, or 2) if CSC fails to operate and maintain the
TCCY Facility in accordance with the applicable standards adopted by the State
of Louisiana and the American Correctional Association (as may be amended from
time to time) or, 3) if required by the order or judgment of any court , or 4)
if CSC is in default of any of its other obligations under this Agreement, or 5)
if TADA is required by the DOC to take back over operational responsibilities
subcontracted under this Agreement, or 6) if such action is required to satisfy
the obligations of FBA and/or TADA under the Indenture.
CSC may, for its convenience, terminate this Subcontract upon one hundred
eight (180) days prior written notice to TADA.
2.3 Assignment. CSC shall not have the right to assign this Subcontract or
----------
any of the rights obtained hereunder without the written consent of TADA and
FBA, which consent will not be unreasonably withheld by TADA and FBA.
2.4 Management Fee; Operating Expenses. CSC is entitled to a management fee
----------------------------------
(the "Management Fee") in return for its operation and management of the TCCY
Facility. Pursuant to the terms of Section 3.03(b) of the Indenture, the
Trustee is directed to disburse to CSC a Management Fee calculated as follows.
The Department Payments shall be made to the Trustee and the Trustee is directed
to allocate, pursuant to Section 3.03(b) of the Indenture a proportionate amount
of the Department Payments in the following order of priority: (i) to the
payment of the principal and interest on the Certificates; (ii) to the payment
of any deficiencies in the Reserve Fund, as established pursuant to the
Indenture; (iii) to the payment of certain expenses, including (a) a monthly
payment to the City, (b) to the payment of casualty, liability, and business
interruption insurance, and all other insurance associated with the management,
operation, and ownership of the
3
<PAGE>
TCCY Facility, (c) to the payment of all taxes associated with the TCCY
Facility, including the annual property tax assessed on the TCCY Facility, (d)
to the payment of the Use Payments established in the Indenture, and as revised
herein at Section 3.4, owed from CSC to FBA, and (e) to the payment of a
Maintenance Reserve Fund, established pursuant to the Indenture. After the
Trustee has applied the Department Payments to the deposits and disbursements
itemized in (i), (ii) and (iii)(a) - (e) above, the Trustee is directed to
disburse the amount remaining to CSC as a Management Fee, from which CSC is
responsible for the payment of any and all fees associated with the management
and operation of the TCCY Facility.
So long as the Subcontract is effective, CSC, as TADA's subcontractor,
shall be solely responsible for any and all operating expenses incurred in
connection with the utilization of the TCCY Facility, including without
limitation, all taxes, charges, fees and other charges assessed or imposed upon
the TCCY Facility or the operations conducted thereon, all compensation paid to
employees and contractors in the operation of the TCCY Facility, the Use
Payments, and all utility costs and other items of overhead expense incurred in
connection with the operation of the TCCY Facility. Allocations of the
Department Payments withheld by the Trustee and deposited to the respective
funds shall be considered as revenues and expenses attributable to the party
responsible for such payment hereunder in each case.
As long as this Agreement is in effect, CSC's entitlement to the above
described Management Fee shall not be affected by any sale or assignment of any
rights hereunder by FBA or TADA.
2.5 Continuing Opportunities. CSC shall be entitled, if it desires, and if
------------------------
allowed by each particular contract, to an assignment of all contracts of TADA
relating to the rights and obligations undertaken under this Subcontract. This
shall include the opportunity to evaluate and hire any or all trained employees
currently working at the TCCY Facility. However, nothing contained herein shall
be construed to impose any responsibility on CSC to exercise these rights. To
the extent reasonably possible, TADA will assist CSC in this regard and use it
best efforts to assist CSC in its evaluation and hiring process. In connection
herewith, personnel record and other records relating to the TCCY Facility,
including but not limited to employee files, will be turned over to CSC. CSC
agrees to cooperative with FBA and TADA and make any and all of these records
available to FBA and/or TADA , upon request.
CSC expressly does not assume any obligation or duty under or arising from
any contract or other agreement or the acts or omissions of TADA or FBA in the
operation of the TCCY Facility which occurred prior to the Effective Date of
this Subcontract. This includes, but is not limited to, the care or handling of
residents. CSC agrees to assume, upon the execution of this Subcontract, the
employment at will of current employees at the TCCY Facility, whose employment
may continue at will for those who meet the minimum requirements for employment
at CSC for the position in question. At the time TADA or FBA distributes final
payroll checks to its employees at the TCCY Facility, TADA or FBA shall also
distribute to each such employee all of his or her accrued vacation time. The
execution of this Subcontract and the employment of the employees by CSC will
not result
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in any carryover liability to CSC for vacation time, taxes, penalties or other
claims resulting from TADA's or FBA's employment of the employees. CSC does not
assume any responsibility for contributions to or liability in connection with
any employee benefit or health plan previously provided to the employees by TADA
or FBA, except to the extent such is required by applicable Federal or State
law.
