<PAGE>
As filed with the Securities and Exchange Commission on February 17, 1999
Registration No. 333-72003
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to
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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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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Preliminary Copies
[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 more
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
February , 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". February 11, 1999 closing sale prices: CSCQ $11 1/2
per share and YSII $3 1/2 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:
, March , 1999, 1:00 p.m.
The Hyatt Hotel,
1000 Boulevard of the Arts,
Sarasota, FL 34236
For YSI stockholders:
, March , 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 February , 1999, and is
first being mailed to stockholders on or about February , 1999.
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Preliminary Copies
[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 March , 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 February , 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,
_____________________________________
Ira M. Cotler
Secretary
February , 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
[YSI LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
The special meeting of Stockholders of YSI will be held at Harbor Court
Hotel, 550 Light Street, Baltimore, MD 21202, on March , 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 February , 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,
_____________________________________
Mark S. Demilio
Secretary
February , 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
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................................................. 4
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............ 5
Listing and Trading of CSC Common Stock................................. 5
Regulatory Approvals.................................................... 5
Other Conditions........................................................ 5
Cancellation of the Merger.............................................. 5
Termination Fee......................................................... 6
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
Decreases in Occupancy Levels at Our Facilities May Have a Material
Adverse Effect on Our Business......................................... 12
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The Non-Renewal or Termination of Our Facility Management Contracts,
Which Generally Range from One to Three Years, Could Have a Material
Adverse Effect on Our Business......................................... 12
We Face Financial Risks Relating to Speculative Projects, Including the
Loss of Initial Outlays on Contracts Not Awarded to Us................. 13
Our Ability to Secure New Contracts to Develop and Manage Correctional
Detention Facilities Depends on Many Factors We Cannot Control......... 13
We Face Risks and Uncertainties in Expanding Our Operations Outside of
the United States and its Territories, Including New and Unfamiliar
Regulatory Requirements, Currency Exchange Issues, Political and
Economic Issues, and Staffing and Managing These Operations............ 13
We May Not Be Able to Achieve the Growth We Anticipate, or if Achieved,
We May Not Be Able to Effectively Manage It............................ 13
Risks Relating to the Combined Company's Future Acquisitions............ 13
We face Public Resistance to Privatization of Correctional and Detention
Facilities............................................................. 14
Our Business is Subject to Unique Governmental Regulation and We Risk
Noncompliance.......................................................... 14
The Loss of any CSC Executive Officers Could Have a Material Adverse
Effect on the Combined Company......................................... 14
We May Encounter Material Costs Relating to Year 2000 Compliance........ 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.. 26
Opinion of the YSI Board of Directors' Financial Advisor................ 28
Form of the Merger...................................................... 30
Merger Consideration.................................................... 30
Conversion of Shares; Procedures for Exchange of Certificates;
Fractional Shares...................................................... 31
Effective Time.......................................................... 31
Effect on Shares Issuable Under YSI Stock Plans......................... 32
Effect on Shares Issuable Upon Exercise of YSI Warrants................. 32
Federal Income Tax Consequences of the Merger........................... 32
Tax Opinions............................................................ 32
Accounting Treatment.................................................... 34
CSC's Assumption of YSI Debentures...................................... 34
Regulatory and Third Party Approvals.................................... 35
Appraisal Rights........................................................ 35
Interests of Certain Persons in the Merger.............................. 35
Delisting and Deregistration of YSI Common Stock........................ 37
Restrictions on Resales by Affiliates................................... 37
THE STOCKHOLDERS' MEETINGS................................................ 39
Purpose, Time and Place................................................. 39
Record Date; Voting Power............................................... 39
Votes Required.......................................................... 39
Share Ownership of Management........................................... 40
Voting of Proxies....................................................... 40
Revocability of Proxies................................................. 40
Solicitation of Proxies................................................. 41
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ii
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THE MERGER AGREEMENT...................................................... 42
General................................................................. 42
Closing; Effective Time................................................. 42
Articles of Incorporation of Surviving Corporation...................... 42
By-laws of Surviving Corporation........................................ 42
Board and Officers of Surviving Corporation............................. 42
Consideration to be Received in the Merger.............................. 42
Exchange of Certificates; Fractional Shares............................. 42
Representations and Warranties.......................................... 43
Certain Covenants....................................................... 44
No Solicitation......................................................... 44
YSI Stock-Based Awards and YSI Warrants................................. 45
Employee Benefit Plans.................................................. 45
Indemnification and Insurance........................................... 46
Conditions to the Consummation of the Merger............................ 46
Termination............................................................. 47
Expenses................................................................ 48
Amendment, Extension and Waiver......................................... 49
SELECTED CONSOLIDATED FINANCIAL DATA OF CORRECTIONAL SERVICES
CORPORATION.............................................................. 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CORRECTIONAL SERVICES CORPORATION.......................... 51
SELECTED CONSOLIDATED FINANCIAL DATA OF YOUTH SERVICES INTERNATIONAL,
INC. .................................................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF YOUTH SERVICES INTERNATIONAL, INC.......................... 58
CORRECTIONAL SERVICES CORPORATION AND YOUTH SERVICES INTERNATIONAL, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA..................... 68
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INFORMATION CONCERNING CORRECTIONAL SERVICES CORPORATION................. 86
Corporate Structure.................................................... 86
Description............................................................ 86
Business Strategy...................................................... 87
Operational Divisions.................................................. 88
Marketing and Business Development..................................... 88
Contract Award Process................................................. 88
Market................................................................. 89
Competition............................................................ 89
Recent Events.......................................................... 90
Facilities............................................................. 90
Adult Division......................................................... 91
Juvenile Division...................................................... 92
Community Corrections Division......................................... 93
Facility Management Contracts.......................................... 93
Operating Procedures................................................... 93
Facility Design and Construction....................................... 94
Facilities Under Construction.......................................... 94
Employees.............................................................. 94
Employee Training...................................................... 94
Insurance.............................................................. 95
Regulation............................................................. 95
Litigation............................................................. 95
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE
OFFICERS OF CSC......................................................... 96
INFORMATION CONCERNING YOUTH SERVICES INTERNATIONAL, INC................. 98
Description............................................................ 98
Market................................................................. 98
Business Strategy...................................................... 99
YSI Programs........................................................... 100
Consulting and Development Services.................................... 103
Personnel and Training................................................. 104
Litigation............................................................. 106
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE
OFFICERS OF YSI......................................................... 107
WHERE YOU CAN FIND MORE INFORMATION...................................... 109
MANAGEMENT............................................................... 110
Directors and Executive Officers....................................... 110
Committees of the Board of Directors................................... 111
Directors Compensation................................................. 111
Indemnification........................................................ 112
Executive Compensation................................................. 112
Employment Agreements.................................................. 114
Key Employees.......................................................... 114
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 116
DESCRIPTION OF CSC COMMON STOCK FOLLOWING THE MERGER..................... 118
CSC Common Stock....................................................... 118
Nasdaq National Market Matters......................................... 118
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COMPARISON OF RIGHTS OF
HOLDERS OF YSI COMMON
STOCK AND CSC COMMON
STOCK.................... 119
Number of Directors..... 119
Removal of Directors.... 119
Filling Vacancies on the
Board of Directors..... 119
Interested Director
Transactions........... 120
Amendment to Certificate
of Incorporation....... 120
Amendment of By-laws.... 120
Stockholder Meetings and
Provisions for Notices;
Proxies................ 121
Voting by Stockholders.. 121
Stockholder Action
Without a Meeting...... 121
Business Combinations... 122
Control Share
Acquisitions........... 123
Appraisal Rights........ 124
Dividends............... 124
Limitation of Liability
and Indemnification of
Directors and
Officers............... 124
Authorized Capital...... 125
EXPERTS................... 126
LEGAL MATTERS............. 126
CORRECTIONAL SERVICES
CORPORATION CONSOLIDATED
FINANCIAL STATEMENTS..... F-1
YOUTH SERVICES
INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL
STATEMENTS............... G-1
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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
v
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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 109).
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 February 11, 1999, CSC had
agreements to operate 37 correctional and detention facilities in 12 states and
Puerto Rico for an aggregate of approximately 9,900 beds. This represents a
106% increase in the number of agreements and a 294% increase in the number of
beds from December 31, 1997. 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 February 11, 1999, YSI operated 27
residential juvenile justice facilities 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 26)
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 more 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 45 juvenile
rehabilitative facilities with approximately 5,000 beds in 15 states and
Puerto Rico and provide aftercare services to an additional 800 juveniles. The
combined company will have a total of 64 adult and juvenile facilities with
approximately 12,000 beds plus aftercare services. To review the background
and reasons for the merger in greater detail, see pages 16 through 28.
Expected Completion Date of the Merger
We are working to complete the merger in March 1999.
Merger Consideration (page 30)
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 February , 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)
The exchange ratio of .375 of a share of CSC common stock that a YSI common
stockholder will receive in the merger for each share of YSI common stock is
fixed and will not be adjusted in the event of an increase or decrease in the
price of either YSI or CSC common stock. September 23, 1998 was the last full
trading day prior to our announcement of the signing of the merger agreement.
On September 23, 1998 the closing price for YSI common stock was $3 29/32, and
for CSC common stock was $11 1/8. If we had consummated the merger on that
day, YSI stockholders would have received CSC common stock having a market
value of $4.17 for each share of YSI common stock they held. On February 11,
1999, the closing price for YSI common stock was $3 1/2 and for CSC common
stock was $11 1/2. If we had consummated the merger on that day, YSI
stockholders would have received CSC common stock having a market value of
$4.31 for each share of YSI common stock they held. Since the exchange ratio
will not change despite fluctuations in the relative values of the YSI and CSC
common stock, the value of the CSC common stock that YSI stockholders will
receive for each share of YSI common stock held will be based on the market
prices of our common stock on the day we consummate the merger. These prices
could vary from those on either of the above dates. See page 7 for information
concerning comparative market price data for YSI and CSC common stock.
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
2
<PAGE>
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 32 through 34.
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 (pages 23 to 26 and 28 to 30)
YSI. The YSI Board of Directors has obtained an opinion dated September 23,
1998 and an updated opinion dated February , 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 February , 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 39)
You are entitled to vote at your stockholders' meeting if you owned shares
as of the close of business on February , 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.
3
<PAGE>
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.
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 ,
March , 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 40 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 page 31 for further details.
Share Ownership of Management and Certain Stockholders (pages 96 and 107)
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 35)
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
4
<PAGE>
of the merger to the YSI stockholders and the CSC stockholders, respectively.
Please refer to pages 35 through 37 for more information concerning these
interests.
Directors and Executive Officers of CSC Following the Merger (page 110)
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 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 118)
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 35)
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 46)
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 47)
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.
5
<PAGE>
Termination Fee (page 48)
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.
Comparative Rights of Stockholders of YSI and CSC (page 119)
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 124)
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 our joint proxy solicitor:
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 February 11, 1999. September
23, 1998 was the last full trading day prior to our announcement of the signing
of the merger agreement. February 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>
September 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
February 11, 1999....... $ 11 1/2 $ 10 3/8 $ 11 1/2 $ 3 5/8 $ 3 7/16 $ 3 1/2 $4.313 $3.891 $4.313
</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 February 11, 1999)....... 12 1/2 10 4 3/16 3 3/16
</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.................................. 10,417
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 5,169 8,639
Net earnings (loss).................. 1,377 1,496 3,419
Net earnings (loss) per share
Basic................................ $ 0.12 $ 0.13 $ 0.29
Diluted.............................. 0.11 0.12 0.27
<CAPTION>
As of
September 30, 1998
------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital...................... $ 14,942
Total assets......................... 133,322
Long term debt, net of current
portion............................. 44,314
Shareholders' equity................. 48,366
</TABLE>
9
<PAGE>
SUMMARY COMPARATIVE PER SHARE DATA
In reviewing the table below, please note that:
. The YSI historical adjusted information and equivalent pro forma combined
per YSI share include the results of operations and accounts of Community
Corrections, Inc. and exclude the results of operations of the Behavioral
Health business for all periods presented;
. YSI's cash dividends declared 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; and
. The pro forma combined data assume an exchange ratio of .375 of a CSC
share for each share of YSI and the 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 $14,850,000 before income tax benefits.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
CSC--HISTORICAL
Net Income (loss)
Basic.................................. 0.43 0.39
Diluted................................ $0.40 $0.37
Cash Dividends declared per common
share................................... -- --
Book value per basic common share........ 6.09 5.63
YSI--HISTORICAL ADJUSTED
Earnings (loss) per common share
Net Income (loss)
Basic.................................. (0.17) 0.04
Diluted................................ (0.17) 0.03
Cash dividends declared per common share
........................................ -- --
Book value per basic common share........ 1.83 2.14
PRO FORMA COMBINED
Net Income (loss)
Basic.................................. 0.12 0.29
Diluted................................ 0.11 0.27
Cash dividends declared per common
share................................... -- --
Book value per common share.............. 4.72 4.70
EQUIVALENT PRO FORMA COMBINED PER YSI
SHARE
Net Income (loss)
Basic.................................. 0.05 0.11
Diluted................................ 0.04 0.10
Cash dividends declared per basic common
share................................... -- --
Book value per common share.............. 1.77 1.76
</TABLE>
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 February 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 $3 1/2, 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 1/2. 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 June , 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
Discussion 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 $1.7 million of the debentures are entitled to redemption of
their debentures within 90 days after the merger and the holders of the
debentures representing the approximately $30.5 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. Unlike CSC's facilities YSI's juvenile facilities typically do not
have 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 $14.850 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 $4,500,000, 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.
Decreases in Occupancy Levels at Our Facilities May Have a Material Adverse
Effect on Our Business
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
or a 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 contributions from
operations 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.
The Non-Renewal or Termination of Our Facility Management Contracts, Which
Generally Range from One to Three Years, Could Have a Material Adverse Effect
on Our Business
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. Our facility management 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,
including our ability to secure new facility management contracts from others.
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 with or without cause by giving us adequate notice. It is not unusual
for a contracting government agency to notify us that we are not in compliance
with certain provisions of a facility contract. Our failure to cure any such
noncompliance could result in termination of the facility contract, which could
materially adversely affect our financial condition, results of operations and
liquidity. 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.
We Face Financial Risks Relating to Speculative Projects, Including the Loss of
Initial Outlays on Contracts Not Awarded to Us
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.
Our Ability to Secure New Contracts to Develop and Manage Correctional
Detention Facilities Depends on Many Factors We Cannot Control
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.
We Face Risks and Uncertainties in Expanding Our Operations Outside of the
United States and its Territories, Including New and Unfamiliar Regulatory
Requirements, Currency Exchange Issues, Political and Economic Issues, and
Staffing and Managing These 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.
We May Not Be Able to Achieve the Growth We Anticipate, or if Achieved, We May
Not Be Able to Effectively Manage It
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
13
<PAGE>
acquired intangible assets, any of which could have a material adverse effect
on our financial condition, results of operations and liquidity.
We face 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 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.
Our Business is Subject to Unique Governmental Regulation and We Risk
Noncompliance
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 or non-renewal or
termination of our facility management contracts. 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.
The Loss of any CSC Executive Officers Could Have a Material Adverse Effect on
the Combined Company
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 Compliance
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
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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.
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 March , 1999
and at any adjournments or postponements of the meetings.
At their special meeting, the YSI 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 45 juvenile
rehabilitative facilities with approximately 5,000 beds in 15 states and
Puerto Rico, and provide aftercare services to an additional 800
juveniles. This will give the combined company a total of 64 adult and
juvenile facilities with approximately 12,000 beds plus aftercare
services;
. 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 facilities ranging
from services for pre- adjudicated, at-risk juveniles to first-time
and multiple offenders to juvenile aftercare. Unlike CSC's
facilities YSI's juvenile facilities typically do not have fences,
gates and other hardware security measures;
. 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 22 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
21
<PAGE>
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:
-- the structure of the transaction as a tax-free reorganization for
federal income tax purposes;
-- the pooling-of-interests accounting treatment of the merger; and
-- 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:
. 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
. 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;
22
<PAGE>
. 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 substantial estimated direct and indirect costs 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 some of the countervailing
considerations, as follows:
. We established working groups to foster mutual cooperation and
communication, and to minimize unnecessary management distractions
during the transition;
. We have developed a joint communication strategy to address the concerns
of stockholders, clients and employees; and
. 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
CSC retained J.C. Bradford & Co. to act as financial advisor in connection
with the merger.
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.
The full text of the J.C. Bradford opinion is attached to this document as
Annex C. The full text of the J.C. Bradford opinion sets forth the assumptions
made by J.C. Bradford in arriving at its opinion as well as certain
qualifications to the opinion of J.C. Bradford. Furthermore, the full text of
the J.C. Bradford opinion describes the information reviewed by J.C. Bradford
and briefly describes the qualifications of J.C. Bradford to render an opinion
as to the fairness, from a financial point of view, of the merger to the CSC
stockholders, other than the YSI stockholders who will become CSC stockholders.
The summary of the J.C. Bradford opinion is qualified in its entirety by
reference to the full text of the J.C. Bradford opinion.
23
<PAGE>
In preparing its report to the Board of Directors, J.C. Bradford performed a
variety of financial and comparative analyses, which are described below. 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.
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. 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 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. 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 also reviewed the financial contribution of CSC and
YSI to the combined company on a pro forma projected basis. 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, CSC would contribute approximately 58.7% of the
revenue of the combined company, approximately 57.4% of EBITDA and
approximately 63.3% of net income. In each case, 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 --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.
24
<PAGE>
(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. 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. 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.
(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.
25
<PAGE>
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 has received customary fees for the rendering of such services.
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.
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 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;
26
<PAGE>
. 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
. 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;
27
<PAGE>
. 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
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
28
<PAGE>
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 is attached to this document
as Annex B. The full text of the SunTrust Equitable opinion sets forth the
assumptions made by SunTrust Equitable in arriving at its opinion as well as
certain qualifications to the opinion of SunTrust Equitable. Furthermore, the
full text of the SunTrust Equitable opinion describes the information reviewed
by SunTrust Equitable and briefly describes the qualifications of SunTrust
Equitable to render an opinion as to the fairness, from a financial point of
view, of the exchange ratio to the YSI stockholders.
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.
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
</TABLE>
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
29
<PAGE>
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.
<TABLE>
<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>
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.
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
30
<PAGE>
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.
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.
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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 February 11,
1999, options to purchase approximately 892,937 shares of YSI common stock were
outstanding under the YSI Stock Plans at an average exercise price of $12.50
per share. After the merger, such options will be converted to options to
acquire approximately 334,851 shares of CSC common stock at an average exercise
price of $33.33 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 February 11, 1999, 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 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
Prior to 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,
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. 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.
Prior to 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.
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
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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 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.
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In November 1998, YSI obtained agreements from six holders of debentures,
holding approximately $30.5 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, and the requisite waiting
period expired on December 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. 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
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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, among other things:
. YSI enters into an agreement that would result in a change in control;
or
. the stockholders of YSI approve certain mergers, share exchanges or
consolidations or the sale of substantially all assets 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.
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.
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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 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
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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.
Transfer Restrictions. 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 March , 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 February , 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 February , 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:
. delivering, prior to the CSC special meeting, to Ira M. Cotler,
Secretary, CSC, 1819 Main Street, Suite 1000, Sarasota, Florida 34236, a
written notice of revocation bearing a later date or time than the
proxy;
. delivering to the Secretary of CSC a duly executed proxy bearing a later
date or time than the revoked proxy; or
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. 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:
. 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 written notice of revocation
bearing a later date or time than the proxy;
. delivering to the Secretary of YSI a duly executed proxy bearing a later
date or time than the revoked proxy; or
. 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, each of YSI and CSC has retained Corporate Investor
Communications, Inc. to assist it in the solicitation of proxies from
stockholders in connection with the special meetings. Corporate Investor
Communications, Inc. will receive a fee of $4,500 from YSI and $4,000 from CSC,
as compensation for its services and reimbursement of its out-of-pocket
expenses. Each of YSI and CSC has agreed to indemnify Corporate Investor
Communications, Inc. 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 would otherwise be entitled after
taking into account all shares of YSI common stock held of record at the
effective time by the holder, and (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,
which 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;
. 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
. 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:
. 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
. 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
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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 period then ended,
accompanied by the related report of Arthur Andersen LLP to YSI.
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;
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. YSI or CSC if there has been:
- 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
- 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.