2.6 Consideration to TADA. TADA shall receive from CSC, as full
---------------------
consideration of the granting of the subcontract rights set forth above, the
following: 1) CSC obligates itself to fulfill all of TADA's obligations in
connection with operating and maintaining the TCCY Facility, as well as
providing programmatic services to the juveniles adjudicated thereto by the DOC
pursuant to the Cooperative Endeavor Agreement, Management Services Agreement
and the City Assignment, including insuring compliance with the appropriate
American Correctional Association Standards and all DOC policies and
regulations; 2) CSC agrees to indemnify TADA as set forth below and 3) CSC
hereby pays to TADA ten ($10.00) dollars and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
TADA. TADA hereby acknowledges that for so long as the obligations and rights
contemplated by this Subcontract are in effect and CSC is in compliance hereof,
TADA will not have the right to receive the Management Fee as set forth in the
Facility Use Agreement between it and TADA and as further defined below.
2.7 Indemnification. CSC will indemnify, defend and hold harmless TADA and
FBA, their assigns, successors, officers, directors, shareholders, employees and
agents, from all claims, lawsuits, losses, costs, penalties, expenses arising
out of or related to: 1) CSC's failure to perform any of the obligations or
covenants undertaken in this Subcontract; or 2) CSC's operation and maintenance
of the TCCY Facility, including the requirement to provide programmatic services
to the juveniles adjudicated thereto by the DOC, as required by the provisions
of the Cooperative Endeavor Agreement, Management Services Agreement and the
City Assignment; or 3) CSC's obligations relating to CSC's employment of any
former employees of TADA and/or FBA; or 4) CSC's failure to comply with
applicable regulations of the DOC, the American Correctional Association
standards or any court order.
TADA and FBA will indemnify, defend and hold harmless CSC, their assigns,
successors, officers, directors, shareholders, employees and agents, from all
claims, lawsuits, losses, costs, penalties and expenses arising out of or
related to: 1) TADA's or FBA's failure to perform any of the obligations or
covenants undertaken in the Cooperative Endeavor Agreement, Management Services
Agreement, City Assignment, TADA Assignment, FBA Assignment or Facility Use
Agreement occurring prior to CSC's execution of this Subcontract; or 2) TADA's
or FBA's operation and maintenance of the TCCY Facility prior to the effective
date hereof, including the requirement to provide programmatic services to the
juveniles adjudicated thereto by the DOC; or 3) TADA's or FBA's obligation
relating to the employment of individuals prior to CSC's execution of this
Subcontract; or 4) any and all other matters relating to possession, use,
operation and maintenance of the TCCY Facility occurring prior to CSC's
execution of this Subcontract.
2.8 Annual Audits by CSC. FBA and/or TADA shall have the right, at least
--------------------
twice each
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year, to enter upon the TCCY Facility premises for the purpose of having a
licensed engineer inspect CSC's maintenance of the TCCY Facility as required by
this Agreement. CSC shall also provide FBA and TADA with a copy of any report
performed by the DOC, the City, the Department of Justice, the American
Correctional Association, etc., and relating to the TCCY Facility, within seven
(7) days of CSC's receipt of same.
In addition, CSC shall, on at least an annual basis, and otherwise as
reasonably requested by FBA, provide FBA, the Trustee and Carlyle Capital
Markets Inc. with a copy of its current audited financial statements and
reports.
2.9 Other Reports and Audits. In addition to the foregoing, CSC shall
------------------------
provide FBA and TADA with a copy of all reports, litigations or audits,
including but not limited to those initiated by DOC, the U.S. Department of
Justice and the American Correctional Association.
III. FACILITY USE AGREEMENT
3.1 Use of the TCCY Facility. In consideration of the payments to be made
------------------------
pursuant to the terms of this Agreement ("Use Payments") and the provisions
stipulated to be performed by CSC in the Subcontract portion of this Agreement,
and for so long as the Subcontract between TADA and CSC is in effect, FBA, as
owner of the TCCY Facility, acknowledges that CSC shall have the exclusive right
to utilize the TCCY Facility for the purpose of operating the TCCY Facility and
fulfilling its obligations to TADA pursuant to the provisions of the Subcontract
contained hereinafter.
For purposes of this Agreement, CSC exclusive rights of use of the TCCY
Facility hereunder shall be inclusive of all buildings and appurtenances,
parking lot, Warden and Deputy Warden houses, and the guest bedrooms. This
exclusive right shall not include the right to install, operate, manage or
maintain inmate telephones, enclosures and associated equipment ("inmate
telephone services") at TCCY Facility, as all such rights belong to Tallulah
Management Facility #2, Inc (now Frostline, Inc.). CSC herein agrees to
cooperate with and assist Tallulah Management Facility #2, Inc (now Frostline,
Inc.), as necessary to protect its rights and interests with respect to the
inmate telephone services.
3.2 Term. FBA agrees that CSC shall have the exclusive right to use the
----
TCCY Facility as of and from the Effective Date, continuing for so long as the
original Facility Use Agreement remains in effect between TADA and FBA, unless
terminated earlier as provided below.
The parties hereto specifically acknowledge and agree that the original
Facility Use Agreement is and remains in full force and effect and that CSC
assumes the obligations and responsibilities of TADA pursuant to the Facility
Use Agreement. The parties hereby additionally acknowledge and agree that, in
the event that this Agreement is terminated, TADA shall immediately re-assume
the obligations and responsibilities undertaken by it pursuant to the Facility
Use Agreement or find a substitute operator.
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3.3 Assignment. CSC shall not have the right to assign this Subcontract or
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any of the rights obtained hereunder without the written consent of FBA and
TADA, which consent will not be unreasonably withheld by FBA and TADA.
3.4 Use Payments. In consideration of CSC's utilization of the TCCY
------------
Facility, as TADA's subcontractor, CSC agrees to pay to FBA certain use payments
(the "Use Payments"). The Use Payments are composed of (i) a fixed component of
$31,000.00 payment per month; (ii) a component based upon actual TCCY Facility
juvenile population; (iii) a variable component; and (iv) other Trustee
payments described herein for which FBA is otherwise responsible. For any
partial months under this Agreement, the Use Payments shall be made on a prorata
basis. Components (i) - (iii) are to be calculated as follows:
Component No. 1 -- Fixed Component: Beginning on January 1, 1999, and
continuing on the 1st day of each month thereafter, the Trustee shall be
instructed to pay to FBA on the 25th of each month a fixed component of
$31,000.00, for the preceding month, to continue during the duration of
this Agreement unless a new Use Payment is negotiated between FBA and CSC.
Component No. 2 -- Component Based Upon Actual Facility Population:
Beginning 90 days from the Effective Date and through November 15, 1999,
Trustee shall be instructed to pay FBA each month a component of the Use
Payment calculated to be $2.00 per day for each juvenile actually housed at
the TCCY Facility during that particular month, and effective November 16,
1999, through the duration of this Agreement, Trustee will be instructed
that this component of the Use Payment will be increased to $4.00 per day
for each juvenile actually housed at the TCCY Facility during that
particular month, unless the actual increase in the total Department
Payment which becomes effective on November 16, 1999 is less than $2.00 per
juvenile, in which case this component of the Use Payments shall be
increased by the same dollar amount as the actual increase in the total
Department Payment becoming effective on November 16, 1999. Notwithstanding
the foregoing, effective November 16, 2000, and continuing for the duration
of this Agreement, this component of the Use Payment shall be $4.00 per day
for each juvenile actually housed at the TCCY Facility during each month.
Component No. 3 -- Variable Component. In addition to the fixed component
and the component based upon actual TCCY Facility population, the Trustee
shall be directed to pay each month to FBA a portion of the Use Payment
comprised of the variable component, commencing on November 16, 1999, and
continuing on the 16th day of each month thereafter. The Variable Component
of the Use Payment is calculated as follows:
The difference between --
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The "Reduced Department Payment", i.e., the amount that the DOC
would pay pursuant to the Cooperative Endeavor Agreement in the
event that the DOC assumed operation of the TCCY Facility, as
established on the date of this Agreement, i.e., $17.55,
and
the "Reduced Department Payment as escalated and recalculated
each year by a factor of the actual Consumer Price Index,
multiplied by 686, representing the number of juvenile offenders
guaranteed by the DOC,
multiplied by the actual number of days in each month,
then multiplied by a factor of 0.7.
The revised Variable Component of the Use Payment will be calculated and
effective upon the date that FBA is notified by the DOC that the DOC has
revised the amount of the Department Payments payable pursuant to the
Cooperative Endeavor Agreement. The Variable Component will be increased
by an amount corresponding to the increase in the Department Payments.
By its execution hereon, FBA agrees to provide written notification of the
revised Department Payment to the Trustee, CSC and Carlyle Capital Markets
Inc. within seven (7) days from receipt of its notice from the DOC.
The Reduced Department Payments are projected to be escalated annually by
an estimated 3%. Upon notification from or on behalf of FBA of the actual
amount of the Reduced Department Payments, Carlyle Capital Markets Inc.
will provide the revised calculations to the Trustee, CSC and FBA.
By its execution hereof, Trustee assumes no liability for the erroneous
calculations of the Variable Component of the Use Payment and will rely
solely on the information provided to it by FBA and Carlyle Capital Markets
Inc. with respect thereto.
It is specifically acknowledged by FBA and TADA, that as long as the
Subcontract and the Facility Use Agreement contained herein are in effect, FBA
will not be entitled to receive the payment stipulated in the Facility Use
Agreement between TADA and FBA, in the amount of
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$120,000.00/month, and listed as the Sixth disbursement in Section 3.03 -
Application of Other Moneys of the Indenture.
CSC shall forward its invoice on the 1st calendar day of each month to the
DOC, representing the services rendered in the preceding calendar month. Use
Payments to FBA shall be payable on the 25th day of each calendar month by the
Trustee, for services of the preceding month. Use Payments for a partial month
shall be prorated. Pursuant to the terms of provisions of Section 3.04 of the
Indenture, the Trustee is directed to allocate to the extent of funds available
thereunder, the portion of the Department Payments equal to the Use Payments,
and the Trustee is directed to deposit each Use Payment to the Use Payment Fund
established pursuant to Section 3.01 of the Indenture, to be disbursed by the
Trustee to FBA in accordance with the Indenture.
Use Payments may be increased or decreased, upon mutual agreement of the
parties hereto. If the Use Payment is increased or decreased, FBA shall notify
the Trustee of the negotiated amount, and FBA shall direct the Trustee to
allocate an amount of the Department Payments in an amount equal to such
negotiated Use Payment to be deposited to the Use Payment Fund.