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
. 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
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. 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
. 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
. 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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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>
50
<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. In the fourth
quarter of 1998, CSC adopted the Financial Accounting Standards Board Statement
of Position 98-5 on Accounting for the Costs of Start-up Activities; as a
result, 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. In the
fourth quarter of 1998, CSC adopted SOP 98-5; as a result, 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.
51
<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.
52
<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
53
<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.
54
<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
55
<PAGE>
terminates on June , 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 $1.7 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 $30.5 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.
56
<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>
Nine Months Six Months
Ended Year Ended
September 30, Ended December 31, Year Ended June 30,
----------------- Dec. 31, -------------------- -----------------------------------
1998 1997 1997 1996 1995 1996 1995 1994 1993
------- -------- -------- ------- ----------- -------- ------- ------- -------
(unaudited)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement Of Operations
Data:
Revenues................ $67,365 $ 90,685 $116,102 $59,761 $49,240 $103,642 $53,852 $34,943 $ 8,895
Program expenses
Direct operating....... 60,288 78,867 100,496 50,977 42,142 89,421 45,491 29,868 8,397
Start-up costs......... 494 61 211 189 85 58 308 40 392
------- -------- -------- ------- ------- -------- ------- ------- -------
Contribution from
operations............. 6,583 11,757 15,395 8,595 7,013 14,163 8,053 5,025 106
Other operating expenses
Development costs...... 1,570 817 1,297 666 526 840 777 518 302
General and
administrative........ 5,785 6,977 8,992 3,556 2,775 5,467 3,520 2,220 1,293
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.............. -- 27,000 20,898 -- -- -- -- -- --
Costs of attempted
acquisitions.......... -- -- -- -- -- 569 -- -- --
------- -------- -------- ------- ------- -------- ------- ------- -------
(Loss) income from
operations............. (3,877) (24,477) (17,232) 4,373 3,712 7,287 3,756 2,287 (1,489)
------- -------- -------- ------- ------- -------- ------- ------- -------
Other income (expense)
Interest expense....... (1,722) (2,438) (3,095) (1,939) (1,268) (3,209) (284) (403) (173)
Interest income........ 303 356 473 502 44 645 50 51 8
Loss on sale of
investments........... -- (203) (203) (45) -- -- -- -- --
Other income (expense),
net................... 334 (5) (105) (196) (233) (463) (24) 2 (17)
------- -------- -------- ------- ------- -------- ------- ------- -------
(1,085) (2,290) (2,930) (1,678) (1,457) (3,027) (258) (350) (182)
------- -------- -------- ------- ------- -------- ------- ------- -------
(Loss) income before
income taxes........... (4,962) (26,767) (20,162) 2,695 2,255 4,260 3,498 1,937 (1,671)
Income tax (expense)
benefit................ 863 5,554 3,085 (946) (978) (1,856) (1,332) 140 --
------- -------- -------- ------- ------- -------- ------- ------- -------
Net (loss) income....... $(4,099) $(21,213) $(17,077) $ 1,749 $ 1,277 $ 2,404 $ 2,166 $ 2,077 $(1,671)
======= ======== ======== ======= ======= ======== ======= ======= =======
(Loss) earnings per
common share:
Basic.................. $ (0.36) $ (1.96) $ (1.57) $ .18 $ .14 $ .26 $ .25 $ .28 $ (.27)
======= ======== ======== ======= ======= ======== ======= ======= =======
Diluted................ $ (0.36) $ (1.96) $ (1.57) $ .16 $ .13 $ .24 $ .24 $ .26 $ (.27)
======= ======== ======== ======= ======= ======== ======= ======= =======
Weighted average common
shares outstanding:
Basic.................. 11,251 10,846 10,911 9,981 8,987 9,138 8,507 7,399 6,271
======= ======== ======== ======= ======= ======== ======= ======= =======
Diluted................ 11,251 10,846 10,911 10,894 9,765 10,134 9,131 7,961 6,271
======= ======== ======== ======= ======= ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of As of December 31, As of June 30,
September 30, ------------------- ------------------------------
1998 1997 1996 1996 1995 1994 1993
------------- --------- --------- ------- ------- ------- ------ ---
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 6,570 $ 8,015 $ 3,120 $ 7,080 $ 848 $ 3,898 $ 663
Working capital......... 18,478 23,136 13,260 30,267 9,728 6,163 178
Total assets............ 63,520 66,367 94,133 75,507 29,309 18,245 4,704
Long-term obligations,
net of current
portion................ 33,897 33,078 37,235 43,508 7,158 1,391 3,141
Total liabilities....... 42,979 43,032 61,220 51,948 11,666 4,443 5,452
Shareholders' (deficit)
equity................. 20,541 23,335 32,913 23,559 17,643 13,802 (748)
</TABLE>
57
<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 February 11, 1999, YSI
operated 27 residential facilities 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.
58
<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.
59
<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.
60
<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.
61
<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,
62
<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
63
<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.
64
<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.
65
<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
66
<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.
67
<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 17,656 23,336 16,519 15,313
Other operating expenses..... 778 -- -- 3,329 3,910
-------- -------- -------- ------- -------
Income from operations....... 4,124 5,169 8,639 3,791 2,337
Interest expense, net........ (1,543) (1,965) (2,297) (3,317) (1,743)
-------- -------- -------- ------- -------
Income before income taxes... 2,581 3,204 6,342 474 594
Income tax provision......... 1,204 1,708 2,923 323 400
-------- -------- -------- ------- -------
Net earnings................. $ 1,377 $ 1,496 $ 3,419 $ 151 $194
======== ======== ======== ======= =======
Net earnings per share:
Basic...................... $ 0.12 $ 0.13 $ 0.29 $ 0.02 $ 0.02
======== ======== ======== ======= =======
Diluted.................... $ 0.11 $ 0.12 $ 0.27 $ 0.01 $ 0.02
======== ======== ======== ======= =======
Balance sheet data:
Working capital.............. $ 14,942
Total assets................. $133,322
Long-term debt, net of
current portion............. $ 44,314
Shareholders' equity......... $ 48,366
</TABLE>
68
<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.
69
<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.................................................... 72
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Nine Months Ended September 30, 1998.................................... 73
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For the Nine Months Ended September 30, 1998................................ 74
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Nine Months Ended September 30, 1997.................................... 75
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For the Nine Months Ended September 30, 1997................................ 76
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1997............................................ 77
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1997............................................ 78
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1996............................................ 79
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1996............................................ 80
Correctional Services Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1995............................................ 81
Youth Services International, Inc.
Unaudited Pro Forma Combined Condensed Statements of Operations
For Year Ended December 31, 1995............................................ 82
Notes to Unaudited Pro Forma Combined Condensed Financial Statements........ 83
</TABLE>
70
<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.
71
<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)(3) 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 4,500 (3) 17,993
6,000 (7)
Other................. 5,116 4,755 (1,400)(3) 8,471
------- -------- ------- --------
$76,652 $ 63,520 $(6,850) $133,322
======= ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and
accrued liabilities.. $17,772 $ 8,389 $12,560 (3) $ 38,721
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 12,560 40,642
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
AND LOSS RESERVES...... 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) (9,878)(3) (31,252)
(9,532)(7)
------- -------- ------- --------
47,235 20,541 (19,410) 48,366
------- -------- ------- --------
$76,652 $ 63,520 $(6,850) $133,322
======= ======== ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
72
<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 11,365 12,518
======= ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
73
<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 provision
(benefit).............. (863) 86 (949)
------- ------- -------
Net loss................ $(4,099) $(2,180) $(1,919)
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
74
<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 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.
75
<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)
-------- -------- -------
Income (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.
76
<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.
77
<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 provision
(benefit).............. (3,085) (3,985) 900
-------- -------- -------
Net earnings (loss)..... $(17,077) $(17,470) $ 393
======== ======== =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
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<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................ $ (0.30) $ 0.19 $ 0.01
======= ======= =======
Weighted average shares
outstanding:
Basic.................. 5,782 9,521 9,352
======= ======= =======
Diluted................ 6,272 10,435 10,185
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
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<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.
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<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................ $ (0.34) $ 0.20 $ 0.02
======= ======= =======
Weighted average shares
outstanding:
Basic.................. 4,553 8,732 7,828
======= ======= =======
Diluted................ 5,127 9,511 8,695
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
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<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 before income
taxes.................. 4,752 1,368 3,384
Income tax provision.... 1,956 506 1,450
------- ------- -------
Net earnings............ $ 2,796 $ 862 $ 1,934
======= ======= =======
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
82
<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. As of September 30, 1998, CSC has capitalized
$418,000 and YSI has expensed $472,000 of transaction and related costs.
The following describes the pro forma adjustments to record the effect of
the transaction and related costs as of September 30, 1998.
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.
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<PAGE>
The adjustment to increase accounts payable and accrued liabilities by
$12,560,000 represents the $14.850 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 $9,878,000 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 adopted during the fourth
quarter of fiscal 1998.
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<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 Statements."
<TABLE>
<CAPTION>
Year Ended December 31,
Nine Months Ended --------------------------
September 30, 1998 1997 1996 1995
------------------ ------- -------- --------
<S> <C> <C> <C> <C>
CSC--HISTORICAL
Net Income (loss)
Basic........................ $ 0.43 $ 0.39 $ (0.32) $ (0.38)
Diluted...................... 0.40 0.37 (0.32) (0.38)
Cash Dividends declared per
common share.................. -- -- -- --
Book value per basic common
share......................... 6.09 5.63
YSI--HISTORICAL ADJUSTED(1)
Earnings (loss) per common
share
Net Income (loss)
Basic........................ (0.17) 0.04 0.21 0.22
Diluted...................... (0.17) 0.03 0.19 0.20
Cash dividends declared per
common share(2)............... -- -- -- --
Book value per basic common
share......................... 1.83 2.14
PRO FORMA COMBINED(3)(4)
Net Income (loss)
Basic........................ 0.12 0.29 (0.01) 0.02
Diluted...................... 0.11 0.27 (0.01) 0.02
Cash dividends declared per
common share.................. -- -- -- --
Book value per common share.... 4.72 4.70
EQUIVALENT PRO FORMA COMBINED
PER YSI SHARE(1)
Net Income (loss)
Basic........................ 0.05 0.11 0.00 0.01
Diluted...................... 0.04 0.10 0.00 0.01
Cash dividends declared per
basic common share............ -- -- -- --
Book value per common share.... 1.77 1.76
</TABLE>
- --------
(1) Includes the results of operations and accounts of Community Corrections,
Inc. 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 $14,850,000 before income tax
benefits.
85
<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 February 11, 1999
CSC had agreements to operate 37 correctional and detention facilities in 12
states and Puerto Rico for an aggregate of approximately 9,900 beds. This
represents a 106% increase in the number of agreements and 294% increase in the
number of beds from December 31, 1997. Of these agreements, 18 agreements
representing approximately 2,700 beds in 7 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:
. substance abuse offenders;
. parole violators;
. pre-trial detainees;
. females; and
. sex offenders.
CSC's juvenile division focuses on secure facilities which provide:
. rehabilitative services for large populations (over 200);
. intensive treatment programs including educational and vocational
services;
. treatment for habitual offenders;
. specialized female services;
. detention services; and
. 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.
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<PAGE>
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, 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 22 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.
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:
. control over the use of the facility;
. improved long term returns;
. ability to expand capacity; and
. 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.
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<PAGE>
Operational Divisions
CSC has organized its operations into three divisions: Adult, Juvenile and
Community Corrections.
Adult. The Adult Division operates 15 facilities, seven in Texas, two in
Arizona and one in each of Colorado, Mississippi, New Mexico, Oklahoma and
Washington, with a total of 6,621 beds. 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 and a 96 bed facility in Clark County, Nevada. The
juvenile facilities house convicted youths aged 12 to 20 and represent a total
of approximately 2,650 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.
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
88
<PAGE>
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:
. the current size and growth projections of the available correctional and
detention population;
. whether or not a minimum capacity level is guaranteed;
. the willingness of the contracting authority to allow CSC to house
populations of similar classification within the proposed facility for
other governmental agencies; and
. 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 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
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<PAGE>
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 October 20, 1998, CSC announced it had commenced operations of a 1,200
bed adult prison in Crowley, Colorado. This facility is CSC's largest facility
and its first in the State of Colorado.
On December 14, 1998 CSC commenced operations at the Tallulah Correctional
Center for Youth in Tallulah, Louisiana. The facility is a 700 bed secure
treatment facility and CSC believes this facility is the largest of its kind to
be privately operated in the United States.
On February 8, 1999, CSC announced it had finalized a contract to operate a
96 bed secure treatment facility in Clark County, Nevada. CSC believes this
facility is the first of its kind to be privatized in that state.
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 February 11, 1999:
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 Prison State Owned
Phoenix West
Phoenix, Arizona (1996)
Arizona State Prison, 600 Prison State Owned
Florence
Florence, Arizona
(1997)
McKinley County Jail 200 Jail/Long-Term County/Multi-State Managed
Gallup, New Mexico Detention
(1997)
Frio County Jail 300 Jail/Long-Term County/State/Federal Part-Leased/
Pearsall, Texas (1997) Detention Part-Owned
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 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 County/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 Secure Treatment County Managed
Residential Facility Facility
Okaloosa, Florida
(1998)
Bayamon Detention Center 120 Secure Detention Commonwealth of Managed
Bayamon, Puerto Rico Facility Puerto Rico
(1998)
Bayamon Treatment 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--Not Yet
Operational)
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 Treatment 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)
North Las Vegas, Nevada 96 Secure Treatment State Managed
Facility (2000--Not Yet Facility
Operational)
</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 with or 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 rehabilitative and
educational programs, such as academic or vocational education, job and life
skills training, counseling, substance abuse programs, and work and
recreational programs.
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<PAGE>
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. Several of our facilities 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 February 11, 1999, CSC had approximately 3,839 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.
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
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<PAGE>
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 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.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS OF CSC
The following table sets forth certain information as of February 11, 1999,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of CSC common stock by:
. each person known by CSC to beneficially own more than 5% of the
outstanding shares of CSC common stock;
. each executive officer named in the summary compensation table included
under "Management" and each director of CSC; and
. all executive officers and directors of CSC as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes shares over which the person or entity has voting or
investment power, and shares issuable to such person or entity pursuant to
options exercisable within 60 days of the Record Date. In calculating
beneficial ownership after the merger, we have assumed that there will be
12,155,062 shares outstanding based on the number of shares of YSI common stock
outstanding on February 11, 1999 and the fixed exchange ratio in the merger of
.375 of a share of CSC common stock for each share of YSI common stock.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the merger After the merger
---------------------------------- ---------------------
Number of Total Number of
Shares Shares and
issuable upon Shares issuable
exercise or upon exercise
conversion of or conversion of
Total convertible convertible
Name and Address of Number of securities securities
Beneficial Owner Shares within 60 days+ % within 60 days %
- ------------------- --------- --------------- ---- ---------------- ----
<S> <C> <C> <C> <C> <C>
Esther Horn(1).......... 637,175 -- 8.1% 637,175 5.4%
James F. Slattery(1).... 815,967(2) 24,825 10.6 840,792 6.9
Aaron Speisman(1)....... 420,795 18,135++ 5.5 438,930 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........... 13,518(2) 108,850(3)++ 1.5 122,368 1.0
Richard P. Staley....... -- 32,708 * 32,708 *
Michael C. Garretson.... -- 96,250 1.2 96,250 *
Stuart Gerson........... -- 36,975++ * 36,975 *
Melvin T. Stith......... -- 22,500 * 22,500 *
Shimmie Horn............ -- 6,667 * 6,667 *
Gilder, Gagnon, Howe &
Co.(3)(4).............. 2,144,740 -- 27.1 2,941,990(5) 24.2
Greenville Capital
Management
Inc. (4)(6)............ 480,466 -- -- 480,466 --
All officers and
directors as a group
(eight persons)........ 1,417,156 346,910 21.3 1,764,066 14.1
</TABLE>
- --------
*Less than 1%
+ Consists of shares issuable upon exercise of options unless otherwise voted.
++ Includes shares issuable upon exercise of warrants for: Mr. Spiesman--6,700
shares; Mr. Cotler--8,850 shares; and Mr. Gerson--3,850 shares.
(1) Address is c/o Correctional Services Corporation, 1819 Main Street, Suite
1000, Sarasota, Florida 34236.
(2) Includes 2,612 shares of CSC common stock owned by his wife as to which he
disclaims beneficial ownership.
(3) Address is 1775 Broadway, 6th 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
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<PAGE>
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.
(4) The information regarding the beneficial ownership of common stock by such
person or entity 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 February 11, 1999.
(5) Includes 797,250 shares of CSC common stock into which Gilder, Gagnon's
2,144,740 shares of YSI common stock as of the record date of the special
meeting are convertible in the merger. This share information is based on
a Schedule 13G filed with the SEC by Gilder, Gagnon on August 11, 1998.
(6) Address is P.O. Box 220, Rockland, Delaware 19732. Based on a Schedule 13G
filed with the SEC by Greenville Capital Management Inc. on February 10,
1999. Greenville Capital Management Inc., an investment adviser, has sole
dispositive power over these shares.
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<PAGE>
INFORMATION CONCERNING
YOUTH SERVICES INTERNATIONAL, INC.
Description
YSI is a leading national provider of private educational, developmental and
rehabilitative facilities 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 February 11, 1999, YSI operated 27 residential juvenile justice facilities
in 12 states serving approximately 2,300 youth and conducted non-residential
facilities 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
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 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
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<PAGE>
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:
. develop new programs through RFP and de novo privatization;
. increase the licensed capacity of its existing programs;
. expand its range of services; and
. pursue mergers and acquisitions.
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
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<PAGE>
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 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.
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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.
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
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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.
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 February 11,
1999 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 225 225
Reflections Treatment
Agency, TN Sexual Offender Sep-92 RFP 52 47
Forest Ridge Youth Serv-
ices, IA Female Academy Feb-93 Acquisition 140 140
Charles H. Hickey, Jr. Academy/High Impact/ Jul-93 RFP 330 339
School, MD Detention/Sexual Offender
Chamberlain Academy, SD Academy Nov-93 Acquisition 78 80
Springfield Academy, SD Academy Nov-93 Acquisition 108 80
Tarkio Academy, MO Academy/Sexual Offender Sep-94 De Novo 302 200
Woodward Academy, IA Academy/Sexual Offender Jul-95 RFP 98 82
Camp Washington, VA Boot Camp Jan-96 RFP 45 33
Everglades Academy, FL Academy Dec-96 RFP 102 102
Keweenaw Academy, MI Academy Jan-97 De Novo 148 145
Los Hermanos, TX Academy Jan-97 Acquisition 60 56
Cypress Creek Academy,
FL Academy Mar-97 RFP 100 77
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 52 45
Snowden Cottage Academy,
DE Academy Nov-97 RFP 18 16
Elmore Academy, MN Academy Apr-98 De Novo 100 82
Chanute Transition Cen-
ter, IL Transition Jul-98 De Novo 50 49
Cotulla Boot Camp, TX Boot Camp Jul-98 Acquisition 60 48
Hondo Detention Center,
TX Detention Jul-98 Acquisition 15 16
Lockhart Boot Camp, TX Boot Camp/Detention July-98 Acquisition 38 32
San Marcos Boot Camp, TX Boot Camp/Detention Jul-98 Acquisition 76 62
Stuart Nunn Boot Camp,
TX Boot Camp Jul-98 Acquisition 36 15
Texarkana Boot Camp, TX Boot Camp/Detention July-98 Acquisition 148 112
JoAnn Bridges Academy,
FL Female Academy Sep-98 RFP 30 27
----- -----
Total 2,713 2,355
===== =====
</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 February 11, 1999:
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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND EXECUTIVE OFFICERS OF YSI
The following table presents certain information, as of February 11, 1999,
based on information obtained from the persons named below, regarding the
beneficial ownership of shares of YSI common stock by:
.each of the current YSI directors and named executive officers of YSI as
set forth in its 1998 Proxy Statement;
.all current directors and executive officers of YSI as a group; and
.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 over which the person or entity has voting or
investment power, and shares issuable to such person or entity pursuant to
options exercisable within 60 days of the Record Date. In calculating
beneficial ownership of CSC common stock after the merger, we have assumed that
there will be 12,155,062 shares outstanding based on the number of shares of
YSI common stock outstanding on February 11, 1999 and the fixed exchange ratio
in the merger of .375 of a share of CSC common stock for each share of YSI
common stock.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Merger After the Merger
-------------------------------------- --------------------------
CSC
YSI Common Stock Common Stock
-------------------------------------- --------------------------
Number of
Number of Shares
Shares and shares
issuable upon issuable upon
exercise or exercise or
conversion of conversion of
convertible convertible
Name and Address of Number of securities securities
Beneficial Owner Shares within 60 days % within 60 days %
- ------------------- --------- -------------- ---- ---------------- -------
<S> <C> <C> <C> <C> <C>
Timothy P. Cole......... 16,000 191,668 1.8% 77,875 *
Mark S. Demilio......... -- 50,000 * 18,750 *
Alan J. Andreini........ 35,001 16,279 * 19,230 *
James A. Flick, Jr...... 5,279 10,012 * 5,734 *
Lenneal J. Henderson.... 3,800 10,300 * 5,287 *
Bobbie L. Huskey........ 4,386 13,752 * 6,801 *
All current directors
and executive officers
as a group
(6 persons)............ 64,466 292,011 3.1 133,679 1.1%
Gilder, Gagnon, Howe & 2,126,000(1)(2) -- 18.8 2,941,990(3) 24.2
Co.....................