3.5 Utilities/Overhead Expenses. As of the Effective Date, and for the
---------------------------
duration of this Agreement, CSC will be responsible for and pay the cost of all
utilities and other items of overhead expense incurred in connection with the
TCCY Facility.
3.6 Maintenance. During the term of this Agreement, CSC will be responsible
-----------
for all repairs and maintenance to the TCCY Facility, other than "extraordinary
maintenance." For purposes of this Agreement, the term "extraordinary
maintenance" is defined as "replacement of major building components and major
equipment (other than that listed on Exhibit I and assets purchased separately
by CSC) of the TCCY Facility. These include the following: generators, kitchen
equipment, laundry equipment, air conditioners, heater, sewerage lift station,
water distribution system and gas distribution system." Repairs and maintenance
of items generally meeting the above definition of "extraordinary maintenance"
shall not be the responsibility of FBA, if the repairs or maintenance are made
necessary as a result of vandalism.
3.7 Insurance. CSC shall, for the duration of this Agreement, obtain and
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pay all premiums for policies of general liability insurance, including business
interruption coverage (in an amount sufficient to maintain the timely payment of
Distributions for a period of twelve months), and casualty insurance, and other
insurance associated with its management, operation and maintenance of the TCCY
Facility, with aggregate limits of not less than $10,000,000 .00 per occurrence.
FBA, TADA and the Trustee shall be named in all such policies of insurance as
additional insureds.
FBA acknowledges that it is and remains responsible for the payment of all
insurance premiums associated with the ownership of the TCCY Facility. CSC and
the Trustee shall be named as an additional insureds in all policies for which
FBA is responsible. The parties specifically recognize that the insurance
requirements contained in Section 9.02(d) of the Indenture must be complied
with, and that each FBA and CSC will make its respective contributions to the
Insurance
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Fund, as defined by the Indenture, to insure timely payment of premiums for the
required coverage. Notwithstanding the foregoing, CSC and FBA acknowledge that
payment of the insurance premiums required by Section 9.02(d) of the Indenture
will be paid directly by the Trustee each month out of the Department Payments.
As such, these payments by the Trustee on behalf of CSC and FBA effectively
become additions to the Management Fee and Use Payments, respectively. Any
interest owned on the money deposited into the Insurance Fund or for fees
charged by the Trustee will belong to the parties in the portion of the
respective share of the total insurance expenditures required and fees charged.
FBA represents, and CSC acknowledges, current liability premiums (including the
business interruption coverage) are paid through 9/30/99. As such, as of the
Effective Date hereof, CSC will reimburse FBA for the prorata premium amounts
which on such date will become CSC's responsibility.
3.8 Taxes. Pursuant to the Indenture, FBA, as owner of the TCCY Facility,
-----
shall be responsible for the payment of property taxes, ad valorem taxes and
special assessments, state, parish or city, associated with the TCCY Facility.
CSC shall pay, prior to delinquency, all personal property taxes levied or
assessed against CSC equipment, fixtures, personal property located at the TCCY
Facility. As with payment of the insurance premiums covered above, such payments
shall be made directly by the Trustee on FBA's and CSC's behalf , which payments
effectively become additions to the Use Payments and Management Fee,
respectively. In addition, CSC shall pay any and all licenses, charges, and
other fees of every kind and nature as and when they become due and before the
same become delinquent arising out of or in connection with CSC's use and
occupancy of the TCCY Facility.
3.9 Compliance with Laws. CSC agrees to comply with all valid laws,
--------------------
ordinances, codes, rules and regulations of governmental authorities having
jurisdiction applicable to the occupancy or use of the TCCY Facility.
3.10 Alterations and Improvements. Upon prior written consent of FBA and
----------------------------
TADA, CSC shall have the right to make alterations and improvements to the TCCY
Facility. Upon the termination of this Agreement, all alterations and
improvements to the TCCY Facility shall be retained and become the property of
FBA. CSC acknowledges that the TCCY Facility is covered by a mortgage held by
the Trustee for the benefit of the Certificate Holders.
3.11 Surrender. Upon termination of this Agreement, CSC shall deliver the
---------
TCCY Facility to FBA in as good a condition as the TCCY Facility existed on the
Effective Date of this Agreement, reasonable wear and tear excepted.
3.12 Liability of FBA and/or TADA. Neither FBA nor TADA shall be liable to
----------------------------
CSC or to CSC's employees, agents, licensees, invitees, juveniles adjudicated by
the DOC to the TCCY Facility or any other person for (1) any injury or damage to
person or property due to CSC's operations of the TCCY Facility; or (2) for any
loss or damage to any person or property occasioned by theft, act of God, or any
other matter beyond the control of FBA or TADA.
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3.13 Indemnification. CSC agrees that it shall indemnify, defend and hold
---------------
harmless FBA and TADA, from and against (1) all fines, suits, losses, costs,
liabilities, claims, demands or actions, by reason of any breach, violation or
non-performance of any of the terms, provisions, covenants, agreements or
conditions on the part of CSC under this Agreement; and (2) all claims, demands,
actions, damages, losses, costs, liabilities, expenses and judgments suffered
by, recovered from or asserted against FBA or TADA on account of injury or
damage to person or property to the extent that any such damage or injury may be
incident to, arise out of, or be caused, either proximately or remotely, wholly
or in part by any act, omission, negligence or misconduct on the part of CSC or
any of its agents, servants, employees, contractors, guest, licensees, invitees
or juveniles adjudicated by the DOC to the TCCY Facility or of any persons
entering the TCCY Facility under or with the express or implied invitation,
permission or consent of CSC, or when any such injury or damage is the result,
proximately or remotely, of the violation of CSC or any of its agents, servants,
employees, contractors, guest, licensees, invitees or juveniles adjudicated by
the DOC to the TCCY Facility, of any law, ordinance or governmental order of any
kind, or when any such injury or damage may in any other way arise from the
occupancy or use by CSC of the TCCY Facility. CSC covenants and agrees that in
case FBA or TADA shall be made a party to any litigation commenced by or against
CSC, or relating to its use of the TCCY Facility, the CSC shall pay all
reasonable costs and expenses, including reasonable attorneys fees and court
costs, incurred by or imposed upon FBA or TADA by virtue of any such litigation,
and the amount of all such cost and expenses, including attorneys fees and court
costs, shall be a demand obligation owing by CSC to FBA and TADA, and shall bear
interest at the highest rate allowed by law.
Subject to Section 3.12, FBA and TADA agree that they shall indemnify,
defend and hold harmless CSC, from and against (1) all fines, suits, losses,
costs, liabilities, claims, demands or action, by reason of any breaches,
violations or non-performance of any of the terms, provisions, covenants,
agreements or conditions on the part of FBA and/or TADA under this Facility Use
Agreement; and (2) all claims, demands, actions, damages, losses, costs,
liabilities, expenses and judgments suffered by, recovered from or assessed
against CSC on account of injury or damage to person or property to the extent
that any such damage or injury may be incident to, arise out of, or be caused
by, either proximately or remotely, wholly or in part by any act, omission,
negligence or misconduct on the part of FBA and/or TADA or any of their agents,
servants, employees, contractors, guests, licensees or invitees, or by any
juveniles adjudicated by the by the DOC to the TCCY Facility (when such injury
or damage is sustained prior to the Effective Date hereof) or of any persons
entering the TCCY Facility under or with the express or implied invitation,
permission or consent of FBA and/or TADA or any of their agents, servants,
employees, contractors, guests, licensees, invitees or juveniles adjudicated by
the DOC to the TCCY Facility, when such damage or injury occurs prior to the
Effective Date of this Agreement, of any law, ordinance or governmental order
of any kind, or when any such injury or damage may in any other way arise from
the occupancy or use by FBA and/or TADA of the TCCY Facility prior to the
Effective Date hereof. FBA and TADA covenant and agree that in case CSC shall be
made a party to any litigation commenced by or against FBA and/or TADA, and for
which indemnity is provided in this Section, FBA and/or TADA shall pay all such
cost and expense, including attorneys fees and court costs, which shall be a
demand obligation owing by CSC to FBA and TADA, and shall bear interest at the
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highest rate allowed by law.
3.14 No Real Rights Created. This Agreement does not create a servitude or
-----------------------
other real right on or to the TCCY Facility. Neither this Agreement nor any
memorandum or extract hereof shall be recorded in the public records of the
Parish of Madison, State of Louisiana. This Agreement shall be subject to and
subordinate to the lien of any mortgage now or hereinafter placed upon the TCCY
Facility.
3.15 Conflict with the Indenture. To the extent that the terms, conditions
---------------------------
or provisions contained herein are in conflict with the terms, conditions or
provisions of the Indenture, the terms, conditions and provisions of the
Indenture shall govern.
IV. ASSET PURCHASE
4.1 Ownership of Assets. TADA represents that it has full power,
-------------------
authority, and legal right to transfer, assign and sell the assets listed on
Exhibit I ("the Assets"), attached hereto and incorporated herein for all
purposes. TADA represents that no other party owns any of the Assets.
4.2 Price. CSC hereby purchases from TADA all of the Assets, subject to
-----
any existing security interests granted thereon, for the full sum of $357,323.00
(hereinafter the "Asset Price"), which amount includes applicable sales taxes,
the receipt and sufficiency of which is hereby acknowledged by TADA. CSC, TADA
and FBA mutually agree that the Asset Price stipulated above is a fair market
price for the purchase of the Assets, taking into consideration the condition of
the Assets and all existing security interests attaching thereto. TADA and FBA
agree to deliver such bills of sales, financing statements and/or titles as CSC
may reasonably request to effectuate the purchase of the Assets and the transfer
of title of the Assets to CSC.
4.3 Inspection. CSC acknowledges that it has had an opportunity to and has
----------
inspected the Assets, and confirms that all of the Assets are present and
accounted for.
4.4 Sales Tax. CSC acknowledges that it will be responsible for the
---------
payment of any and all sales tax imposed by any taxing authority on the Assets,
as well as any other personal property, equipment and fixtures now or
hereinafter owned by CSC and located at the TCCY Facility.