1775 Broadway, 26th
Floor
New York, NY 10019
Jacob May............... 1,796,300(1)(4) -- 15.9 673,613 5.5
1900 Church Street,
Suite 400
Nashville, TN 37203
Essex Investment
Management Company..... 844,562(1)(5) -- 7.5 316,711 2.6
125 High Street
Boston, Massachusetts
02110
Forest Investment 605,453(1)(6) -- 5.3 227,045 1.9
Management LLC.........
53 Forest Avenue Old
Greenwich, Connecticut
06870
HBK Investments L.P..... -- 686,828(1)(7) 5.7 257,560 2.1
777 Main Street, Suite
2750
Fort Worth, Texas 76102
J.P. Morgan & Co. Inc... 625,700(1)(8) -- 5.5 234,638 1.9
60 Wall Street
New York, New York
10260
Wellington Management
Company, LLP........... 1,116,900(1)(9) -- 9.9 418,837 3.4
75 State Street
Boston, Massachusetts
02109
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of outstanding Common
Stock.
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(1) The information regarding the beneficial ownership of Common Stock by such
individual or entity 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 or entity
in such report and the number of shares of Common Stock issued and
outstanding as of February 11, 1999.
(2) 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.
(3) Based on a Schedule 13G filed with the SEC by Gilder, Gagnon on August 11,
1998, includes 2,144,740 shares of CSC Common Stock beneficially owned as
of February 11, 1998.
(4) 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.
(5) 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.
(6) 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.
(7) Based upon an Amendment to Schedule 13D filed with the SEC on February 11,
1999 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 $2,590,000 principal amount of YSI's
7% Convertible Subordinated Debentures due 2006 (the "Convertible
Debentures"), HBK Offshore Fund Ltd. ("Offshore") owns $1,800,000
principal amount of the Convertible Debentures, Finance owns $4,039,500
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 352,044 shares issuable to Securities and Offshore;
Investments and Finance will have shared voting power and shared
dispositive power with regard to 323,937 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.
(8) 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.
(9) Based on an Amendment No. 2 to Schedule 13G filed with the SEC on February
10, 1999 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 396,000 shares and shared dispositive power with
regard to 1,116,900 shares.
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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 February
, 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.
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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 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 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.
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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 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
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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 $100,000 for that year (the "Named
Executives"):
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Number of
Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Year ($) ($) ($)(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.
----------------
The following table sets forth information relating to options granted to
Mr. Slattery, the only executive officer named in the Summary Compensation
Table who was granted options during CSC's fiscal year ended December 31, 1998:
<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>
OPTION GRANTS IN LAST FISCAL YEAR
These 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>
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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 finalizing 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 compensation 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. CSC is in the process of finalizing the
remainder of the terms of Mr. Cotler's compensation. These options become
exercisable at the annual rate of 8,333 shares, commencing on 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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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 Jackson 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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<PAGE>
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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<PAGE>
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
. any person who beneficially owns 10% or more of the voting power of the
corporation's outstanding voting stock,
. 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
. 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:
. 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
. 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
. 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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<PAGE>
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:
. one-fifth or more but less than one-third;
. one-third or more but less than a majority; or
. 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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<PAGE>
. the act or omission of the director or officer was material to the
matter giving rise to the proceeding and
-- was committed in bad faith, or
-- was the result of active and deliberate dishonesty,
. the director or officer actually received an improper personal benefit
in money, property or services, or
. 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 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
. 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.
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<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.
126
<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 FACILITY LOSS RESERVES........... 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 --
Facility loss reserves for 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 based on management's
expectation of the outcome from negotiations occurring during the fourth
quarter of 1996 with the respective contracting agencies. The New York State
contract expiring in 1997 was not expected to be renewed. In addition, the Fort
Worth community was against the continued housing of residents at CSC's halfway
house. These factors resulted in substantially reduced occupancy levels and
operating losses being sustained at both programs. As a result, CSC accrued
certain expenses at December 31, 1996, and has written down certain assets
related to each program.
In December 1996, CSC notified the contracting agency, Texas Department of
Criminal Justice, that the entire Fort Worth facility will be closed by April
1, 1997. CSC estimated the costs to be incurred to exit the facility and
charged these costs 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 and insurance through the lease
expiration date of May 1999. CSC began winding down the operations of the
Program in the first quarter of 1997 and closed a portion of the facility.
Subsequently, CSC was asked by the TDCJ to leave the remaining 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. Management evaluated the terms of the
amended contract with the TDCJ and determined that it would result in a loss.
This loss approximated the remaining unamortized closure reserve associated
with its original decision to close the Ft. Worth facility. CSC believes that
the remaining balance of the contract loss reserves reserved at December 31,
1997 totaling $243,000 is adequate to offset the estimated losses to be
incurred under the amended contract. CSC's decision to continue to operate the
facility in accordance with the terms of the amended contract is based on its
desire to offset a portion the fixed obligations of CSC pertaining to the
building. These obligations will continue regardless of whether or not CSC
actually operates the program.
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 at CSC's Brooklyn and Manhattan, New York
locations. Such expenses include rents and related costs, real estate taxes and
insurance from April 1, 1997 through the expiration of the locations' operating
leases on December 31, 1998 and April 30, 2000, respectively. CSC continued to
operate its programs for the Federal Bureau of Prisons at these
F-15
<PAGE>
locations. However, management estimated it would incur a loss under its
contract to operate the BOP program at its Manhattan facility and accordingly
at December 31, 1996 established a reserve for the estimated loss totalling
approximately $646,000.
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 signed
contracts to operate these two programs, the State did not give a minimum
occupancy guarantee and did not increase the per diem rate. It is CSC's belief
that the populations in the Manhattan, DOC and BOP programs and the Brooklyn
DOC program will continue to fluctuate and such operations will result in
losses under the contractual obligations. CSC believes that the unamortized
balance of the closure and contractual loss reserves originally recorded in
connection with its decision to discontinue these operations totaling
$1,496,000 is adequate to offset the estimated losses to be incurred by CSC
under these contracts at December 31, 1997. CSC's decision to operate these
programs is based on its desire to offset a portion 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
Facility loss reserves........................................... 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.
Facility loss reserves are management's estimate of the losses incurred by CSC
under fixed contractual obligations to deliver its program services at the Ft.
Worth and New York facilities. These costs include rent and related facility
costs and CSC's direct costs to deliver the program services net of any
revenues generated under the contracts.
Facility loss reserves are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Facility loss reserves................................ $1,737,741 $2,566,504
Less current portion.................................. 982,741 960,504
---------- ----------
Long-term portion of facility loss reserves........... $ 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 contract loss reserves costs totaling $828,764.
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.. 39% 10% 5%
Immigration Naturalization Service...... 15% 28%
Arizona Department of Corrections....... 11% 14%
Various Local Agencies within the State
of Texas............................... 20% 26% 20%
Texas Department of Criminal Justice.... 21% 25%
Federal Bureau of Prisons............... 25% 27%
New York Department of Corrections...... 14% 14%
</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 FACILITY LOSS RESERVES......... 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, are deferred until the anticipated contract has been
awarded. Costs of unsuccessful or abandoned contracts are charged to expense
when their recovery is not considered probable. Deferred development costs
consist primarily of legal costs paid to third parties for services regarding
issues for land use, permits, zoning and contracts, professional and consulting
services paid to third parties (for example: developers, architects, engineers
and program consultants directly involved in evaluating and securing
contracts), direct travel and related costs incurred to secure contracts,
proposal preparation costs incurred for successful bids (primarily copying,
binding and delivery costs) and fees paid to various agencies under specific
awarded contracts. 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.
Facility start-up costs 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. Facility start-up costs consist primarily
of employee training costs (primarily wages and related payroll costs paid to
all facility staff prior to opening of a facility) fees paid to third party
trainers, travel costs and other direct start up expenses incurred. The effect
of including the option periods in determining the amortization period of
deferred development and start-up costs is not material to CSC's financial
position or results of operations.
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. Subsequent to September 30, 1998 CSC elected to adopt
SOP 98-5 for the year ended December 31, 1998. As a result CSC will write off
existing unamortized deferred development and start up costs as of January 1,
1998 totalling approximately $8.0 million. This write off will be accounted for
as a cumulative effect of a change in accounting principle and will be
presented net of related income taxes totalling approximately $3.0 million.
In addition, CSC will expense deferred development and start up expenses
deferred during 1998 and reverse the related amortization expense recorded in
1998. For the nine months ended September 30, 1998 this will decrease CSC's
operating income by approximately $9.0 million and its net income by
approximately $5.4 million.
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 June , 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 Public Accountants.............................. G-2
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... G-3
Consolidated Statements of Operations for the year ended December 31,
1997, the six months ended December 31, 1996 and the years ended
December 31, 1996 and 1995........................................... G-4
Consolidated Statement of Stockholders' Equity for the year ended
December 31, 1997, the six months ended December 31, 1996 and the
years ended December 31, 1996 and 1995............................... G-5
Consolidated Statements of Cash Flows for the year ended December 31,
1997, the six months ended December 31, 1996 and the years ended
December 31, 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 LLP
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)
<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 (Loss) Pro Forma
Revenue Income Net (Loss) 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>
Pro Forma
Net (Loss) Net (Loss)
Revenue Income 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 (loss) 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 (FASB) issued
Statement of Financial Accounting Standard (SFAS) 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.
Deferred Revenue
Deferred revenue consists of advance payments for services which will be
recognized as revenue as the related services are performed.
G-9
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
G-10
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 7) 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.
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.
G-11
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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.
G-12
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 closure 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 FROM OPERATIONS.................................... (3,877) (24,477)
INTEREST AND OTHER EXPENSE, net......................... (1,085) (2,290)
------- ---------
LOSS BEFORE TAXES....................................... (4,962) (26,767)
INCOME TAX BENEFIT...................................... (863) (5,554)
------- ---------
NET LOSS................................................ $(4,099) $ (21,213)
======= =========
LOSS 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 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").
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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 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.
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(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.
(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
A-3
<PAGE>
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.
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<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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<PAGE>
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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<PAGE>
(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 against risks to which Parent and its properties are
exposed in such amounts and subject to such terms as are commercially
reasonable.
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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 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
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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;
(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
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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 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
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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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<PAGE>
(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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<PAGE>
(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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<PAGE>
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
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<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.
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<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>
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<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>
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<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.
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"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 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
A-42
<PAGE>
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."
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.
A-43
<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.
/s/ Mark S. Demilio
By: ____________________________
Name: Mark S. Demilio
Title:Senior Vice President,
General Counsel and Acting
Chief Financial Officer
CORRECTIONAL SERVICES CORPORATION
/s/ James F. Slattery
By: ____________________________
Name: James F. Slattery
Title:President
PALM MERGER CORP.
/s/ James F. Slattery
By: ____________________________
Name: James F. Slattery
Title:President
A-44
<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)
4.3 Form of CSC Series A Warrant.(1)
4.4 Form of CSC 10% Subordinated Promissory Note.(1)
4.5 Form of Placement Agent's Warrant between CSC and Janney Montgomery
Scott Inc.(1)
4.6 YSI's 12% Subordinated Debenture Due December 31, 2002.(11)
4.7 Form of YSI's 7% Convertible Subordinated Debentures Due February 1,
2006.(12)
4.8 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)
4.9 Indenture, dated October 15, 1996, by and between YSI and the Chase
Manhattan Bank, as trustee.(27)
4.10 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 together with form of
guaranty from CSC.
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>
II-3
<PAGE>
<TABLE>
<C> <S>
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 dated 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.
10.71 YSI's Stock Option Plan.(11)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.72 YSI's Board of Directors Compensation Plan.(13)
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 June 24, 1996.
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.
10.99.5 Contract Buyout Agreement, dated as of December 21, 1998, by and between YSI and
Golden Eagle Education & Training Inc. (formerly International Youth Institute).
10.99.6 Amendment to Contract Buy-Out Agreement dated as of January 6, 1999 by and between
YSI and Golden Eagle Education & Training, Inc. (formerly International Youth
Institute, Inc.).
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
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.
+10.109 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, effective as of November 30, 1998
by and among YSI, each of its subsidiaries and Signet Bank.
10.111 Second Allonge to Amended and Restated Master Revolving Promissory Note from YSI
and certain of its subsidiaries to Signet Bank effective 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.
10.113 Form of Exchange Agent Agreement between CSC and American Stock Transfer & Trust
Company.
10.114 Construction/Installment Purchase and Management Services Contract by and among
CSC, the State of Nevada, Department of Human Resources, Nevada Real Property
Corporation and Clark & Sullivan Constructors--Rite of Passage, Inc. dated
February 2, 1999.
10.115 Form of Proxy Solicitor Agreement.
*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.
*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>
- --------
* Previously Filed.
+ 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
II-6
<PAGE>
(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).
(12) Incorporated by reference to Exhibit 4.4 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.
II-7
<PAGE>
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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.
(c) 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.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) hereof, 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.
II-8
<PAGE>
(e) 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.
(f) 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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 16th day of February, 1999.
CORRECTIONAL SERVICES CORPORATION
*
By: _________________________________
Ira M. Cotler
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
President, Chief
* Executive Officer, February 16,
- ------------------------------------- Chairman of the 1999
James F. Slattery Board and Director
(Principal
Executive Officer)
* Chief Financial February 16,
- ------------------------------------- Officer (Principal 1999
Ira M. Cotler Financial and
Accounting Officer)
Director February ,
- ------------------------------------- 1999
Aaron Speisman
Director
* February 16,
- ------------------------------------- 1999
Richard P. Staley
Director
* February 16,
- ------------------------------------- 1999
Stuart M. Gerson
Director
* February 16,
- ------------------------------------- 1999
Shimmie Horn
Director
* February 16,
- ------------------------------------- 1999
Melvin T. Stith
/s/ Ira M. Cotler
* By____________________________
Ira M. Cotler
Attorney-in-fact
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
2.1 Agreement and Plan of Merger, dated as of September 23,
1998, among YSI, CSC and Palm Merger Corp.(28)
<C> <S> <C>
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)
4.3 Form of CSC Series A Warrant.(1)
4.4 Form of CSC 10% Subordinated Promissory Note.(1)
4.5 Form of Placement Agent's Warrant between CSC and
Janney Montgomery Scott Inc.(1)
4.6 YSI's 12% Subordinated Debenture Due December 31,
2002.(11)
4.7 Form of YSI's 7% Convertible Subordinated Debentures
Due February 1, 2006.(12)
4.8 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)
4.9 Indenture, dated October 15, 1996, by and between YSI
and the Chase Manhattan Bank, as trustee.(27)
4.10 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 together with form of guaranty from CSC.
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>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
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> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<C> <S> <C>
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<C> <S> <C>
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)
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 dated May 26, 1998
between CSC and Jefferson County, Texas for the
Operation and Management of the Jefferson County
Detention Facility in Beaumont, Texas.(9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<C> <S> <C>
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.
10.71 YSI's Stock Option Plan.(11)
10.72 YSI's Board of Directors Compensation Plan.(13)
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 June 24,
1996.
10.99.2 Amended and Restated Training Services Agreement
between YSI and International Youth Institute, dated
as of January 1, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<C> <S> <C>
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.
10.99.5 Contract Buyout Agreement, dated as of December 21,
1998, by and between YSI and Golden Eagle Education &
Training Inc. (formerly International Youth
Institute).
10.99.6 Amendment to Contract Buy-Out Agreement dated as of
January 6, 1999 by and between YSI and Golden Eagle
Education & Training, Inc. (formerly International
Youth Institute, Inc.).
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.
+10.109 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,
effective as of November 30, 1998 by and among YSI,
each of its subsidiaries and Signet Bank.
10.111 Second Allonge to Amended and Restated Master
Revolving Promissory Note from YSI and certain of its
subsidiaries to Signet Bank effective 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.
10.113 Form of Exchange Agent Agreement between CSC and
American Stock Transfer & Trust Company.
10.114 Construction/Installment Purchase and Management
Services Contract by and among CSC, the State of
Nevada, Department of Human Resources, Nevada Real
Property Corporation and Clark & Sullivan
Constructors--Rite of Passage, Inc. dated February 2,
1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
------- ------------
<C> <S> <C>
10.115 Form of Proxy Solicitor Agreement.
*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.
*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>
- --------
* Previously Filed.
+ 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).
(12) Incorporated by reference to Exhibit 4.4 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).
<PAGE>
(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.
<PAGE>
EXHIBIT 4.10
November 23, 1998
________________________
________________________
________________________
Dear Sirs:
You are currently a holder of a total of $_________ of 7% Convertible
Subordinated Debentures Due 2006 of YSI (the "Debentures") issued under an
Indenture dated October 15, 1996 between Youth Services International, Inc.
("YSI") and The Chase Manhattan Bank, as Trustee (the "Indenture"). Capitalized
terms not otherwise defined herein shall have the meanings assigned to them in
the Indenture.
YSI has entered into an Agreement and Plan of Merger dated as of
September 23, 1998 by and among YSI, Correctional Services Corporation ("CSC")
and Palm Merger Corp., a wholly-owned subsidiary of CSC ("Merger Subsidiary),
which contemplates the merger of Merger Subsidiary with and into YSI (the
"Merger"). As structured, the Merger, when completed, will constitute a
Designated Event under the terms of the Indenture, triggering your right to
require YSI to redeem the Debentures on the Holder Redemption Date, which is
approximately 90 days after the date of the closing of the Merger (the "Closing
Date"). YSI and CSC have considered restructuring the transaction in a manner
that would not constitute a Designated Event and thereby not trigger your
redemption right. In lieu of restructuring the transaction, CSC has requested
that YSI enter into this letter agreement with you.
In consideration for YSI's agreement not to restructure the Merger in
a manner that would not constitute a Designated Event, and of the other
covenants and agreements set forth herein, you hereby agree as follows:
1. You hereby waive your right to, and agree that you will not,
surrender any of the Debentures, deliver a Redemption Notice or take any other
action to exercise your right to require YSI to redeem the Debentures on the
Holder Redemption Date relating to the Merger.
2. YSI will not consent to any restructuring of the Merger in a
manner that would not constitute a Designated Event under the Indenture.
3. YSI will, at your option, repurchase the Debentures from you for
cash, at 100% of the principal amount of the Debentures, plus accrued and unpaid
interest to the date of repurchase (and Additional Amounts, if any), on the date
that is one year from the Closing Date
<PAGE>
(the "Repurchase Date"). In order to exercise your option hereunder, and as a
condition to such repurchase, on or before the close of business on the fifth
business day prior to the Repurchase Date, you will surrender the Debentures to
be redeemed, together with the Redemption Notice, at Youth Services
International, Inc. 2 Park Center Court, Suite 200, Owings Mills, Maryland
21117, or such other place as designated by YSI in writing to you in advance of
the fifth business day prior to the Repurchase Date.
4. You agree that, beginning on the date hereof and ending on the
first day following the Holder Redemption Date with respect to the merger, you
will not, directly or indirectly, sell, offer to sell, grant any option for the
sale of, or otherwise dispose of, any Debentures, unless the transferee agrees
to be bound by the terms hereof (including this paragraph 4) and evidences such
agreement by executing a counterpart to this letter agreement, (which will
thereupon also be binding on YSI on behalf of the transferee) or an identical
agreement with YSI. YSI agrees that from the period beginning on the second day
after the Holder Redemption Date with respect to the merger and ending on the
Repurchase Date, YSI will execute a counterpart to this agreement, or an
identical agreement, on behalf of any transferee of the Debentures who so
requests. It is understood and agreed that any transferee after the Holder
Redemption Date that does not execute a counterpart or identical agreement will
have no right to redeem with respect to the Merger.