V. DISCLOSURES
5.1 Inmate Telephone Services. TADA represents, and CSC acknowledges, that
-------------------------
pursuant to an assignment dated March 30, 1995, TADA assigned the exclusive
right to install, operate, manage, maintain inmate telephones, enclosures and
associated equipment ("inmate telephone services") at TCCY, either directly or
indirectly, to Tallulah Management Facility #2, Inc (now Frostline, Inc.). CSC
understands that none of the rights and benefits associated with the inmate
telephone services are conveyed herein, as such rights belong to Tallulah
Management Facility #2, Inc (now Frostline, Inc.). CSC agrees to cooperate with
and assist Tallulah Management Facility #2,
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Inc (now Frostline, Inc.), as necessary to protect its rights with respect to
the inmate telephone services.
5.2 Pending Litigation. To the best of TADA's and FBA's knowledge, there
------------------
are no pending or threatened actions or proceedings before any court or
administrative agency which shall materially adversely affect the condition,
business or operation of CSC or the ability of CSC to perform its obligations
hereunder, with the exception of the following: 1) Hayes Williams, et al v.
John McKeithen, et al, C.A. #71-98B, filed in the United States District Court
for the Middle District of Louisiana; this matter has been consolidated with In
Re: Juvenile Facilities, C.A. # CH97-M5-001-B and In Re: Tallulah Correction
Center for Youth, C.A. #CH97-0665-B-M1 and The United States of America v. State
of Louisiana, et al, C.A. 98-947-B-1 seeking injunctive relief; and 2) Brian
B., et al v. Richard Stalder, et al, C.A. #98-886-B-M1, seeking injunction and
which may be consolidated with the foregoing civil actions.
Further, TADA represents that there are a number of administrative review
actions and civil actions seeking damages against TADA, in which case TADA is
being defended by its insurer(s), and which matters remain the responsibility of
TADA notwithstanding any other obligations undertaken herein by CSC.
VI. DEFAULT
6.1 Assurances. CSC may be required from time to time, at its own cost,
----------
at the request of TADA and/or FBA, to provide reasonable assurances, as TADA
and/or FBA deem necessary and appropriate to insure the CSC is capable of
fulfilling all of its obligations hereunder.
6.2 Notice and Opportunity to Cure. In the event that CSC shall be in
------------------------------
default of any material obligations arising out of this Agreement, TADA and/or
FBA shall provide written notice to CSC of the condition(s) constituting default
and will indicate a reasonable time period within which TADA and/or FBA requires
CSC to cure such condition(s).
Upon the occurrence of a condition constituting default, and after receipt
of notice from TADA and/or FBA, if CSC believes that the condition(s) cannot be
corrected within the time set forth by TADA and/or FBA, and if CSC, through a
diligent, ongoing, and conscientious effort to correct the default believes that
the cure will take longer that the time set forth by TADA and/or FBA, then CSC
shall submit a plan for review by FBA and/or TADA. FBA and/or TADA have the
option to approve the plan, in which instance they will not exercise their
remedies hereunder as long as CSC takes diligent , ongoing and conscientious
actions to cure the default. If FBA and/or TADA disapprove CSC's plan, then FBA
and/or TADA will identify corrective action necessary to be taken and the time
period within which such corrective actions must be taken. If, after receipt of
the required corrective action and required time period from TADA and/or FBA,
CSC should fail or refuse, for any reason, to timely take the corrective actions
required by TADA and/or FBA, then the Facility Use Agreement and the Subcontract
shall be immediately terminated. Thereafter, TADA and/or FBA may without the
necessity of additional notice or demand to CSC, and without releasing
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CSC from any obligation, covenant or condition, make, perform, observe, take or
do whatever necessary to protects its rights and interest. Under such
circumstances, the exclusive right to utilize the TCCY Facility shall
immediately revert back to FBA, and all rights granted to CSC under the
Subcontract shall immediately revert back to TADA. In the event of such a
default termination, TADA shall have an absolute right to take regain possession
of and use all of Assets, and all other assets and resources being used at the
time of the default termination by CSC to operate and maintain the TCCY
Facility, either itself or by way of a substitute operator, and to fulfill its
obligations under the Cooperative Endeavor Agreement, Management Services
Agreement and the City Assignment. This right shall include without limitation,
any contractual right with respect to the employees of CSC. Notwithstanding the
foregoing, in no event shall such a default termination or subsequent actions
taken by TADA and/or FBA to mitigate their damages limit any rights of TADA or
FBA to seek compensation or bring an action to recover all damages.
In the event of a bankruptcy, reorganization, debt arrangement moratorium,
proceeding under any bankruptcy or insolvency law, or dissolution or liquidation
proceeding is instituted by or against CSC, this Agreement shall be reviewed
immediately and determination made as to continue this Agreement or modify this
Agreement to ensure that FBA and TADA are not liable for CSC's debt.
VII. MISCELLANEOUS
The following general conditions shall apply to all aspects of this
Agreement:
7.1 No Implied Waiver. The failure of FBA and/or TADA to insist at any
-----------------
time upon the strict performance of any covenant or agreement or to exercise any
right, power or remedy contained in this Agreement shall not be construed as a
waiver or a relinquishment thereof in the future.