5. You hereby represent and warrant to YSI that:
a. you have such knowledge and experience in financial and business
matters that you are capable of evaluating the merits and risks of the waiver
and repurchase contemplated hereby;
b. you are an "Accredited Investor" within the meaning of one or
more paragraphs (1), (2), (3) or (8) of Rule 501(a) under the Securities Act of
1933; and
c. You understand and are able to bear any economic risks associated
with the waiver and repurchase contemplated hereby.
6. It is understood that YSI's obligation to make payments of
principal, interest and Additional Amounts (if any) to you in connection with
the repurchase of the Debentures hereunder shall be subordinated and subject in
right of payment to the priority rights of holders of Senior Indebtedness to the
extent and in the manner set forth in Section 8 of the Indenture.
7. All terms of the Indenture not contrary to the provisions hereof
shall remain outstanding and in full force and effect.
8. YSI covenants that no other holder of the Company's 7% Convertible
Subordinated Debentures due 2006 who agrees to waive its right to deliver a
Redemption Notice to require YSI to redeem the Debentures on the Holder
Redemption Date relating to the Merger
2
<PAGE>
has received or will receive in exchange therefor any right that is more
favorable to such holder than the rights received by you.
Please indicate your agreement to the terms hereof by causing this
letter agreement to be duly executed on your behalf where indicated below.
Sincerely,
______________________________________
Mark S. Demilio
Senior Vice President General Counsel
and Acting Chief Financial Officer
Youth Services International, Inc.
ACCEPTED AND AGREED TO:
By: _______________________________
Name: _______________________________
Title: _______________________________
3
<PAGE>
CORRECTIONAL SERVICES CORPORATION
GUARANTY
Guaranty, dated as of November 23, 1998, by Correctional Services
Corporation, a Delaware corporation ( the "Guarantor"), in favor of
__________________ ("Holder").
WHEREAS, Guarantor has entered into an Agreement and Plan of Merger dated
as of September 23, 1998, by and among Youth Services International, Inc.
("Guarantied Party"), Guarantor and Palm Merger Corp., a wholly-owned subsidiary
of Guarantor, providing for the merger (the "Merger") of Palm Merger Corp. with
and into Guarantied Party. Upon consummation of the Merger, Guarantied Party
will become a wholly-owned subsidiary of Guarantor. In connection with the
Merger, Guarantor has requested that Guarantied Party obtain Holder's consent to
waive certain rights it has as a holder of Guarantied Party's 7% Convertible
Subordinated Debentures Due 2006 (the "Debentures"). Guarantied Party has
promised to redeem the Debentures on the first anniversary of the Merger, for
cash.
1. Guaranty. To induce Holder to enter into a letter agreement with
--------
Guarantied Party, dated as of November 12, 1998, pursuant to which
Holder will waive certain rights under the Debentures (the
"Modification Agreement"), and provided the Merger shall have
occurred in the manner contemplated in the Modification Agreement,
Guarantor unconditionally and irrevocably guaranties to Holder, its
successors, endorsees, and assigns, the prompt payment when due of
all present and future obligations and liabilities of all kinds of
Guarantied Party to Holder arising out of or relating to the
Modification Agreement (the "Obligations").
2. Absolute Guaranty. Guarantor's obligations hereunder shall not
-----------------
be affected by the genuineness, validity, regularity, or
enforceability (except to the extent the lack of enforceability
relates to an action or inaction of Holder) of the Obligations or
of any instrument evidencing the Obligations, or by the existence,
validity, enforceability, perfection or extent of any collateral
therefor, or by any other circumstance relating to the Obligations
which might otherwise constitute a defense to this Guaranty. Holder
shall not be obligated to file any claim relating to the
Obligations in the event that Guarantied Party becomes subject to a
bankruptcy, reorganization, or similar proceeding, and the failure
of Holder so to file shall not affect Guarantor's obligations
hereunder. In the event that any payment of Guarantied Party to
Holder in respect of any Obligations is rescinded or must otherwise
be returned for any reason whatsoever, Guarantor shall remain
liable hereunder in respect to such Obligations as if such payment
had not been made. Guarantor agrees that its obligations under this
Guaranty constitute a guaranty of payment and performance and not
of collection.
1
<PAGE>
3. Consents, Waiver Agreements, and Renewals. Guarantor agrees that
------------------------------------------
Holder may at any time and from time to time, either before or
after the maturity thereof, without notice to or further consent of
Guarantor, extend the time of payment of, exchange or surrender any
collateral for, or renew, any of the Obligations, and may also make
any agreement with Guarantied Party or with any other party to or
person liable on any of the Obligations, or interested therein, for
the extension, renewal, payment, compromise, discharge, or release
thereof, in whole or in part, or for any modification of the terms
thereof, or of any agreement between Holder and Guarantied Party or
any such other party or person, without in any way impairing or
affecting this Guaranty. Guarantor agrees that Holder may resort to
Guarantor for payment of any of the Obligations, whether or not
Holder shall have resorted to any collateral or shall have
proceeded against any other obligor principally or secondarily
obligated with respect to any of the Obligations.
4. Expenses. Guarantor agrees to pay on demand all out-of-pocket
---------
expenses (including the reasonable fees and expenses of Holder's
attorneys) in any way relating to any action taken following
Guarantor's default hereunder for the enforcement or protection of
the rights of Holder hereunder.
5. Subrogation. Guarantor shall not exercise any rights which it may
------------
acquire by way of subrogation until all of the Obligations to
Holder shall have been paid in full. If any amount shall be paid to
Guarantor in violation of the preceding sentence, such amount shall
be held in trust for the benefit of Holder and shall forthwith be
paid to Holder to be credited and applied to the Obligations,
whether matured or unmatured. Subject to the foregoing, upon
payment of all of the Obligations, Guarantor shall be subrogated to
the rights of Holder against Guarantied Party, and Holder agrees to
take at Guarantor's expense such steps as Guarantor may reasonably
request to implement such subrogation.
6. Continuing Guaranty. This Guaranty is absolute, unconditional, and
--------------------
irrevocable and shall remain in full force and effect and be
binding upon Guarantor, its successors and assigns, until all of
the Obligations have been satisfied in full. If any of the present
or future Obligations are guarantied by individuals or entities in
addition to Guarantor, the death, release, or discharge, in whole
or in part, or the bankruptcy, liquidation, termination, or
dissolution of one or more of them shall not discharge or affect
the liabilities of Guarantor under this Guaranty.
7. No Waiver: Cumulative Rights. No failure on the part of Holder to
-----------------------------
exercise, and no delay in exercising, any right, remedy, or power
hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise by Holder of any right, remedy, or power
hereunder preclude any other or
2
<PAGE>
future exercise of any right, remedy, or power. Each and every
right, remedy, and power hereby granted to Holder or allowed it by
law or other agreement shall be cumulative and not exclusive of any
other, and may be exercised by Holder from time to time.
8. Waiver of Notice. Guarantor waives notice of the acceptance of
-----------------
this Guaranty, notice of the Obligations, presentment to or demand
of payment from anyone whomsoever liable upon any of the
Obligations, presentment, demand, notice of dishonor or non-
payment, protest, diligence, suit, notice of any sale of any
collateral, notice of the taking of other action by Holder against
Guarantied Party, Guarantor, or others, and any and all other
notices whatsoever.
9. Representations and Warranties.
-------------------------------
(a) Guarantor is duly organized, validly existing, and in good
standing under the law of the jurisdiction of its formation
and has full corporate power and authority to execute,
deliver, and perform this Guaranty.
(b) The execution, delivery, and performance of this Guaranty
have been and remain duly authorized by all necessary
action and do not contravene any provision of Guarantor's
certificate of incorporation, as amended to date, or any
law, rule, regulation, decree, order, judgment, guideline,
policy, or resolution, or any contractual restriction
binding on Guarantor or its assets.
(c) All consents, licenses, clearances, authorizations, and
approvals of, and registrations and declarations with, any
governmental or regulatory authority necessary for the due
execution, delivery, and performance of this Guaranty have
been obtained and remain in full force and effect and all
conditions thereof have been duly complied with, and no
other action by, and no notice to or filing with, any
governmental or regulatory authority is required in
connection with the execution, delivery, or performance of
this Guaranty.
(d) This Guaranty constitutes the legal, valid, and binding
obligation of Guarantor, enforceable against Guarantor in
accordance with its terms.
10. Assignment. Neither Guarantor nor Holder may assign its rights,
-----------
interests, or obligations under this Guaranty to any other person
without the prior written consent of Guarantor or Holder, as the
case may be, except that Holder (or its permitted assignee) may
assign its rights, interests, or obligations under this Guaranty
to any transferee of the Debentures provided
3
<PAGE>
Holder (or its permitted assignee) has complied with the
provisions of paragraph 4 of the Modification Agreement.
11. Governing Law. This Guaranty shall be governed by, and construed
--------------
and enforced in accordance with, the law of the State of Texas
applicable to contracts made and to be performed within such State
without reference to choice of law doctrine.
12. Partial Invalidity. In the event that any provision of this
-------------------
Guaranty is declared to be illegal, invalid, or otherwise
unenforceable by a court of competent jurisdiction or regulatory
authority, the remainder of this Guaranty shall not be affected
except to the extent necessary to delete such illegal, invalid, or
unenforceable provision unless the deletion of such provision
would substantially impair the respective benefits of the
remaining portions of this Guaranty.
IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered by
Guarantor to Holder as of the date first written above.
CORRECTIONAL SERVICES CORPORATION
By:
-------------------------------
Ira M. Cotler
Executive Vice President, Chief
Financial Officer
ACCEPTED and AGREED,
By:____________________________
Name:__________________________
Title:___________________________
4
<PAGE>
EXHIBIT 5
---------
[LETTERHEAD OF EPSTEIN BECKER & GREEN, P.C.]
February 16, 1999
Correctional Services Corporation
1819 Main Street
Suite 1000
Sarasota, Florida 34236
Ladies and Gentlemen:
We have acted as counsel to Correctional Services Corporation (the
"Company") in connection with its filing on February 8, 1999 with the Securities
and Exchange Commission of a registration statement on Form S-4 (which
registration statement, as amended at the time of its effectiveness is
hereinafter referred to as the "Registration Statement") covering shares of the
Company's authorized and unissued shares of common stock, $.01 par value (the
"Shares").
As such counsel, we have examined original copies, or copies certified
to our satisfaction, of the corporate records of the Company, agreements and
other instruments, certificates of public officials and such other documents as
we deemed necessary as a basis for the opinion hereinafter set forth.
On the basis of the foregoing, we are of the opinion that the Shares
have been validly authorized and, when issued in the manner referred to in the
Registration Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of such Registration Statement.
Very truly yours,
EPSTEIN BECKER & GREEN, P.C.
/s/ Epstein Becker & Green, P.C.
<PAGE>
EXHIBIT 8.1
-----------
[LETTERHEAD OF EPSTEIN BECKER & GREEN, P.C.]
February 16, 1999
Correctional Services Corporation
1819 Main Street - Suite 1000
Sarasota, Florida 34236
Re: Agreement and Plan of Merger among Correctional Services
Corporation, Palm Merger Corp., and Youth Services International, Inc.
----------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Correctional Services Corporation, a
Delaware corporation ("Parent"), and Palm Merger Corp., a Maryland corporation
wholly owned by Parent ("Merger Subsidiary"), in connection with the proposed
merger (the "Merger") of the Merger Subsidiary with and into Youth Services
International, Inc., a Maryland corporation (the "Company"), pursuant to the
terms of the Agreement and Plan of Merger, dated as of September 23, 1998 (the
"Merger Agreement"), by and among the Company, the Parent and the Merger
Subsidiary, as described in more detail in the Merger Agreement. This opinion
is being provided in satisfaction of the condition set forth in Section 7.2(e)
of the Merger Agreement. All capitalized terms, unless otherwise specified,
have the meanings assigned to them in the Merger Agreement.
In connection with the preparation of this opinion, we have examined
and with your consent relied upon (without any independent investigation or
review thereof) originals or copies, certified or otherwise identified to our
satisfaction, of the following documents (including all exhibits and schedules
thereto): (1) the Agreement; (2) the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (the "Registration Statement")
and/or the Proxy Statement/Prospectus of Parent and the Company; (3) certain
written representations and certifications made to us by Parent; (4) certain
written representations and certifications made to us by the Company (such
representations and certifications of the Parent and the Company, collectively
referred to herein as the "Representations and Warranties," are annexed hereto
as exhibits); (5) instruments and documents related to the formation,
organization and operation of Parent, Merger Subsidiary and the Company or to
the consummation of the Merger and the
<PAGE>
Correctional Services Corporation
February 16, 1999
Page 2
transactions contemplated thereby and (6) such other documents as we have deemed
necessary or appropriate to enable us to render the opinion below. In addition,
we have reviewed the form of opinion of counsel received by the Company from the
Company's counsel, Hogan & Hartson L.L.P., with respect to the tax consequences
of the proposed transaction (the "Company Counsel's Opinion").
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such copies.
In connection with rendering this opinion, we also have assumed or
obtained representations that:
1. All information contained in each of the documents we have examined
and relied upon in connection with the preparation of this opinion is accurate
and completely describes all material facts relevant to our opinion, all copies
are accurate and all signatures are genuine. We have also assumed that there has
been (or will be by the Effective Time of the Merger) due execution and delivery
of all documents where due execution and delivery are prerequisites to the
effectiveness thereof.
2. The Merger will be consummated in accordance with the Maryland
General Corporation Law and will qualify as a statutory merger under such law.
3. All representations made in the exhibits hereto are true, correct,
and complete in all material respects. Any representation or statement made "to
the best of knowledge" or similarly qualified is correct without such
qualification.
4. The Merger will be consummated in accordance with the Agreement and
as described in the Proxy Statement/Prospectus (including satisfaction of all
covenants and conditions to the obligations of the parties without amendment or
waiver thereof); each of Parent, Merger Subsidiary and the Company will comply
with all reporting obligations with respect to the Merger required under the
Internal Revenue Code of 1986, as amended (the "Code") and the Treasury
Regulations promulgated thereunder; and the Agreement and all other documents
and instruments referred to therein or in the Proxy Statement/Prospectus are
valid and binding in accordance with their terms.
5. The Company Counsel's Opinion has been concurrently delivered and
not withdrawn.
<PAGE>
Correctional Services Corporation
February 16, 1999
Page 3
Opinion - Federal Income Tax Consequences
-----------------------------------------
Based upon and subject to the qualifications and assumptions set forth
herein, and assuming that, as of the Effective Time of the Merger and following
the Merger there will be no acts or omissions which will violate or be
inconsistent with any of the Representations and Warranties, we are of the
opinion that:
1. The Merger will constitute a reorganization pursuant to Section
368(a) of the Code and Parent, Merger Subsidiary and the Company will each be
"party to the reorganization" within the meaning of Section 368(b) of the Code;
and
2. No gain or loss will be recognized for United States Federal income
tax purposes by the Parent or Merger Subsidiary as a result of the Merger.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
1. This opinion is based upon applicable current provisions of the
Code, Treasury Regulations, and interpretations of the foregoing as expressed in
pertinent judicial authorities, administrative determinations (including the
practices and procedures of the Internal Revenue Service (the "IRS")) of the
IRS, and such other authorities as we have considered relevant, all as of the
date hereof. An opinion of counsel merely represents counsel's best judgment
with respect to the probable outcome on the merits and is not binding on the IRS
or the courts. There can be no assurance that positions contrary to our opinion
will not be taken by the IRS, or that a court considering the issues would not
hold contrary to such opinion. Parent has not requested a ruling from the IRS
(and no ruling will be sought) as to any of the federal income tax consequences
addressed in this opinion. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. We undertake no responsibility to advise you of any new
developments in the law or in the application or interpretation of the Federal
income tax laws.
2. This letter addresses only the specific tax opinion set forth above.
This letter does not address any other Federal, state, local or foreign tax
consequences that may result from the Merger or any other transaction (including
any transaction related to the Merger or contemplated by the Merger Agreement).
3. Our opinion is intended to address only the United States Federal
tax consequences to Parent and Merger Subsidiary and is not intended to address
(nor may it be relied upon with respect to) the tax consequences to the Company
or the Company's shareholders.
<PAGE>
Correctional Services Corporation
February 16, 1999
Page 4
4. Our opinion set forth herein is based upon the description of the
contemplated transactions as set forth above in the Agreement and the Proxy
Statement/Prospectus. If the actual facts relating to any aspect of the
transactions differ from this description in any material respect, our opinion
may become inapplicable. In the event any of the Representations and Warranties
or any of the assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
This opinion is provided solely for the use of Parent. This opinion
may not, without our prior consent, be relied upon, used, circulated, quoted or
otherwise referred to in any manner by any other person, firm, governmental
authority, entity or party whatsoever, including the Company shareholders. We
hereby consent to the use of this opinion letter as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement.
In giving the consent, we do not thereby admit that we are an "expert" within
the meaning of the Securities Act of 1933, as amended.
Sincerely yours,
EPSTEIN BECKER & GREEN, P.C.
/s/ Epstein Becker & Green, P.C.
<PAGE>
EXHIBIT 8.2
February 16, 1999
Board of Directors and Shareholders
Youth Services International, Inc.
2 Park Center Court
Suite 200
Owings Mills, Maryland 21117
Gentlemen/Ladies:
This opinion is being delivered to you in accordance with Section
7.3(d) of the Merger Agreement (the "Agreement") dated as of September 23, 1998,
by and among Youth Services International, Inc. (the "Company"), a Maryland
corporation, Correctional Services Corporation ("Parent"), a Delaware
corporation and Palm Merger Corp. ("Merger Subsidiary"), a Maryland corporation
wholly owned by Parent. Pursuant to the Agreement, Merger Subsidiary will be
merged with and into the Company (the "Merger").
In connection with the preparation of this opinion, we have examined
and with your consent relied upon (without any independent investigation or
review thereof) the following documents (including all exhibits and schedules
thereto): (1) the Agreement; (2) the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (the "Registration Statement")
and/or the Proxy Statement/Prospectus of Parent and the Company; (3)
representations and certifications made to us by Parent; (4) representations and
certifications made to us by the Company; (5) such other instruments and
documents related to the formation, organization and operation of Parent, Merger
Subsidiary and the Company or to the consummation of the Merger and the
transactions contemplated thereby as we have deemed necessary or appropriate.
In addition, we have reviewed the form of opinion of counsel, received by Parent
from Parent's counsel, Epstein Becker & Green, P.C., with respect to the tax
consequences of the proposed transaction (the "Parent Counsel's Opinion"). 1/
-
- --------------------------
1/ All capitalized terms used herein and not otherwise defined shall have the
- -
same meaning as they have in the Agreement. All section references, unless
<PAGE>
Youth Services International, Inc.
February 16, 1999
Page 2
The Proposed Transaction
------------------------
Based solely upon our review of the documents set forth above, and
upon such information as Parent, Merger Subsidiary and the Company have provided
to us (which we have not attempted to verify in any respect), and in reliance
upon such documents and information, we understand that the proposed transaction
and the relevant facts with respect thereto are as follows:
Parent is the owner of all of the outstanding stock of Merger
Subsidiary, a Maryland corporation. Parent is a developer and operator of adult
and juvenile correctional facilities for federal, state and local governments.
In addition, Parent is an operator of private secure juvenile correctional
facilities. Merger Subsidiary was organized solely for the purpose of
accomplishing the merger described below.
The Company is a provider of private educational, developmental and
rehabilitative programs to adjudicated juveniles.
Because it is believed that the businesses of Parent and the Company
would be complimentary, it is proposed that pursuant to the Agreement and the
laws of the State of Maryland, Merger Subsidiary merge with and into the
Company. Merger Subsidiary's separate corporate existence will cease and the
Company will be the surviving corporation (the "Surviving Corporation"). As the
Surviving Corporation, the Company will succeed to all of the assets and
liabilities of Merger Subsidiary under Maryland General Corporation Law.
By virtue of the Merger, each Share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of
Company Common Stock to be canceled) will be converted into, and become
exchangeable for the right to receive the Merger Consideration, consisting of
.375 shares of Parent Common Stock (the "Exchange Ratio"). At the Effective
Time, each share of common stock of Merger Subsidiary issued and outstanding
immediately prior to the Effective Time will be converted into one validly
issued, fully paid and nonassessable share of common stock, $0.01 par value, of
the Surviving Corporation. At the Effective Time, each Company Warrant will 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
- ------------------------------------------------------------------------------
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
<PAGE>
Youth Services International, Inc.
February 16, 1999
Page 3
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.