7.2. Severability. If any provision of this Agreement should be held
------------
invalid or unenforceable, the validity and enforceability of the remaining
provisions hereof shall not be affected thereby
7.3 Notice. Any notice required or permitted to be made in connection with
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this Agreement may be deemed delivered, whether actually received or not, two
(2) days after being deposited in the U.S. Mail, postage prepaid, by certified
or registered mail, return receipt requested, addressed to the applicable
party(ies) at such address indicated below:
If to FBA: FBA, L.L.C.
P.O. Box 84010
Baton Rouge, Louisiana 70884
Attn: Verdi Adam
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If to TADA: TADA, Inc.
P.O. Box 84010
Baton Rouge, Louisiana 70884
Attn: Verdi Adam
If to CSC: CSC
1819 Main Street, Suite 1000
Sarasota, Florida 34236
Attn: James F. Slattery
If to Carlyle
Capital Markets Inc.: Carlyle Capital Markets Inc.
14755 Preston Road
Dallas, Texas 75240
Attention: Barry L. Friedman, President
If to the Trustee: First Tennessee Bank National Association
4385 Poplar Avenue
Memphis, Tennessee 38117
Attention: Dennis D. Gillespie, Vice President
7.4 Amendments in Writing. This Agreement shall not be changed orally, but
---------------------
shall only be changed by way of a written agreement signed by all parties
hereto. Any waiver or consent with respect to this Agreement shall only be
effective in that specific instance and for the specific purpose for which it
was given. No course of dealings, usage of trade nor parole evidence shall be
used to supplement or modify any of the terms or conditions of this Agreement.
7.5 Governing Law. This Agreement shall be governed and controlled by the
-------------
laws of the State of Louisiana as to interpretation, enforcement, validity,
construction, effect and in all other respects. Subject to the requirement of
Section 7.6, the parties hereto agree that any lawsuit by one of the parties
hereto against another parties hereto, and arising out of or related to this
Agreement, shall be filed in the Nineteenth Judicial District Court for the
State of Louisiana.
7.6 Disputes. The parties hereto agree to submit any grievance or dispute
--------
arising out of or in any way related to this Agreement to non-binding mediation
prior to the initiation of litigation. Such mediation shall be held in Baton
Rouge, Louisiana.
7.7 Entire Agreement. This Agreement contains the full agreement of the
----------------
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements or understanding relating thereto. All prior agreements with
respect to the subject matter hereof shall be null, void and of no consequence.
Further, no representations, inducements, promises or agreements have been made.
15
<PAGE>
This document may be executed in multiple originals.
THUS DONE AND SIGNED, after due reading of the whole, at _____________ ,
_____________, this ____ day of December, 1998.
FBA, L.L.C.
By: /s/ Verdi Adam
-----------------------------
VERDI ADAM
Managing Member
Trans-American Development Associates, Inc.
By: /s/ Verdi Adam
-----------------------------
VERDI ADAM
Vice President
Correctional Services Corporation
By: /s/ James F. Slattery
-----------------------------
JAMES F. SLATTERY
President
16
<PAGE>
ACKNOWLEDGED this ____ day of December, 1998.
First Tennessee Bank National Association
By: /s/ Dennis D. Gillespie
-------------------------------
DENNIS D. GILLESPIE
President
17
<PAGE>
EXHIBIT 11
EXHIBIT 11 - Statement re computation of per share earnings
The following table sets forth the computation of basic and diluted earnings per
share in accordance with SFAS No. 128:
<TABLE>
<CAPTION>
Years ended December 31, Nine months ended
September 30,
1997 1996 1995 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) $3,025,524 $(1,868,027) $(1,739,391) $3,296,159 $1,903,070
========== ============ ============ ========== ==========
Denominator:
Basic earnings per share:
Weighted average shares outstanding 7,675,220 5,781,853 4,552,707 7,750,947 7,670,310
Effect of dilutive securities - stock
options and warrants 442,702 - - 505,204 455,822
----------- ---------- ---------- --------- ----------
Denominator for diluted earnings per share 8,117,922 5,781,853 4,552,707 8,256,151 8,126,132
=========== ============ ============ ========== ==========
Net income (loss) per common share - basic $ 0.39 $ (0.32) $ (0.38) $ 0.43 $ 0.25
=========== ============ ============ ========== ==========
Net income (loss) per common share - diluted $ 0.37 $ (0.32) $ (0.38) $ 0.40 $ 0.23
=========== ============ ============ ========== ==========
</TABLE>
The effect of dilutive securities for 1996 were not included in the calculation
of diluted net loss per common share as the effect would have been
anti-dilutive.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 11, 1998, accompanying the consolidated
financial statements of Correctional Services Corporation and Subsidiaries
contained in this Registration Statement on Form S-4. We consent to the use of
the aforementioned report in the Registration Statement on Form S-4 and to the
use of our name, as it appears under the caption "Experts."