No fractional share of Parent Common Stock will be issued, and, in
lieu thereof, a cash payment will be made equal to 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 for
the twenty most recent days that Parent Common Stock has traded ending on the
last full trading day prior to the Effective Time. No appraisal rights will be
available in connection with the Merger.
Assumptions and Representations
-------------------------------
In connection with rendering this opinion, we have assumed or obtained
representations (and, with your consent, are relying thereon, without any
independent investigation or review thereof, although we are not aware of any
material facts or circumstances contrary to or inconsistent therewith) that:
1. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion is
accurate and completely describes all material facts relevant to our opinion,
all copies are accurate and all signatures are genuine. We have also assumed
that there has been (or will be by the Effective Time of the Merger) due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
2. The Merger will be consummated in accordance with applicable state
law and will qualify as a statutory merger under applicable state law.
3. All representations made in the exhibits hereto are true, correct,
and complete in all material respects. Any representation or statement made "to
the best of knowledge" or similarly qualified is correct without such
qualification.
4. The Merger will be consummated in accordance with the Agreement
and as described in the Proxy Statement/Prospectus (including satisfaction of
all covenants and conditions to the obligations of the parties without
<PAGE>
Youth Services International, Inc.
February 16, 1999
Page 4
amendment or waiver thereof); each of Parent, Merger Sub and the Company will
comply with all reporting obligations with respect to the Merger required under
the Code and the Treasury Regulations thereunder; and the Agreement and all
other documents and instruments referred to therein or in the Proxy
Statement/Prospectus are valid and binding in accordance with their terms.
5. The Parent Counsel's Opinion has been concurrently delivered and
not withdrawn.
Opinion - Federal Income Tax Consequences
-----------------------------------------
Based upon and subject to the assumptions and qualifications set forth
herein, it is our opinion that for Federal income tax purposes the following
will result:
1. The Merger will qualify as a reorganization pursuant to Section
368(a) of the Code and Parent, Merger Subsidiary and the Company will each be a
party to such "reorganization" within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by the Company as a result of
the Merger.
3. No gain or loss will be recognized by a holder of Company Common
Stock upon the exchange of its shares solely for shares of Parent Common Stock
pursuant to the Merger, except with respect to cash, if any, received by a
holder of Company Common Stock in lieu of a fractional share of Parent Common
Stock.
In addition to the assumptions set forth above, this opinion is
subject to the exceptions, limitations and qualifications set forth below:
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the practices and procedures of the
Internal Revenue Service (the "IRS") in issuing private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives
such a ruling) and published rulings and procedures all as of the date hereof.
An opinion of counsel merely represents counsel's best judgment with respect to
the probable outcome on the merits and is not binding on the Internal Revenue
Service or the courts. There can be no assurance that positions contrary to our
opinions will not
<PAGE>
Youth Services International, Inc.
February 16, 1999
Page 5
be taken by the IRS, or that a court considering the issues would not hold
contrary to such opinions. Parent has not requested a ruling from the IRS (and
no ruling will be sought) as to any of the federal income tax consequences
addressed in this opinion. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the opinion
expressed herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the law or in the application or interpretation of the
federal income tax laws.
2. This letter addresses only the specific tax opinions set forth
above. This letter does not address any other federal, state, local or foreign
tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger).
3. Our opinion is intended to address only the tax consequences to
the Company and the holders of Company Common Stock and is not intended to
address (nor may it be relied upon for) the tax consequences to Parent or Merger
Subsidiary. We express no opinion regarding, among other things, the tax
consequences of the Merger (including the opinion set forth above) as applied to
specific holders of Company Common Stock that may be relevant to particular
classes of holders of Company Common Stock, such as dealers in securities,
corporate shareholders subject to the alternative minimum tax, foreign persons,
and holders of shares acquired upon exercise of stock options or in other
compensatory transactions.
4. Our opinion set forth herein is based upon the description of the
contemplated transactions as set forth above in the section captioned "The
Proposed Transaction," the Agreement and the Proxy Statement/Prospectus. If the
actual facts relating to any aspect of the transactions differ from this
description in any material respect, our opinion may become inapplicable. No
opinion is expressed as to any transaction other than those set forth in the
section captioned "The Proposed Transaction," the Agreement and the Proxy
Statement/Prospectus or to any transaction whatsoever, including the Merger, if
all the transactions described in the section captioned "The Proposed
Transaction," the Agreement and the Proxy Statement/Prospectus are not
consummated in accordance with the terms of the section captioned "The Proposed
Transaction," the Agreement and the Proxy Statement/Prospectus and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which
<PAGE>
Youth Services International, Inc.
February 16, 1999
Page 6
we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion is provided to the Company and the holders of Company
Common Stock only, and without our prior consent, may not be relied upon, used,
circulated, quoted or otherwise referred to in any manner by any person, firm,
governmental authority or entity whatsoever other than reliance thereon by the
Company and the holders of Company Common Stock. Notwithstanding the prior
sentence, we hereby consent to the use of the opinion letter as an exhibit to
the Registration Statement and to the use of our name in the Registration
Statement. In giving the consent, we do not thereby admit that we are an
"expert" within the meaning of the Securities Act of 1933, as amended.
Sincerely yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 10.99.1
TRAINING SERVICES AGREEMENT
This Training Services Agreement is entered into as of this 24th day of
June, 1996 by and between Youth Services International, Inc. (hereafter referred
to as "YSI") with offices at 2 Park Center Court, Suite 200, Owings Mills,
Maryland 21117 and International Youth Institute, Inc. (hereafter referred to as
"IYI"), a Maryland corporation with principal offices at 901 N. Pitt Street,
Suite 250, Alexandria, VA 22314.
1. Scope of Services
-----------------
During the term of this Agreement, IYI shall furnish the training-related
services set forth in the Scope of Services attached hereto as Attachment I of
this Agreement.
2. Professional Service Fees
-------------------------
IYI- shall receive compensation for the training services performed as set
forth in Attachment I of this Agreement. Said compensation shall be broken down
as follows:
(i) Tier 1 - Basic Training Program. The mutually agreed upon price
for the basic training services provided to YSI by IYI under this
Agreement, as stated in Attachment I Scope of Service is $862,896.00
($71,908.00/month) per year, for each year of this Agreement. Payment for
Tier I services will be advanced by YSI with monthly invoices to be
itemized by program to facilitate YSI records.
(ii) Tier 2 - Elective Training. IYI shall make additional, elective
training courses available to YSI and shall be compensated on an
incremental, hourly basis. This compensation shall be based upon the fixed
rate of $10.00 per student training hour for all training that falls
outside the scope of the Tier I program as stated in Attachment I to this
Agreement.
(iii) Annual Administrative Fee. YSI agrees that, in addition to the
basic training program fee and any fees pertaining to elective training, an
annual administrative fee of $25,000 shall be paid to IYI by YSI at the
beginning of each contract year.
(iv) The fees stated in paragraphs (i) and (ii) above shall include
all direct expenses (including but not limited to travel, accommodations,
transportation, and meals; outside consultants or professionals retained by
IYI; special report preparation; communications and other direct costs
directly attributable to the services performed).
-1-
<PAGE>
(v) The fees stated in paragraphs (i) and (ii) above include $317,230
for trainer salaries and benefits, an amount which is subject to adjustment
based upon actual cost incurred.
For a detailed breakdown of these fees, refer to Attachment II of this
Agreement.
3. Payment
-------
(a) IYI shall be paid on a monthly basis at the agreed upon rate in
accordance with the payment schedule in Attachment II of this Agreement.
(b) IYI shall submit invoices following the end of each calendar month, at
YSI's address, as stated in the opening paragraph of this Agreement.
(c) Payments to IYI pursuant to this Agreement shall be made no later than
twenty (20) days after receipt by YSI of a proper invoice from IYI.
(d) YSI shall issue all payments directly to iii at the address stated in
the opening paragraph of this Agreement.
4. Limitations on Authority
------------------------
In performing services for YSI, IYI shall be an independent contractor, not
an employee or agent of YSI. Neither IYI nor YSI shall have the right or
authority to make or undertake any promise, warranty, or representation, to
execute any contract, or otherwise to assume any obligation or responsibility in
the name or on behalf of the other unless specifically authorized in writing by
an authorized official of the other party.
5. Indemnification
---------------
(a) YSI shall indemnify IYI against liability for any suits, action, or
claims of any character arising from or relating to IYI's performance under this
Agreement, given that IYI has billed its contractual obligations to YSI under
this Agreement.
(b) YSI shall assume fill' responsibility for meeting its regulatory or
third party contractual obligations and shall indemnity IYI against liability
for any suits, action, or claims of any character arising from or relating to
YSI's failure to meet said obligations.
(c) YSI shall immediately notify IYI of any claim or suit made or filed
against YSI regarding any matter resulting from or relating to IYI's-obligations
under the Agreement, and will cooperate, assist, and consult with IYI in the
defense or
-2-
<PAGE>
investigation of any claim, suit, or action made or filed against IYI as a
result of or relating to IYI's performance under this Agreement.
6. Assignment and Succession
-------------------------
Neither party may assign or transfer any of the rights or obligations under
this Agreement without prior written consent of the other party. All rights and
obligations of the parties hereunder shall be binding on their successors.
7. Liaison and Notice
------------------
(a) Any notice or other communication required or permitted to be given
under this Agreement by either party shall be given for all purposes by delivery
in person, by certified air mail, postage prepaid (return receipt requested), to
the address of the other party as listed in the opening paragraph of this
Agreement.
(b) Until further notice, YSI designates David B. Dolch as the liaison to
--------------
IYI for all purposes hereunder, and any requests-by YSI for services shall be
channeled through him. Until further notice, IYI designates John R. Allen,
President, as the liaison with YSI for all purposes hereunder, and any requests
from YSI for services shall be directed to him.
(c) Such notice shall take effect upon receipt by the addressee; if notice
is not delivered in person and if any doubt arises as to date of receipt, notice
shall be deemed to have been received upon expiration of ten days from the date
of posting if by certified mail.
(d) Any dispute or controversy arising out of or in connection with this
a, or the breach, or validity thereof, shall be settled by final and binding
arbitration in accordance with Arbitration Rules of the American Arbitration
Association.
8. Governing Law
-------------
This Agreement and any related agreements and any arbitration proceeding
Agreement or thereunder shall be governed by the laws of the State of Maryland,
without regard to its conflict of laws rules.
9. Severability
------------
Any term or provision of this Agreement which may be held illegal, invalid
or unenforceable shall be ineffective to the extent of such illegality,
invalidity, or unenforceability without rendering illegal, invalid, or
unenforceable the remaining terms and provisions of this Agreement to the extent
that continuation of the remaining portions of the Agreement does not constitute
a material impairment of the rights and obligations under this Agreement.
-3-
<PAGE>
10. Waiver
------
No waiver by a party hereto of any default by the other party in the
performance of any provision, condition, or requirement herein shall be deemed
to be a waiver of, or in any manner release the other party from performance of
any other provision, condition, or requirement herein; nor shall it be deemed to
be a waiver of, or in any manner a release of the other party from, future
performance of the same provision, condition, or requirement. Any delay or
omission of a party hereto to exercise any right hereunder shall not impair the
exercise of any such right, or any like right, accruing to it thereafter. No
waiver by one party of a right created by this Agreement shall constitute a
waiver of such right by the other patty except as may otherwise be required by
law with respect to persons not parties hereto.
11. Term of Agreement
-----------------
The term of this Agreement shall be three years, beginning July 1, 1996 and
ending June 30, 1999.
12. Amendments
----------
(a) This Agreement contains the entire agreement of the parties with
respect to the subject matter hereof and cancels and supersedes any and all
prior agreements.
(b) This Agreement may be amended only by the express written consent of
both parties.
13. Termination
-----------
This Agreement can be terminated at any time upon the occurrence of any of
the following:
1) By the solvent party in the event of any court of competent jurisdiction:
(i.) filing an order adjudicating the other party bankrupt; (ii.)
appointing a trustee or receiver of the property, or of a substantial part
of such property, of the other party; or (iii.) approving a petition for or
effecting an arrangement in bankruptcy.
2) The event of a default which consists of: (i.) the failure of YSI to
compensate IYI in accordance with the payment requirements established in
this agreement, and /or (ii) the failure of IYI to substantially perform
under this agreement in providing the contemplated services to YSI.
-4-
<PAGE>
3) Upon 90 days written notice, either party may terminate this agreement.
14. Acceptance
----------
IN WITNESS WHEREOF, YSI and IYI have caused this Agreement to be executed
by their duly authorized representatives.
Youth Services International, Inc. International Youth Institute, Inc.
By: /s/ Henry D. Felton By: /s/ John R. Allen
------------------- -----------------
Name: Name: John R. Allen
-------------------------- -----------------------
Title: Title: President
------------------------- -----------------------
Date: July 3, 1996 Date: July 3, 1996
------------ ------------
-5-
<PAGE>
ATTACHMENT 1
SCOPE OF SERVICES
Beginning July 1, 1996, and throughout the following year, International
Youth Institute, Inc. (IYI) will provide a basic training program for Youth
Services International (YSI) programs and facilities. This Tier I training
program is outlined below:
TIER I. BASIC TRAINING PROGRAM
A. TRAINING PROGRAM STRUCTURE
--------------------------
1. PROGRAM FACILITY TRAINING NEEDS ASSESSMENT
On-site assessment at individual employee and program level.
2. QUALITY ASSURANCE, PERFORMANCE ANALYSIS, AND MONTHLY REPORTING
Ensure program quality and consistency, monitor training progress, and
track performance for reporting at individual program level as well as
aggregate analysis and reporting of corporate-wide status and
outcomes. Monthly reports will include training accomplished during
the last month, cumulative training for the current fiscal year-to-
date, and projections of the following month as well as the remainder
of the quarter and fiscal year.
B. BASIC TRAINING COURSES
----------------------
1. ORIENTATION (PRE-SERVICE) TRAINING FOR ALL NEW EMPLOYEES
Based on current staffing levels and turnover rate as well as standard
orientation course length (2300 FETs, 47% turnover, 1092 new employees
per year, 48-hour course). Training costs permit no more than 2
orientation courses at one location during a single month. Orientation
curriculum is attached.
2. ANNUAL ACCREDITATION CONTINUATION TRAINING
Continuation/accreditation training will be based on current staffing
levels and standard annual re-certification requirements in health,
safety, security, and crisis intervention.
C. INDEPENDENT STUDY, VIDEO AND CORRESPONDENCE COURSES
---------------------------------------------------
-6-
<PAGE>
The Tier I Basic Training Program does not include any independent study,
video or correspondence courses.
In addition to the basic Tier I training program, IYI will also make
elective training courses available to YSI. For the purpose of this Agreement,
all elective training courses shall be considered tier II options.
TIER II. ELECTIVE TRAINING OPTIONS
A. TRAINING COURSES
----------------
Course offerings will be based on (1) program training needs
assessment, and (2) Youth Development Professional Certification
Levels I through IV. Since Tier I training under this Agreement does
not include comprehensive continuation, in-service, and career
development training, responsiveness to additional training
requirements will depend on lead time and scope of potential training
B. INDEPENDENT STUDY, VIDEO, AND CORRESPONDENCE COURSES
----------------------------------------------------
The normal transition process toward full integration will proceed as
shown on the following page. Specific actions may vary based on
individual program needs, but integration will follow the same 90-day
time schedule and will begin on July 1, 1996.
TIER III. PROGRAM SPECIFIC ADJUSTMENTS
Any addition or deletion of programs or facilities will result in
an addendum to this Agreement based on, but not limited to, the
following factors: staff size, distribution of staff by job category,
lead time or activation or deactivation of the program, nature of
services provided (e.g., juvenile justice residence program,
behavioral health group homes, etc.), and applicable statutory and
regulatory standards. Compensation of any programmatic adjustments
shall be negotiated on a case-by-case basis and shall be agreed upon
in writing by both parties in said addendum.
-7-
<PAGE>
ATTACHMENT 1 (Continued)
BASIC TRAINING ORIENTATION CURRICULUM
<TABLE>
<CAPTION>
Hours
-----
<S> <C>
The YSI Story 1.0
Formula for Success
Guiding Principles
World of Work
Juvenile Justice and Behavioral Health Overview
The Student Population 0.5
The Residential Setting 0.5
Rights and Responsibilities 1.0
Point and Level System 1.0
Staff and Student Handbook 1.0
Health, Safety, and Security
Infection Control 1.0
Alcohol and Other Drugs 1.0
Safety, Security and Emergency Procedures 3.5
Suicide Prevention 0.5
Child Abuse and Neglect 0.5
CPR 4.0
Standard First Aid 2.5
Reports and Documentation 1.0
Crisis Intervention Training
Counseling and Behavior 8.0
Limiting the Use of Force 4.0
Verbal Intervention Skills 4.0
Escorts and Restraint 8.0
Introduction to the Foundations
Positive Peer Culture 2.0
Cognitive Behavior/Medical Model 1.0
Managing Emotions 1.0
Cultural Diversity 1.0
--------
TOTAL HOURS 48.0
</TABLE>
-8-
<PAGE>
ATTACHMENT I (continued)
Locations with Full-time Trainers Beginning July 1, 1996:
- --------------------------------------------------------
. Hickey
. Cullen
. Tarkio
. Clarinda
. Desert Hills-Tucson
. DBC (will also serve Parc Place and Promise House)
. Iowa (will serve Forest Ridge and Woodward)
Projected Additional Full-Time Trainers
- ---------------------------------------
. Desert Hills-College Station
. South Dakota (will serve Chainberlain and Springfield)
. Virginia Boot Camp
Due to the small size and geographical separation of the following YSI
facilities, the on-site training manager will be provided on a part-time basis
from the local program staff. All IYI training program support for these
facilities will remain the same as for those facilities with full-time IYI
training managers.
. Tampa Bay
. Utah
. Desert Hills-Albuquerque
. Reflections
In addition to individual program support, IYI will provide the following
services for YSI at the corporate level:
. Ensure full integration of training and certification procedures with
YSI human resource policies and practices;
. Provide measures of training effectiveness and trend analysis;
. Incorporate a systematic approach to ensure best practices are shared
across all programs to continuous improvement of training and related
activities;
-9-
<PAGE>
ATTACHMENT II
SERVICE FEE BREAKDOWN
TIER I. BASIC TRAINING PROGRAM
1. Program Facility Training Needs Assessment $ 54,000.00
2. Quality Assurance, Performance Analysis,
And Monthly Reporting
$500 per month for each of 18 locations $108,000.00
B. Basic Training Courses
----------------------
1. Orientation (Pre-service) Training for All
New Employees
Based on 2300 FTEs, 47% turnover rate, 1092 new
employees per year, 48-hour course. $314,496.00
2. Annual Accreditation Continuation
Training
2300 employees for 28 training hours at $6.00 per
student training hour $386,400.00
C. Independent Study, Video and Correspondence Courses
---------------------------------------------------
The Tier I Basic Training Program does not include any independent study,
video or correspondence courses.
Total Annual Cost of Tier I Basic Training Program $862,896.00
($71,908/month)
TIER II. ELECTIVE TRAINING
A. Training Courses
----------------
Cost per Student Training Hour $10.00
B. Independent Study Video, and To Be
---------------------------- Negotiated
Correspondence Courses
----------------------
ANNUAL ADMINISTRATIVE FEE $25,000.00
-10-
<PAGE>
TRAINING SERVICES AGREEMENT
ADDENDUM
The present document is an Addendum to the original Training Services
Agreement ("original TSA") entered into on the 24th of June, 1996 by and between
Youth Services International, Inc. ("YSP") with offices at 2 Park Center Court,
Suite 200, Owings Mills, Maryland 21117, and the International Youth Institute
("IYI"), a Maryland corporation with principal offices at 901 N. Pitt St., Suite
250, Alexandria, Virginia 22314.
1. Objective of Addendum
---------------------
The objective of this Addendum is to clarify the intent of both parties as
per the original TSA concerning the transfer of existing YSI training managers
to WI and the hiring of new training managers by IYI.
2. Amendments
----------
(a) Whereas it was originally anticipated that all full-time YSI training
managers would be transferred to and employed by WI on July 1, 1996, both
parties now agree that this transfer shall instead take place on October 1,
1996. As of this date, all existing YSI employees designated as facility
training managers shall, upon accepting offers of employment from IYI, become
full-time IYI employees.
(b) Both parties agree that should IYI desire to employ individual(s) as
training manager(s) for existing YSI program(s) which presently do not have
training manager(s), they shall have the ability to hire these individual(s) at
any time as IYI employees. It is understood by both parties that any YSI
executive directors who might be directly affected by these prospective hires
shall be consulted prior to any offer of employment.
3. Entirety of Agreement
---------------------
The amendments defined in paragraphs 2(a) and 2(b) solely represent an
Addendum to the original TSA. All terms and provisions not superseded by the
terms of this Addendum shall remain in force in-their entirety, and all
provisions contained herein shall be subject to all applicable terms of the
original TSA.
4. Acceptance
----------
(a) The signing of this Addendum by both parties indicates their agreement
to the amendments indicated herein and make them binding provisions of the
original TSA.
-11-
<PAGE>
(b) IN WITNESS WHEREOF, YSI and WI have caused this Addendum to be executed
by their duly authorized representatives.
Youth Services International, Inc. International Youth Institute, Inc.
By: /s/ Timothy P. Cole By: /s/ John R. Allen
------------------- -----------------
Name: Timothy P. Cole Name: John R. Allen
--------------- -------------
Title: CEO Title: President
--- ---------
Date: 5 August, 1996 Date: 5 August, 1996
-------------- --------------
-12-
<PAGE>
Exhibit 10.99.2
AMENDED AND RESTATED
TRAINING SERVICES AGREEMENT
THIS AMENDED AND RESTATED TRAINING SERVICES AGREEMENT (this "Agreement")
is made and entered into as of the 1st day of January, 1997 by and between YOUTH
SERVICES INTERNATIONAL, INC., a Maryland corporation having its principal
offices at 2 Park Center Court, Suite 200, Owings Mills, Maryland 21117 ("YSI")
and INTERNATIONAL YOUTH INSTITUTE, INC., a Maryland corporation having its
principal offices at 901 N. Pitt Street, Suite 250, Alexandria, Virginia 22314
("IYI").
WHEREAS, YSI and IYI previously have entered into that certain Training
Services Agreement dated as of July 3, 1996 (the "Original Agreement") pursuant
to which YSI engaged IYI to perform certain training services in connection with
the business of YSI and the parties set forth the terms of certain elective
engagements of IYI by YSI;
WHEREAS, the parties desire to amend certain of the provisions of the
Original Agreement arid to restate the entire agreement of the parties in
connection with the subject matter of the Original Agreement to include such
amendments;
NOW, THEREFORE, in consideration of these premises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound, agree as follows:
1. Termination of Original Agreement. Each of IYI and YSI understands and
---------------------------------
agrees that upon the execution of this Agreement by both parties hereto, the
Original Agreement shall automatically terminate and cease to exist and each of
the terms and provisions of the Original Agreement shall be of no further force
or effect. The parties hereto further understand and agree that the subject
matter of the Original Agreement shall be governed by the terms and provisions
of this Agreement.
2. Scope of Services; Standard.
---------------------------
(a) During the term of this Agreement, YSI hereby engages IYI to perform,
and IYI hereby agrees to perform, the services set forth and described on
Exhibit A attached hereto and made a substantive part hereof (the "Tier I
- ---------
Services"). The Tier I Services shall be provided during the term of this
Agreement at such times arc in such manner as is reasonably necessary in order
to meet or exceed the training requirements for the personnel who are the
subject of the Tier I Services, as such requirements may be set forth by any
state or other governmental
<PAGE>
body or other authority having rules or regulations applicable to the training
of such personnel. During the term off this Agreement, IYI shall have the
exclusive right to perform Tier I Services with respect to all employees of YSI
and its direct and indirect subsidiaries, and neither YSI nor any of its direct
or indirect subsidiaries shall be permitted, during the term of this Agreement,
to perform any Tier I Services, or to engage any third party to perform Tier I
Services, with respect to any employee of YSI or any of its direct or indirect
subsidiaries.
(b) From time to time during the term of this Agreement, IYI also agrees
perform the services (or any portion thereof) set forth and described on Exhibit
-------
B attached hereto and made a substantive part hereof (the "Tier II Services") in
- -
each instance if and only if IYI is the winning bidder for such services in
accordance with the Tier II Service Bidding Process set forth in Section 3
hereof. YSI shall not be required to contract for any Tier II Services at any
time during the term of this Agreement, and in the event that YSI elects to have
any Tier II Services conducted with respect to its personnel, IYI shall have no
right to perform such Tier II Services except as set forth in Section 3 below.
(c) The Tier I Services and the Tier 11 Services provided by IYI pursuant
to this Agreement (collectively, the "Services") shall comply with established
and accepted standards applicable to the training of personnel working in
facilities such as those operated by YSI and its subsidiaries, subject to the
guidelines of any applicable governmental bodies or other authorities and the
general guidelines of the industry.
(d) IYI shall have the right to provide Tier I Services and to submit bids
to provide Tier II Services (in accordance with Section 3 below) with respect to
all employees of governmental authorities or other third parties who enter into
joint venture agreements with YSI or any of its subsidiaries if pursuant to such
agreement such employees will be providing the same type of services provided by
the personnel of YSI or its subsidiaries whose training is covered by this
Agreement; provided that in the event that the agreement between YSI and any
such governmental authority or other third party prohibits YSI from engaging
third parties to conduct the training of personnel or otherwise restricts the
provision of such services by IYI, then IYI's rights under this Agreement shall
riot extend to any employees or other personnel governed by such governmental or
third party agreement.
3. Tier II Service Bidding Process. In the event that, at any time and
-------------------------------
from time to time during the term of this Agreement, YSI requires Tier II
Services, such Tier II Services shall, in each instance, be provided as follows:
(a) YSI may elect to provide such services internally without engaging any
third party to conduct or assist in the conduct of such services, which election
shall not require notice at any time to IYI.
<PAGE>
(b) In the event that YSI does not elect to provide the Tier II Services
internally, YSI must give notice to IYI stating a description of the desired
Tier II Services including the time frame for the provision of such services,
the deadline for the submission of a bid to provide such services and the name
of the party at YSI to whom a bid shall be submitted. Such notice shall be
provided to IYI prior to or simultaneous with any notice or request to any third
party to provide such Tier II Services. In the event that IYI desires to
perform such Tier II Services (it being understood that IYI shall not be
required to submit any bid), on or before the deadline set forth in the notice,
IYI shall submit to the party at YSI set forth in the notice its written bid to
provide such services. YSI shall review IYI's bid along with any other bids it
receives.
(c) In the event that YSI desires to select a provider other than IYI to
perform the Tier II Services YSI shall give written notice to IYI of such desire
prior to giving notice to such other provider, which notice shall contain an
- --------
outline of the bid submitted to YSI by such other third party provider. IYI
shall then have 30 days to resubmit its bid in an effort to make its bid more
attractive to YSI than the bid of such other third party provider. YSI shall be
permitted thereafter to engage the services of the other third party provider if
and only if the bid submitted by such third party provider remains more
attractive to YSI than IYI's resubmitted bid based on pricing, experience,
training quality or some other appropriate factor.
4. Professional Service Fees --Tier I Services.
-------------------------------------------
(a) Subject to the provisions of Section 11 below, YSI shall pay to IYI, in
consideration of the Tier I Services, a monthly fee equal to the following:
<TABLE>
<CAPTION>
Period Selection of Monthly Fee
------ ------------------------
<S> <C> <C>
January - December 1997 Program FTE's x $46
January - December 1998 Program FTE's x $37
January - December 1999 Program FTE's x $34
January - December 2000 Program FTE's x $33
January - December 2001 Program FTE's x $32
</TABLE>
(b) Program FTE's for the purposes of the monthly payment will be
computed by YSI consistent with its historical reporting based upon Program
FTE's as of the end of the previous month. Program FTE's for the purposes
hereof are defined as (i) the number of employees on YSI's payroll that are
scheduled for 40 hours per week other at YSI's youth care programs; plus ((ii)
the total scheduled hours per week for all part time employees on YSI's payroll
other than employees allocated at the corporate headquarters of YSI divided by
40.
<PAGE>
(c) Monthly payments shall be made by YSI in arrears in the form of a
company check made payable to IYI and mailed to IYI at the address set forth in
the opening paragraph of this Agreement each month on or before the 5th day of
the following of each month; provided, however, that payment for the months of
January, February and March, 1997 shall be made on the date hereof (it being
understood that no payment shall be made on April 5, 1997, and payments in
accordance with this paragraph(c) will resume on May 5, 1997). Together with
each monthly payment, YSI shall submit to IYI a schedule showing the calculation
of the number of Eligible Program FTEs for such month.
5. Professional Services Fees -- Tier II Services. In the event that,
----------------------------------------------
during the term of this Agreement, IYI provides any Tier II Services, the fees
for such services shall be as set forth in the final bid of IYI accepted by YSI
in accordance with the provisions of Section 3 hereof. IYI shall invoice YSI
for such Tier II Services on a monthly basis.
6. Term of Agreement. The term of this Agreement shall be five years,
-----------------
beginning on January 1, 1997 and ending on December 31, 2001, unless sooner
terminated pursuant to the provisions of section 7 hereof.
7. Termination.
-----------
(a) By Either Party. Either party may terminate this Agreement at any
---------------
time during the term hereof, effective immediately upon the giving of notice of
such termination to the other party, in the event that (i) a voluntary or
involuntary petition or action under Title II of the United States Code is filed
by or against the other party (provided that in the event such petition or
action is filed by or against IYI, so long as IYI retains control of all of its
assets and there is no intent by any party to sell any Intellectual Property,
this Agreement shall continue in full force and effect), (ii) the other party
makes a general assignment for the benefit of its creditors, or (iii) the other
party commits any illegal act.
(b) By IYI. IYI may terminate this Agreement at any time during the term
------
hereof, effective 90 days after giving notice of such termination to YSI, in the
event that YSI fails to make any payment required to be made pursuant to the
terms of this Agreement and such nonpayment is not cured within 30 days of
notice thereof by IYI to YSI.
(c) By YSI.
------
(i) YSI may terminate this Agreement at any time during the term
hereof for Cause, effective 90 days after giving notice of such termination to
IYI. For purposes of this Agreement, the term "Cause" shall refer to and
include (a) the failure of IYI to perform the Tier I Services in accordance with
the provisions of exhibit A and the standards referred to in Section 2(c) hereof
---------
which failure has not
<PAGE>
been addressed by the cure process in (ii) within 2O days following notice
thereof from YSI to IYI; (b) the failure of IYI to perform the Tier II Services
in accordance with the IYI bid relating to such services and the standards
referred to in Section 2 (c) hereof which failure has not been addressed by the
cure process in (ii) within 30 days of notice thereof from YSI to IYI; and (c)
the breach by IYI of any material term of that certain Transfer and Assignment
of Intellectual Property Agreement of even date herewith between IYI and YSI or
of any material term of that certain License Agreement of even date herewith
between IYI and YSI in each case, that has not been cured (if applicable) within
the time period specified for cure, if any, in such agreement.
(ii) The cure process referenced in clause (i) above consists
of:
1. Notification of the failure, followed by
2. A 30 day period in which a plan to rectify the failure is
presented, followed by
3. a specified period in which performance will be brought back
to accepted standards.
(iii) YSI may terminate this Agreement at any time during the term
hereof, effective immediately upon the giving of notice to IYI, in the event of
a Change in Control of YSI. For purposes of this Agreement, the term "Change in
Control" shall mean a change in control of & nature that would be required to be
reported in response to Item 6(e) of Schedule a of Regulation a promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act");
whether or not YSI is in fact required to comply therewith, provided that,
without limitation, such a change in control shall be deemed to have occurred if
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than a trustee or other fiduciary holding securities under
an employee benefit plan of YSI or any of its subsidiaries or a corporation
owned, directly or indirectly, by the stockholders of YSI in substantially the
same proportions as their ownership of stock of YSI, becomes the "beneficial
owner" (as defined in Rule d3 under the Exchange Act), directly or indirectly,
of securities of YSI representing 20% or more of the combined voting power of
YSI then outstanding securities; (3) the stockholders of YSI approve a merger,
share exchange or consolidation of YSI with any other corporation, other than a
merger, share exchange or consolidation which would result in the voting
securities of YSI outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least 70% of the combined voting power of the voting
securities of YSI or such surviving entity outstanding immediately after such
merger, share exchange or consolidation, or the stockholders of YSI approve a
plan of complete liquidation of YSI or an agreement for the sale or disposition
by YSI of all or substantially all of YSI's assets.
<PAGE>
(iv) Upon a termination by YSI pursuant to 7(c) (iii) above, IYI will
be entitled to payment of the remaining value of this Agreement as determined by
the independent appraisal process set forth in clause (v) below, which shall
equal the net present value of the remaining payments under this Agreement,
taking into account current market conditions, FTE growth rates during the term
of this Agreement, and & discount rate equal to the interest discount rate of
the Federal Reserve Bank of New Yore.
(v) The independent appraisal process referred to in clause (iv) above
shall be:
1. Each party shall select an independent appraiser who shall
submit an appraisal of the remaining value of this
Agreement. If the appraisals are within ten percent (10%)
the average of the two appraisals shall be used.
2. If the two appraisals are not within ten percent, the
parties shall select a third independent appraiser who shall
submit an appraisal of the remaining value of this
Agreement. If the third appraisal is between the two
initial appraisals, the third appraisal and the closest of
the first two appraisals shall be averaged for a final
value.
3. If the third appraisal is higher than both of the two
initial appraisals, the third appraisal and the highest of
the first two appraisals shall be averaged for a final
value.
4. If the third appraisal is lower than both of the two initial
appraisals, the third appraisal and the lower of the first
two appraisals shall be averaged for a final value.
8. Limitations on Authority. In performing services for YSI, IYI shall
------------------------
be an independent contractor, not an employee or agent of YSI. Neither IYI nor
YSI shall have the right or authority to make or undertake any promise, warranty
or representation, to executive any contract or otherwise to assume any
obligation or responsibility in the name or on behalf of the other unless
specifically authorized prior thereto in writing by an authorized officer of the
other party.
9. Indemnification
---------------
(a) IYI shall defend, indemnify and hold harmless YSI and its
subsidiaries, and the officers, directors, employees, agents, successors and
assigns of YSI or any of its subsidiaries, from and against all claims, damages,
judgments,
<PAGE>
fines, penalties, costs or expenses incurred or sustained by YSI, or its
officers, directors, employees, agents, successors or assigns, by reason of any
direct or indirect breach by IYI of any of the representations, warranties,
covenants or agreements contained in this Agreement, including without
limitation, IYI's failure to perform services in accordance with the terms of
this Agreement (and any accepted bid of IYI, in the case of Tier II services)
and IYI's failure to perform such services in accordance with the standard of
performance required by Section 2(c) hereof.
(b) YSI shall defend, indemnify and hold harmless IYI and its
subsidiaries, and the officers, directors, employees, agents, successors and
assigns of IYI or any of its subsidiaries, from and against all claims, damages,
judgments, fines, penalties, costs or expenses incurred or sustained by IYI, or
its officers, directors, employees, agents, successors or assigns, by reason of
any direct or indirect breach by YSI of any of the representations, warranties,
covenants or agreements contained in this Agreement, including without
limitation, YSI's failure to make prompt payment of all sums due to IYI in
accordance with the terms of this Agreement (and any accepted bid of IYI, in the
case of payment for Tier II Services performed by IYI).
10. Insurance. At all times during the term of this Agreement, (a) IYI
---------
shall maintain a general liability insurance policy with an aggregate coverage
in an amount not less than $500,000 per occurrence, and (b) YSI shall maintain a
general liability insurance policy with an aggregate coverage in an amount not
less than 1,000,000 per occurrence.
11. Renegotiation of Agreement. In the event of an FTE increase of 10% or
--------------------------
more due to the addition of a major program or an acquisition, the parties agree
to negotiate with one another in good faith to renegotiate the terms of this
Agreement as related to the major program or acquisition that caused the 10% or
greater FTE increase.
12. Arbitration. Any dispute or controversy arising out of or in
-----------
connection with this Agreement, or the breach or validity thereof, shall be
settled by final and binding arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association.
13. Miscellaneous Provisions.
------------------------
(a) Governing Law. This Agreement shall be deemed to have been
-------------
executed and delivered in the State of Maryland and shall be construed,
interpreted and enforced in accordance with the internal laws of the State of
Maryland, without application of its choice of law principles.
<PAGE>
(b) Assignment. No party to this Agreement may assign this Agreement
----------
or any rights hereunder, or delegate any duties hereunder, in whole or in part,
without the prior written consent of the other parties hereto; provided,
however, that IYI may assign this Agreement one time without the consent of YSI
only to an entity having the same ownership, substantially all the same
employees and the same business as IYI if such entity was created at the
designation of IYI for the sole purpose of effecting a change in the business
form of IYI; and further provided, that all of the direct and indirect
subsidiaries of YSI and the joint venture and other partners of YSI shall be
third party beneficiaries to this Agreement. Any assignment, sublicense or
delegation of duties made in violation of the terms of this Agreement shall be
null and void and of no force or effect.
(c) Notices. Any notice, request, instruction or other document or
-------
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed given upon delivery in person; upon being deposited
in the mail, postage prepaid, for mailing by certified or registered mail; or
upon being transmitted by facsimile, as follows:
If to YSI delivered, mailed or transmitted to:
Youth Services International, Inc.
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
Attention: David B. Dolce
Facsimile telephone number: (410) 356-8634
If to IYI, delivered, mailed or transmitted to:
International Youth Institute, Inc.
901 N. Pitt Street, Suite 250
Alexandria, Virginia
Attention: John R. Allen
Facsimile telephone number: (703) 549-9807
with a copy to:
McGuire, Woods, Battle & Boothe
8280 Greensboro Drive
McLean, Virginia 22102-3892
Attention: Jocelyn West Brittin
Facsimile telephone number: (703) 712-5050
or, in each case, to such other address or addresses as may be specified in
writing from time to time by any party to the other parties.
<PAGE>
(d) References and Construction.
---------------------------
(i) Unless the context otherwise requires, the singular shall include
the plural and vice versa, references to any gender shall include all other
genders and references to persons shall include individuals, bodies corporate,
unincorporated associations, partnerships and other entities in each case
whether or not having a separate legal personality.
(ii) Section headings are for convenience only and shall not limit or
otherwise affect any of the provisions of this Agreement
(e) Entire Agreement. Except as otherwise specifically provided
----------------
herein, this Agreement constitutes the entire agreement and understanding of the
parties hereto with respect to the matters herein set forth, and all prior
negotiations, writings and understandings relating to the subject matter of this
Agreement are merged herein and are superseded and canceled by this Agreement.
(f) Waivers - Amendments. Any of the terms or conditions of this
--------------------
Agreement may be waived but only in writing by the party which is entitled to
the benefit thereof, and this Agreement may be amended or modified in whole or
in part only by an agreement in writing, executed by all the parties to this
Agreement.
(g) Binding Nature of Agreement. This Agreement shall be binding upon
---------------------------
and inured to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and permitted assigns.
(h) Severability. Any term or provision of this Agreement which may
------------
be held illegal, invalid or unenforceable shall be ineffective to the extent of
such illegality, invalidity or unenforceability without rendering illegal,
invalid or unenforceable the remaining terms and provisions of this Agreement to
the extent that continuation of the remaining portions of the Agreement does not
constitute a material impairment of the rights and obligations under this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
ATTEST: YOUTH SERVICES INTERNATIONAL, INC.
/s/ Mark S. Demilio By: /s/ Timothy P. Cole
- ------------------- -------------------
Name: Timothy P. Cole
Title: Chief Executive Officer
<PAGE>
INTERNATIONAL YOUTH INSTITUTE, INC.
___________________ By: /s/ Thad A. Wolfe
-------------------
Name: Thad A. Wolfe
Title: Chairman & Chief Executive
Officer
<PAGE>
EXHIBIT A
SCOPE OF SERVICES
The training provided will include basic Tier I training (below) with the
flexibility for YSI to seed approximately 24 hours of variable tailored
curriculum content and 16 hours of selected supervisory/leader training for 10%
of the FTEs. Such modified curricula would require EVP of Operations and
CEO/President approval.
TIER I. BASIC TRAINING PROGRAM
A. TRAINING PROGRAM STRUCTURE
--------------------------
1. PROGRAM FACILITY TRAINING NEEDS ASSESSMENT
On-site assessment at individual employee and program level.
2. QUALITY ASSURANCE, PERFORMANCE ANALYSIS, AND MONTHLY REPORTING
Ensure program quality and consistency, monitor training progress, and
track performance for sorting at individual program level as well as
aggregate analysis and reporting of corporate-wide status and
outcomes. Monthly reports will include training accomplished during
the last month, cumulative training for the current fiscal year-to-
date, and projections of the following month as well as the remainder
of the quarter and fiscal year.