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Tampa, Florida
February 8, 1999
<PAGE>
Exhibit 23.2
Arthur Andersen LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
February 8, 1999
<PAGE>
Exhibit 99.1
FORM OF PROXY
CORRECTIONAL SERVICES CORPORATION
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
CORRECTIONAL SERVICES CORPORATION 1819 MAIN STREET, SUITE 1000 SARASOTA, FLORIDA
34236
The undersigned hereby appoints [Proxy], and [Proxy], and each of them,
as proxies of the undersigned, each with the power of substitution, to attend
and act for the undersigned at the Special Meeting of Stockholders of
Correctional Services Corporation to be held at [Place] on [Date], 1999, at
[Time] and at any and all adjournments and postponements thereof, and in
connection therewith, to vote and represent all of the shares of common stock of
CSC which the undersigned would be entitled to vote in any capacity if
personally present at the special meeting. Said proxies, and each of them, shall
have all the powers that the undersigned would have if voting in person. The
undersigned hereby revokes any other proxies to vote at such meeting and hereby
ratifies and confirms all that said proxies, and each of them, may lawfully do
by virtue hereof.
YOUR PROXY CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN THIS CARD OR
FOLLOW INSTRUCTIONS FOR VOTING BY TELEPHONE SET FORTH ON THE REVERSE SIDE OF
THIS CARD.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL
(1) To approve and adopt the Agreement and Plan of Merger among CSC, Palm
Merger Corp., a newly organized subsidiary of CSC, and Youth Services
International, Inc., dated as of September 23, 1998, and as amended as
of January 12, 1999, including the issuance of CSC common stock pursuant
to the merger of Palm with and into YSI in accordance with the terms of
the merger agreement
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Each of the above-named proxies present at the special meeting, either
in person or by substitute, shall have and exercise all the powers of said
proxies hereunder. This proxy, when properly executed, will be voted in the
manner directed herein by the undersigned stockholder with respect to the
proposal and in the discretion of the proxies hereunder on any other business as
may properly come before the special meeting. IF NO INSTRUCTIONS ARE INDICATED
HEREIN, THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO VOTE "FOR" THE
PROPOSAL.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and of the joint proxy statement/prospectus (with all
enclosures and attachments) dated __, 1999 relating to the special
meeting.
Dated: , 1999
Note: Please sign this proxy exactly as your name
appears hereon. Joint owners should each sign
personally. Attorneys, administrators, trustees,
guardians and others signing in a representative or
fiduciary capacity should indicate this capacity. An
authorized officer may sign on behalf of a corporation
and should indicate the name of the corporation and his
or her capacity.
<PAGE>
Exhibit 99.2
FORM OF PROXY
YOUTH SERVICES INTERNATIONAL, INC.
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
YOUTH SERVICES INTERNATIONAL, INC., 2 PARK CENTER COURT, SUITE 200 OWINGS
MILLS, MARYLAND 21117.
The undersigned hereby appoints [Proxy], and [Proxy], and each of them,
as proxies of the undersigned, each with the power of substitution, to attend
and act for the undersigned at the Special Meeting of Stockholders of
Youth Services International, Inc. to be held at [Place] on [Date], 1999, at
[Time] and at any and all adjournments and postponements thereof, and in
connection therewith, to vote and represent all of the shares of common stock of
YSI which the undersigned would be entitled to vote in any capacity if
personally present at the special meeting. Said proxies, and each of them, shall
have all the powers that the undersigned would have if voting in person. The
undersigned hereby revokes any other proxies to vote at such meeting and hereby
ratifies and confirms all that said proxies, and each of them, may lawfully do
by virtue hereof.
YOUR PROXY CANNOT BE VOTED UNLESS YOU SIGN, DATE AND RETURN THIS CARD OR
FOLLOW INSTRUCTIONS FOR VOTING BY TELEPHONE SET FORTH ON THE REVERSE SIDE OF
THIS CARD.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL
(1) To approve the merger of Palm Merger Corp., a newly organized subsidiary
of Correctional Services Corporation, with and into YSI, pursuant to the
Agreement and Plan of Merger among CSC, Palm Merger Corp. and YSI dated
as of September 23, 1998, and as amended as of January 12, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Each of the above-named proxies present at the special meeting, either
in person or by substitute, shall have and exercise all the powers of said
proxies hereunder. This proxy, when properly executed, will be voted in the
manner directed herein by the undersigned stockholder with respect to the
proposal and in the discretion of the proxies hereunder on any other business as
may properly come before the special meeting. IF NO INSTRUCTIONS ARE INDICATED
HEREIN, THIS PROXY WILL BE TREATED AS A GRANT OF AUTHORITY TO VOTE "FOR" THE
PROPOSAL.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders and of the joint proxy statement/prospectus (with all
enclosures and attachments) dated __, 1999 relating to the special
meeting.
Dated: , 1999
Note: Please sign this proxy exactly as your name
appears hereon. Joint owners should each sign
personally. Attorneys, administrators, trustees,
guardians and others signing in a representative or
fiduciary capacity should indicate this capacity. An
authorized officer may sign on behalf of a corporation
and should indicate the name of the corporation and his
or her capacity.
<PAGE>
EXHIBIT 99.3
CONSENT
In accordance with Rule 438 under the Securities Act of 1933, as
amended, the undersigned hereby consents to being named as a prospective
director of Correctional Services Corporation in its Registration Statement on
Form S-4 (SEC File No. 333-_____) filed with the Securities and Exchange
Commission.
/s/ Bobbie L. Huskey
--------------------
Bobbie L. Huskey