B. BASIC TRAINING COURSES
----------------------
1. ORIENTATION (PRE-SERVICE) TRAINING FOR ALL NEW EMPLOYEES
Training costs permit no more than. 2 orientation courses at one
location during a single month. Orientation curriculum is attached.
2. ANNUAL ACCREDITATION CONTINUATION TRAINING
Continuation/accreditation training will be based on current staffing
levels and standard annual re-certification requirements in health,
safety, security, and crisis intervention.
<PAGE>
C. INDEPENDENT STUDY, VIDEO AND CORRESPONDENCE COURSES
---------------------------------------------------
The Tier I Basic Training Program does not include any independent study,
video or correspondence courses.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A (Continued)
BASIC TRAINING ORIENTATION CURRICULUM
Hours
-----
<S> <C>
The YSI Story 1.0
Formula for Success
Guiding Principles
World of Work
Juvenile Justice and Behavioral Health Overview
The Student Population 0.5
The Residential Setting 0.5
Rights and Responsibilities 1.0
Point and Level System 1.0
Staff and Student Handbook 1.0
Health, Safety, and Security
Infection Control 1.0
Alcohol and Other Drugs 1.0
Safety, Security and Emergency Procedures 3.5
Suicide Prevention 0.5
Child Abuse and Neglect 0.5
CPR 4.0
Standard First Aid 2..5
Reports and Documentation 1.0
Crisis Intervention Training
Counseling and Behavior 8.0
Limiting the Use of Force 4.0
Verbal Intervention Skills 4.0
Escorts and Restraint 8.0
Introduction to the Foundations
Positive Peer Culture 2.0
Cognitive Behavior/Medical Model 1.0
Managing Emotions 1.0
Cultural Diversity 1.0
-----
TOTAL HOURS 48.0
</TABLE>
<PAGE>
EXHIBIT B
TIER II SERVICES
----------------
A. Training Course
---------------
Course offerings will be based on (1) program training needs assessment,
and (2) Youth Development Professional Certification Levels I through IV.
Since Tier I training under this Agreement does not include comprehensive
continuation, in-service, and career development training, responsiveness
to additional training requirements will depend on lead time and scope of
potential training.
B. Independent Study, Video and correspondence Courses
---------------------------------------------------
These services will become available to YSI during the term of the
Agreement as developed by IYI.
<PAGE>
Exhibit 10.99.3
AGREEMENT FOR THE TRANSFER AND ASSIGNMENT OF
INTELLECTUAL PROPERTY
THIS AGREEMENT ("Agreement") is entered into as of the 6th day of March,
1997, by and between Youth Services International, Inc. ("YSI"), a Maryland
corporation with principal place of business at 2 Park Center Court, Suite 200,
Owings Mills, Maryland 21117, and International Youth Institute, Inc. ("IYI"), a
Maryland corporation with principal place of business at 901 N. Pitt Street,
Suite 250; Alexandria, Virginia 22314. Both YSI and IYI are sometimes referred
to herein as "the Parties".
WHEREAS, YSI uses and owns all rights in the intellectual property and
other intangibles further described herein and referred to as the "Intellectual
Property"; and
WHEREAS, during 1996 YSI transferred certain employees to IYI who were
instructors experienced in training certain youth correctional professionals;
and
WHEREAS, such former YSI employees may require the use of the Intellectual
Property in connection with their performance for IYI;
WHEREAS, IYI has obtained the Intellectual Property; and
WHEREAS, YSI hereby conveys all right, title and interest in the
Intellectual Property to IYI as set forth herein in exchange for the payment and
other covenants set forth herein and a perpetual, irrevocable, fully paid-up and
royalty-free license for YSI to use the Intellectual Property as set forth in
that certain License Agreement of even date herewith by and between YSI and IYI
(the "License Agreement");
NOW, THEREFORE, in consideration of these premises and the mutual covenants
contained herein the parties hereto mutually agree;
1. Intellectual Property.
---------------------
"Intellectual Property" as used herein shall mean the notes, outlines,
books, compositions, writings, inventions, processes, computer programs, ideas,
know-how, formulae, trade secrets, patents, trademarks, trade names, brand names
and copyrights and any other intangibles or tangibles whatsoever directly
related or incidental to the training of youth workers, including training
curricula, student handbooks and course syllabi and transfer of experienced
trainers or items from YSI to IYI. See Attachment A for a non-exhaustive list
of some of these items.
-1-
<PAGE>
2. Transfer and Assignment.
-----------------------
Subject to the terms and conditions set forth in this Agreement, including
without limitations Section 4 hereof, YSI hereby transfers, conveys and assigns
to IYI all rights, title and interest of YSI in and to the Intellectual
Property, as defined in Section 1.
3. Excluded Assets. The parties hereto understand and agree that this
---------------
Agreement is not intended, and shall not be construed, to convey any rights to
any intellectual property or other property of YSI not described in Section 1 or
on Attachment A hereof. Without limiting the generality of the foregoing, IYI
understands and agrees with YSI that this Agreement shall not operate to
transfer to IYI any right in or to any of the general management policies and
procedures, financial policies, procedures and information, human resource
policies, procedures and data, current or completed bid proposals, corrective
action plans, special projects or assessments that are proprietary to YSI, or
any other documents of intellectual property or proprietary information of YSI
that relate to the juvenile justice or youth care services provided by YSI in
connection with its business.
4. Restrictions. Notwithstanding the sale of the Intellectual Property to
------------
IYI, both IYI and YSI understand and agree that the ownership rights in and to
the Intellectual Property transferred to IYI by this Agreement shall be subject
at all times to, and limited by the following restrictions:
(a) All rights of IYI in and to the Intellectual Property (and all
improvements, and enhancements thereto) shall terminate, and revert back to YSI,
immediately upon the occurrence of any of the following events: (i) a voluntary
or involuntary petition or action under Title 11 of the United States Code is
filed by or against IYI, provided that so long as IYI retains control of all of
its assets and there is no intent by any party to sell any of the Intellectual
Property, the reversion right shall not apply, or (ii) IYI makes a general
assignment for the benefit of its creditors. Accordingly, from and after the
occurrence of any of the events listed in this paragraph 4(a), IYI shall have no
further rights in or to, including the right to use, the Intellectual Property
(or the improvements or enhancements thereto), but all rights in and to the
Intellectual Property (and all improvements and enhancements thereto) shall
thereafter be the rights of YSI.
(b) IYI agrees to hold the Intellectual Property in confidence and to
protect the value of the Intellectual Property in any way reasonably necessary
in order to sustain such value.
(c) It is understood and agreed by the parties that any products and
services created by IYI in the course of its business are the exclusive property
of IYI, and IYI may sell, convey, give, donate or otherwise transfer or disclose
or license or grant any other permission to use such products and services at
any time
-2-
<PAGE>
to any person or entity, regardless of whether or not such person directly or
indirectly competes with YSI, and regardless of whether such products contain or
are based upon any part of the Intellectual Property. It is further understood
and agreed by the parties that IYI may create intellectual property in the same
field or on the same topic as the Intellectual Property, and IYI may sell,
convey, give, donate or otherwise transfer or disclose or license or grant any
other permission to use such intellectual property at any time to any person or
entity, regardless of whether or not such person directly or indirectly competes
with YSI. Notwithstanding the foregoing, without the written consent of YSI, IYI
shall not at any time sell, convey, give, donate or otherwise transfer or
disclose the Intellectual Property, or any portion thereof, or any enhancements
or modifications thereto, or any rights associated therewith, including any
license or other permission to use the Intellectual Property or any portion
thereof, to any person or entity (including without limitation any subcontractor
of IYI) other than (i) a disclosure of the Intellectual Property to any employee
or other agent, including any subcontractor, of IYI to whom such disclosure is
necessary in connection with the business of IYI permitted by this Agreement,
(ii) any transfer or disclosure to YSI or any subsidiary of YSI, or (iii) any
transfer to any party in connection with the sale by IYI of its business as a
whole, if and only if, the purchaser thereof purchases the Intellectual
Property, or portion thereof, subject to all of the terms and conditions of this
Agreement and the License Agreement.
(d) In the event that IYI attempts to make a sale, conveyance, gift,
donation, lease, license or other transfer or disclosure in violation of
paragraph 4(c), all rights of IYI in and to the Intellectual Property (including
any improvements or enhancements thereto) shall immediately terminate and revert
back to YSI, and IYI shall have no further rights in or to, including the right
to use, the Intellectual Property (or the improvements or enhancements thereto),
but all rights in and to the Intellectual Property (and all improvements and
enhancements thereto) shall thereafter be the rights of YSI; provided, however,
that upon discovery of any such violation, YSI shall promptly notify IYI of the
violation or alleged violation, and IYI shall have the opportunity to cure such
violation by (i) canceling any agreement to sell, convey, gift, donate, lease,
license or other transfer or disclosure; (ii) obtaining the complete recovery of
all Intellectual Property so transferred or disclosed; and (iii) obtaining an
agreement, enforceable by YSI, from the party to whom transferred or disclosed,
not to use or disclose such Intellectual Property, all to the reasonable
satisfaction of YSI.
(e) Remedies. IYI hereby acknowledges and agrees that (a) a remedy at
--------
law may not adequately protect the rights of YSI in the event of any breach or
threatened breach of the provisions 9f Section 4 of this Agreement by IYI or any
of its officers, employees, representatives, agents or affiliates, and (b) any
such breach or threatened breach of such provisions will result in irreparable
harm to YSI. Therefore, without prejudice to any other remedies at law or in
equity to which YSI may be entitled, IYI hereby agrees that YSI shall be
entitled to seek
-3-
<PAGE>
injunctive relief in any court of competent jurisdiction in the event of any
actual or threatened breach of any of the provisions of this Agreement in order
to prevent or terminate the continuance of any such breach or threatened breach
of such provisions, together with reimbursement of legal and other expenses and
fees incurred by YSI in enforcing such provisions or seeking such relief.
The parties hereto understand and agree that the restrictions set forth in
this Section 4 were a material inducement to YSI to sell the Intellectual
Property to IYI, and to IYI to buy the Intellectual Property from YSI, and
constitute an integral part of the consideration for the sale of the
Intellectual Property by YSI to IYI, and that without such restrictions, the
parties would not have entered into this Agreement.
5. Representations and Warranties of YSI.
-------------------------------------
(a) YSI represents and warrants that, to the best of its knowledge, it
owns all rights, title and interest in and to the Intellectual Property. To the
best of YSI's knowledge, the use of the Intellectual Property does not conflict
with, infringe upon or violate a patent, patent license, patent application,
trademark, trade name, trademark or trade name registration, copyright,
copyright registration, service mark, brand mark or brand name or any pending
application relating thereto, or any trade secret, know-how, programs or
processes or any other intellectual property rights of any third person, firm or
corporation;
(b) YSI further represents and warrants that to the best of its
knowledge, there are no outstanding, or overtly threatened, governmental,
judicial or adversary proceedings, hearings, arbitrations, disputes or other
disagreements, and no notice of infringement has been served upon YSI with
respect to any of the Intellectual Property.
(c) YSI further represents and warrants that to the best of its
knowledge, no other writings, inventions, processes, computer programs, know-
how, formulae, trade secrets, patents, trademarks, trade names, brand names,
copyrights, licenses or applications are necessary for the unimpaired use or
conveyance of the Intellectual Property.
(d) YSI further represents and warrants that to the best of its
knowledge, YSI has the authority to transfer, convey and assign the Intellectual
Property and the rights. in and to the Intellectual Property as contemplated by
this Agreement.
6. IYI Covenants.
-------------
(a) The provisions of Section 3 of the License Agreement regarding the
confidentiality of the Intellectual Property, including without limitation, the
-4-
<PAGE>
provisions requiring each of IYI and YSI to ensure that its employees,
representatives and agents keep the Intellectual Property in confidence, are
incorporated herein by reference and are obligations of the parties in this
Agreement as if fully set forth herein.
(b) IYI agrees to cause and ensure that each of its employees,
representatives or agents having access to the Intellectual Property or
information related thereto to be bound by the confidentiality and noncompete
covenants and agreements of IYI of this Agreement.
7. Consideration.
-------------
In consideration of the transfer and assignment set forth in Section 2, IYI
will pay to YSI the sum of Seven Hundred Thousand Dollars ($700,000.00).
8. Payment.
-------
The consideration set out in paragraph 7 shall be paid in the form of a
check to YSI within 90 days of the execution of this Agreement.
9. Registration.
------------
IYI shall file such registrations with the United States copyright Office,
the United States Patent and Trademark Office, and any governmental agencies
responsible for the registration or perfection of rights and as are necessary to
effectuate this Agreement. YSI for itself and on behalf of its subsidiaries,
affiliates, agents, officers, directors, and employees agrees to cooperate, sign
and otherwise execute any such notices or related documents as are reasonably
necessary to evidence, perfect, transfer, assign or convey any of the
Intellectual Property Rights transferred hereunder. Any and all fees, costs or
expenses arising in connection with any filing or recording done pursuant to
this Section 9 shall be borne by IYI.
10. Covenants Not to Compete.
------------------------
(a) IYI hereby covenants and agrees, for itself and its subsidiaries
aid affiliates, that, from and after the date of this Agreement, neither IYI nor
any of its subsidiaries or affiliates will directly or indirectly, either alone
or with others, engage or make equity investments in or have an ownership
interest in, any person, firm, company or entity engaged in any business similar
to the business of YSI, or in a business that would be competitive with the
business of YSI, which is understood to be the provision of juvenile justice and
youth care services; provided, however, that nothing herein shall be deemed to
restrict IYI (or its subsidiaries and affiliates) from (i) making investments
representing not more than five percent (5%) of the outstanding equity
securities of any publicly traded company or (ii) training
-5-
<PAGE>
youth care workers for businesses, firms, companies or entities in which IYI
does not have any financial interest; or
(b) YSI hereby covenants and agrees, for itself and its subsidiaries
and affiliates, that, from and after the date of this Agreement, neither YSI nor
any of its subsidiaries or affiliates, will engage in the business of training
any personnel for compensation (it being understood that YSI and its
subsidiaries and affiliates shall be permitted to train the employees,
representatives or agents of YSI and its subsidiaries and affiliates, state
agencies and joint venture or other partners in connections with YSI's operation
and expansion of the business of YSI and its subsidiaries in the ordinary
course, so long as such training does not conflict with the terms of any
Training Agreement between the parties at the time); provided, however, that
nothing herein shall be deemed to restrict YSI (or its subsidiaries and
affiliates) from making investments representing not more than five percent (5%)
of the outstanding equity securities of any publicly traded company.
(c) Each covenant and agreement of this paragraph 10 shall be read and
construed independently of each other and if any one of them (or portion
thereof) is held invalid, the others (or other portions thereof) shall continue
to be valid and to apply and the one (or the portion) held to be invalid shall
be read and construed in the most restrictive manner intended by this paragraph
10 that would permit it to be held valid and enforceable. Accordingly, the
parties agree that because the provisions of this paragraph 10 are divisible and
separable, if any provision hereof is held to be unreasonable, unlawful or
unenforceable in duration, geographical scope or character of restriction by any
court of competent jurisdiction, such provision shall be modified to the extent
necessary in order that any such provision or portion thereof shall be legally
enforceable to the fullest extent permitted by law, and the parties hereto do
hereby expressly authorize any court of competent jurisdiction to enforce any
such provision or portion of this paragraph 10 or to modify any such provision
or portion hereof in order that any such provision or portion hereof shall be
enforced by such court to the fullest extent permitted by applicable law.
(d) Each of IYI and YSI recognize the broad scope of the foregoing
covenants, but expressly agrees that they are reasonable in light of the scope
of the business of each party and the rights transferred hereby. Each of IYI
and YSI expressly acknowledges that the damages to the business of the other
party resulting from any breach of this paragraph 10 may be intangible in whole
or in part and incapable of being assessed a monetary value and that the other
party is entitled to seek specific enforcement, injunctive relief and other
equitable remedies in addition to monetary damages and legal remedies.
-6-
<PAGE>
11. Indemnity.
---------
(a) Indemnification by IYI. IYI shall defend, indemnify and hold
----------------------
harmless YSI and its subsidiaries, and the officers, directors, employees,
agents, successor and assigns of YSI or any of its subsidiaries, from and
against all claims, damages, judgments, fines, penalties, costs or expenses
incurred or sustained by YSI, or its officers, directors, employees, agents,
successors or assigns, (i) by reason of any direct or indirect breach by IYI of
any of the representations, warranties, covenants or agreements of IYI contained
in this Agreement or (ii) in connection with the Intellectual Property or any
derivative product thereof, as a result of the negligent or intentional
misconduct of IYI or its officers, directors, employees or agents.
(b) Indemnification by YSI. YSI shall defend, indemnify and hold
----------------------
harmless IYI and its subsidiaries and the officers, directors, employees,
agents, successor and assigns of IYI from and against all claims, damages,
judgments, fines, penalties, costs or expenses incurred or sustained by IYI, or
its officers, directors, employees, agents, successors or assigns, (i) by reason
of any direct or indirect breach by YSI of any of the representations,
warranties, covenants or agreements of YSI contained in this Agreement or (ii)
in connection with the IYI Intellectual Property or any derivative product
thereof, as a result of the negligent or intentional misconduct of YSI or its
officers, directors, employees or agents.
12. Bankruptcy Provisions.
---------------------
(a) The parties hereto acknowledge and agree that the Intellectual
Property is "intellectual property" as that term is defined by Title 11 of the
United States Code, as amended ("Title 11").
(b) IYI agrees that in the event a Chapter 7 petition is filed by or
against it under Title 11, IYI will consent to YSI's obtaining relief under 11
U.S.C. (S)107.
(c) IYI agrees that, in the event that a Chapter 7 petition is filed
by or against IYI under Title 11, or IYI becomes the subject of receivership
proceedings, IYI or any subsequently appointed trustee or receiver shall, at the
sole option of and on written request by YSI, continue to perform under this
Agreement or within five days of written request by YSI return to YSI all of the
Intellectual Property and all embodiments of the Intellectual Property,
wheresoever located, at the sole expense of IYI. Further, IYI and any trustee
or receiver shall not interfere with the rights of YSI as provided in this
Agreement, including but not limited to any covenant not to compete, or
confidentiality provisions, which rights shall continue in YSI.
-7-
<PAGE>
13. General.
-------
(a) This Agreement is not assignable by either party, and neither
party may delegate its benefits or its duties hereunder without the prior
written consent of the other party, except that IYI may assign this Agreement
one time without the consent of YSI only to a new entity with the same
ownership, substantially all the same employees and the same business as IYI if
such entity was created at the designation of IYI for the sole purpose of
effecting a change in the business form of IYI. Any other attempted assignment
in violation of this provision shall be void and the provisions hereof will be
binding upon and inure to the benefit of the parties, their successors and any
permitted assigns.
(b) The laws of the State of Maryland excluding that body of law
controlling conflicts of law, will govern all disputes arising out of or
relating to this Agreement.
(c) Neither IYI nor YSI will be responsible for any failure to perform
due to unforeseen circumstances or to causes beyond IYI's or YSI's control,
including but not limited to acts of God, war, riot, embargoes, acts of
government, civil or military authorities, fire, floods, epidemics, accidents,
strikes, or shortages of transportation, facilities, fuel, energy; labor or
materials. In the event of any such occurrence, the party learning of such a
condition shall notify the other party as soon as practicable, and when the
condition is remedied, performance will be resumed with equitable adjustments to
be made in good faith.
(d) The waiver by IYI or YSI of any default by the other will not
waive subsequent defaults by the other of the same or a different kind.
(e) Except as otherwise set forth herein, in the event of a dispute
involving this Agreement, the parties agree to submit all claims in writing to
the American Arbitration Association, Washington, D.C. to be decided under the
commercial rules of the American Arbitration Association. Any award issued in
writing by the American Arbitration Association, based on this provision, may be
converted to judgment by any Court of competent jurisdiction.
(f) In the event any of the provisions of this a is held by a court or
other tribunal of competent jurisdiction to be unenforceable, the other
provisions of this Agreement will remain in full force and effect.
(g) This Agreement, together with Attachment A, constitutes the entire
agreement between the parties pertaining to the subject matter hereof, and
supersedes in their entirety any and all written or oral agreements previously
existing between the parties with respect to such subject matter. The Parties
acknowledge that they are not entering into this Agreement on the basis of any
representations not expressly contained herein or in the License Agreement. Any
-8-
<PAGE>
modifications of this Agreement must be in writing and signed by both parties
hereto. The Parties agree that they have read this Agreement, understand it, and
intend to be bound by its terms.
(h) This Agreement may be executed in two or more counterparts, each
of which when so executed will be deemed an original, and all of which together
will constitute one and the same instrument.
(i) Any notice, request, instruction or other document or
communication required or permitted to be given under this Agreement shall be in
writing and shall be deemed given upon delivery in person; upon being deposited
in the mail, postage prepaid, for mailing by certified or registered mail; or
upon being transmitted by facsimile, as follows:
If to YSI, delivered, mailed or transmitted to:
Youth Services International, Inc.
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
Attention: David B. Dolch
Facsimile telephone number: (410) 356-8634
If to IYI, delivered, mailed or transmitted to:
International Youth Institute, Inc.
901 North Pitt Street, Suite 250
Alexandria, Virginia 22314
Attention: John R. Allen
Facsimile telephone number: (703) 549-9807
or, in each case, to such other address or addresses as may be specified in
writing from time to time by any party to the other parties.
IN WITNESS WHEREOF, the authorized representatives of the parties hereto
have executed this Transfer and Assignment Agreement as of the Effective Date.
Youth Services International, Inc. International Youth Institute, Inc.
By: /s/ Timothy P. Cole By: /s/ Thad A. Wolfe
------------------- -----------------
Title: Timothy P. Cole Title: Chairman & Chief Executive Officer
Chief Executive Officer ----------------------------------
-----------------------
-9-
<PAGE>
STATE OF VIRGINIA
CITY OF ALEXANDRIA ) to wit:
I, the undersigned, a Notary Public in and for the State and County
aforesaid, do hereby certify that this day personally appeared before me Thad A.
Wolfe, whose name is signed to the foregoing Agreement for the Transfer and
Assignment of Intellectual Property Rights, and acknowledged the same.
GIVEN under my hand this 30th day of April, 1997.
/s/ Deborah Ann Hainer
----------------------
Notary Public
My Commission Expires: 1/31/2000
---------
STATE OF MARYLAND )
COUNTY OF HOWARD ) to wit:
I, the undersigned, a Notary Public in and for the State and County
aforesaid, do hereby certify that this day personally appeared before me Timothy
P. Cole, whose name is signed to the foregoing Agreement for the Transfer and
Assignment of Intellectual Property Rights, and acknowledged the same.
GIVEN under my hand this 1st day of May, 1997.
/s/ Barbara B. Martin
---------------------
Notary Public
My Commission Expires: 1/10/99
-------
-10-
<PAGE>
ATTACHMENT A
The following is a representative, nonexhaustive list of Intellectual
Property being purchased, assigned and licensed back:
. Curriculum as received from YSI
. The 3 I's
. YSI Formula for Success
. World of Work
. Transfer of Experienced Trainers
. Youth Development Professionals Career Path
. Comprehensive YSI Program
-11-
<PAGE>
Exhibit 10.99.4
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("License") is entered into this 6th day of March,
1997, by and between Youth Services International, Inc. ("YSI"), a Maryland
corporation with principal place of business at 2 Park Center Court, Suite 200,
Owings Mills, Maryland 21117, and International Youth Institute, Inc. ("IYI"), a
Maryland corporation with principal place of business at 901 N. Pitt Street,
Suite 250, Alexandria, Virginia 22314. Both YSI and IYI are sometimes referred
to herein as "the Parties".
WHEREAS, IYI owns certain notes, outlines, books, compositions, writings,
inventions, processes, computer programs, ideas, know-how, formulae, trade
secrets, patents, trademarks, trade names, brand names, copyrights, intangibles
or tangibles directly related or incidental to the training of youth workers and
transferred to IYI by YSI, a non-exhaustive list of which is set forth on
Exhibit A hereto, ("Intellectual Property") which are commercially valuable and
used in IYI's educational activities and in a variety of products and services
("IYI Products and Services"); and
WHEREAS, the Intellectual Property covered by this License was purchased by
IYI from YSI pursuant to that certain Agreement For the Transfer and Assignment
of Intellectual Property Rights ("Assignment") of even date, appended hereto and
incorporated herein by reference; and
WHEREAS, IYI desires to grant YSI a license to use the Intellectual
Property; and
WHEREAS, YSI desires to license from IYI, the exclusive use (with the
exception of use by IYI) of the Intellectual Property; and
WHEREAS, the grant of this License to use the Intellectual Property
constitutes an integral part of the consideration to YSI for the sale of the
Intellectual Property in the Assignment to IYI, YSI would not have sold the
Intellectual Property to IYI without the execution of this License Agreement.
NOW, THEREFORE, in consideration of their mutual promises, the Parties
agree as follows:
1. Grant of License.
A. Grant of License. Subject to the provisions of this License, IYI
----------------
grants to YSI a perpetual, irrevocable, fully paid-up and royalty-free license
and right to use the Intellectual Property (subject to the provisions of Section
4 of the Assignment) anywhere in the world, subject to the provisions of Section
3C hereof.
<PAGE>
Nothing in this License shall be construed as granting rights to use any
intellectual property other than the Intellectual Property, and any enhancements
covered in Section 1E. Except as set forth in the following sentence, the
License is, and shall at all times continue to be, exclusive in nature, and IYI
hereby agrees that it shall not grant to any person, party or entity any right,
license or privilege with respect to the Intellectual Property. Nothing
contained in this Agreement shall be construed, however, to limit, prohibit,
restrict or preclude the use of the Intellectual Property or the IYI Products or
Services by IYI or any of its subsidiaries for any purpose permitted by the
terms of the Assignment.
B. As a significant and material characteristic of the License contracted
for by YSI in this Agreement, the provisions of Section 4 of the Assignment are
specifically incorporated herein by reference and constitute the obligations of
IYI herein as if fully set forth in this Agreement.
C. Independent Contractors. YSI's relationship with IYI, and IYI's
-----------------------
relationship with YSI, during the term of this License will be that of
independent contractors. Neither Party will have, and will not represent that
it has, any authority to bind the other Party, to assume or create any
obligation, express or implied, to enter into any agreement or licenses on
behalf of the other Party or to make any warranties or representations on behalf
of the other Party or in the other Party's name.
D. IYI's Reserved Rights. Except for those uses as expressly and
---------------------
specifically permitted by this License and the Assignment Agreement, all rights
are reserved to IYI. IYI does not sell any IYI Products or Intellectual
Property to YSI by this License.
E. Discoveries. Improvements and Derivative Works. In the event that IYI
----------------------------------------------
or YSI (the "Developing Party") develops, discovers, or creates any
improvements, enhancements, revisions, derivatives or alternative uses of the
Intellectual Property, which may be applicable to the other Party, the
Developing Party agrees to make available all such developments, discoveries,
improvements, enhancements, revisions, derivatives or alternative uses (and all
information directly related thereto and necessary for the use thereof) to the
other Party without additional consideration.
F. Permission to Sublicense. YSI shall not have the right to sublicense
------------------------
the Intellectual Property without the prior written consent of IYI, which shall
not be unreasonably withheld provided, however, that nothing contained herein
shall prevent or prohibit YSI from sublicensing to, or permitting use of the
Intellectual Property by, any subsidiary, affiliate or joint venture or other
partner of YSI. YSI represents and warrants that in the event permission to
sublicense is granted, that sublicense will contain provisions at least as
favorable as this License with respect to the protection of the Intellectual
Property.
<PAGE>
G. IYI WARRANTY. ALL Intellectual property IS LICENSED TO YSI "AS IS."
------------
IYI DISCLAIMS ALL WARRANTIES, INCLUDING BUT NOT LIMITED TO THE WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE OR THE WARRANTY OF MERCHANTABILITY.
2. Covenants.
A. Notification. Each of YSI and IYI shall notify the other party in
------------
writing of the existence of any claim or proceeding by or against such party
involving the Intellectual Property or the IYI Products within 10 days of the
filing or commencement of such claim or proceeding, or within 10 days of such
party's learning of such claim or proceeding, whichever is later.
B. Permitted Use. IYI agrees that, during the existence of the License,
-------------
it shall not assert any claim for infringement of the Intellectual Property
against YSI, for any use of the Intellectual Property that is consistent with
the terms of the License.
C. Further Assurances. IYI agrees to execute, make, acknowledge, file and
------------------
deliver such further instruments, agreements, certificates and other documents
as may be reasonably requested by YSI in order to more fully evidence the
License granted herein, to record this License or notices of the License granted
herein with any governmental agency or instrumentality or otherwise to
effectuate the full purpose of this License.
D. Infringement. In the event that either party becomes aware of any use
------------
of any name, symbol, design, logo, information or other device which it
considers to be an infringement of the intellectual property rights in the
Intellectual Property or any derivative product thereof or to constitute unfair
competition with respect to the Intellectual Property or such derivative
product(s), such party shall promptly notify the other party of the same. IYI
shall have a period of 30 days from and after its giving or receiving of such
notice to advise YSI of its proposed actions in connection with such
infringement or unfair competition. If IYI elects not to institute any legal
proceedings or not to take any action with respect thereto, YSI shall have the
right to institute any legal proceedings or tee any other actions in its own
name, at its sole cost and expense, to remedy any such infringement or unfair
competition. IYI and YSI shall cooperate with each other, at their respective
cost and expense, in connection with any action or other legal proceeding
instituted with respect to the Intellectual Property or the derivative products
thereof. Any recovery resulting from the initiation of any legal proceedings or
other actions shall be equitably apportioned between IYI and YSI unless YSI
shall have funded the full cost and expenses thereof, or unless IYI shall have
filed a petition under Title 11 of the United States Code, as amended, in which
cases, YSI shall be entitled to receive and retain, without participation by
IYI, the full amount of any such recovery. IYI
<PAGE>
and YSI shall cooperate with each other in defending any claim of infringement,
unfair competition or the like asserted by a third party against IYI or YSI
which relates to wide use of the Intellectual Property or any derivative
products thereof.
3. Proprietary Information.
A. Obligation. Each of IYI and YSI acknowledge that in the course of
----------
using the Intellectual Property and performing various obligations under this
License, it may obtain information relating to the other Party which is of a
confidential and proprietary nature to such other party ("Proprietary
Information"). Such Proprietary Information includes without limitation trade
secrets, know-how, formulas, compositions of matter, inventions, techniques,
processes, programs, diagrams, customer and financial information aid safes and
marketing plans, such as customer or prospect lists. Each of IYI and YSI will
(a) use such Proprietary Information only as reasonably necessary in connection
with the use of the Intellectual Property, (b)hold such Proprietary Information
in strict confidence and exercise due care with respect to its handling and
protection of such Proprietary Information, providing at least as much
protection as such party would use in protecting its own proprietary and/or
trade secret information, and (c) disclose, divulge or publish the same only to
such of its employees who have a business need to know in order for IYI or YSI,
as the case may be, to make proper use of the Intellectual Property. Each of
IYI and YSI further agrees to ensure that any such employee keeps all
Proprietary Information of the other party in confidence and does not use or
disclose such Proprietary Information except as permitted, and further to return
all copies of all Proprietary Information of the other party in its possession,
control or custody immediately upon termination or expiration of this License.
B. Exceptions. The obligations contained in Section 3(A) will not apply
----------
to Proprietary Information which (a) is or becomes public knowledge without the
fault or action of the other party, (b)is received by the other party from a
source other than the originating parry, which source received the information
without violation of any confidentiality restriction, (c) is independently
developed by the other party without violation of any confidentiality
restriction or (d) is or becomes available on an unrestricted basis from the
originating party whose Proprietary Information is at issue.
C. The parties acknowledge the provisions of Section 10 of the Assignment
(Covenant Not to Compete) and specifically incorporate such provisions by herein
by reference.
4. Indemnification.
A. Indemnification by IYI. IYI shall defend, indemnify and hold harmless
----------------------
YSI and its subsidiaries, and the officers, directors, employees, agents,
successor
<PAGE>
and assigns of YSI or any of its subsidiaries, from and against all claims,
damages, judgments, fines, penalties, costs or expenses incurred or sustained by
YSI or any of its subsidiaries, or the officers, directors, employees, agents,
successors or assigns of YSI or any of its subsidiaries, (i) by reason of any
direct or indirect breach by IYI of any of the representations, warranties,
covenants or agreements of IYI contained in this License or (ii) in connection
with the Intellectual Property or any derivative product thereof, as a result of
the negligent or intentional misconduct of IYI or its officers, directors,
employees or agents.
B. Indemnification by YSI. YSI shall defend, indemnify and hold harmless
----------------------
IYI and its subsidiaries and its officers, directors, employees, agents,
successor and assigns from and against all claims, damages, judgments, fines,
penalties, costs or expenses incurred or sustained by IYI, or its officers,
directors, employees, agents, successors or assigns, (i) by reason of any direct
or indirect breach by YSI of any of the representations, warranties, covenants
or agreements of YSI contained in this License or (ii) in connection with the
IYI Intellectual Property or any derivative product thereof, as a result of the
negligent or intentional misconduct of YSI or its officers, directors, employees
or agents.
5. Proprietary Rights.
Use During License. During the term of this License, YSI is authorized by
------------------
IYI to use the intellectual property used by IYI for IYI Products and Services
in connection with YSI's advertisement and promotion of IYI Products and
Services. YSI's use of such intellectual property will be in accordance with
IYI's policies in effect from time to time, including but not limited to
trademark usage and cooperative advertising policies.
6. Term and Termination of License.
A. Term. This License is for a perpetual term and shall continue in full
----
force and effect from and after the date hereof unless and until terminated in
accordance with this Section 6, and nothing contained in this License will be
interpreted as requiring either party to renew this License. Notwithstanding
the provisions of this Section, or any other provisions of this License, this
License may be terminated at any time as set forth below.
B. Automatic Termination. (i) This License shall terminate automatically,
---------------------
with no further act or action of either party, and all right, title and interest
in the Intellectual Property shall be transferred, conveyed and assigned to YSI,
immediately upon the reversion back to YSI of the Intellectual Property in
accordance with Section 4 of the Assignment.
<PAGE>
7. Limitation of Liability.
IN NO EVENT WILL EITHER YSI OR IYI BE LIABLE FOR ANY ANTICIPATORY PROFITS
OR PUNITIVE DAMAGES OF ANY KIND, FROM ALL CAUSES OF ACTION OF ANY KIND,
INCLUDING TORT (INCLUDING NEGLIGENCE), CONTRACT AND BREACH OF WARRANTY, EVEN IF
YSI OR IYI HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.
8. Remedies.
Each of IYI and YSI hereby acknowledges and agrees that (i) a remedy at law
may not adequately protect the rights of IYI or YSI in the event of any breach
or threatened breach of the provisions of this Agreement by the other party or
any of its officers, employees, representatives, agents or affiliates, and (b)
any such breach or threatened breach of such provisions will result in
irreparable harm to the non-breaching party. Therefore, without prejudice to
any other remedies at law or in equity to which they may be entitled, each of
IYI and YSI hereby agrees that the non-breaching party shall be entitled to seek
injunctive relief in any court of competent jurisdiction in the event of any
actual or threatened breach of any of the provisions of this Agreement in order
to prevent or terminate the continuance of any such breach or threatened breach
of such provisions, together with reimbursement of legal and other expenses and
fees incurred by the non-breaching party in enforcing such provisions or seeking
such relief.
9. Bankruptcy Provisions.
A. The parties hereto acknowledge and agree that the Intellectual Property
is "intellectual property" as that term is defined by Title 11 of the United
States Code, as amended ("Title 11").
B. IYI agrees that in the event a petition is filed by or against it under
Title 11 Chapter 7, IYI will consent to YSI's obtaining relief under 11 U.S.C.
(S)107.
C. IYI agrees that, in the event that a petition is filed by or against
IYI under Title 11 Chapter 11, or IYI becomes the subject of receivership
proceedings, IYI or any subsequently appointed trustee or receiver shall, at the
sole option of and on written request by YSI, continue to perform under this
Agreement. Further, IYI and any trustee or receiver shall not interfere with
the rights of YSI as provided in this Agreement, including but not limited to
any covenant not to compete, or confidentiality provisions, which rights shall
continue in YSI.
10. General.
<PAGE>
The General Terms of this License shall be the terms set forth in paragraph
13 of the Agreement for the Transfer and Assignment, which is appended hereto
and incorporated by reference herein.
IN WITNESS WHEREOF, the parties hereto have executed this License Agreement
as of the date first written above.
Youth Services International, Inc. International Youth Institute, Inc.
By: /s/ Timothy P. Cole By: /s/ Thad A. Wolfe
-------------------- ------------------
Title: Timothy P. Cole,
Chief Executive Officer Title: Chairman & Chief Executive Officer
----------------------- ----------------------------------
<PAGE>
EXHIBIT A
The following is a representative, nonexhaustive list of Intellectual Property
being purchased, assigned and licensed back:
. Curriculum as received from YSI
. The 3 I's
. YSI Formula for Success
. World of Work
. Transfer of Experienced Trainers
. Youth Development Professionals Career Path
. Comprehensive YSI Program
<PAGE>
Exhibit 10.99.5
CONTRACT BUY-OUT AGREEMENT
This Contract Buy-Out and License Modification Agreement ("Agreement"),
dated as of December 21, 1998, is made and entered into by and between Youth
Services International, Inc., a Maryland corporation ("YSI") and Golden Eagle
Education & Training, Inc. (formerly, "International Youth Institute, Inc."), a
Maryland corporation ("Golden Eagle").
Explanatory Statement
---------------------
A. YSI and Golden Eagle are parties to (i) an Amended and Restated
Training Services Agreement, dated as of January 1, 1997 ("TSA"), (ii) a License
Agreement, dated as of March 6, 1997 ("License Agreement"), and (iii) an
Agreement for the Transfer and Assignment of Intellectual Property, dated as of
March 6, 1997 ("Assignment").
B. YSI and Golden Eagle desire to effectuate a mutual termination of the
TSA on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the Explanatory Statement, which is
incorporated into and made a part hereof, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto do hereby agree-as follows:
1. Termination of TSA. In consideration of the payment by YSI to Golden
------------------
Eagle provided for in Section 2 hereof, YSI and Golden Eagle hereby terminate
and rescind the TSA in every respect. From and after the Payment Date
(hereinafter defined), the provisions of the TSA shall be of no further force or
effect whatsoever.
2. Buy-Out Amount. As full payment to Golden Eagle for a release and
--------------
discharge of YSI's obligations under the TSA, YSI agrees to pay to Golden Eagle,
by bank treasurer's check or wire transfer, the sum of One Million One Hundred
Fifty Thousand Dollars ($1,150,000) on December 31, 1998 (the "Payment Date").
3. Payments under TSA. YSI agrees to pay, on or before the Purchase Date,
------------------
any and all sums due and owing by it to Golden Eagle under the TSA through the
Payment Date.
4. Golden Eagle Training and Education Employees. YSI shall have the
---------------------------------------------
right, but not the obligation, to employ employees of Golden Eagle who have
heretofore performed services for YSI under the TSA. No employee of Golden
Eagle shall have any obligation to accept any employment that may be offered to
him or her by YSI.
-1-
<PAGE>
5. Expenses. All costs and expenses incurred in connection with this
--------
Agreement and the transactions contemplated hereby will be paid by the party
incurring such costs and expenses.
6. Public Announcements. No public announcement of the existence or terms
--------------------
of this Agreement shall be made by either party without the consent of the
other, and the text of any such announcement shall be reviewed and approved by
the other party before it is made, which consent and approval shall not be
unreasonably withheld.
7. Compliance by Golden Eagle.
--------------------------
A. Golden Eagle hereby agrees that it will not (a)(i) assist, advise or
consult with, (ii) team with, or (iii) lend its name to or otherwise be a part
of a bid proposal (as subcontractor, consultant, reference or otherwise) of, any
person or party in connection with any proposal for any contract relating to
current operations of YSI or the renewal of any YSI contract, or (b)otherwise
violate or breach the noncompete provisions of the Assignment and hereby
represents and warrants that it has not done any of the foregoing.
B. Golden Eagle agrees that any material violation of the provisions of
this Section 7 would enable YSI to reclaim the amount paid by YSI to Golden
Eagle under Section 2 hereof, in addition to any other legal or equitable relief
to which YSI may be entitled, provided, however, that the amount that YSI may
reclaim under the provisions of this paragraph shall be reduced by the sum of
two hundred thousand dollars ($200,000) on each anniversary of the date of
this agreement until such amount shall be reduced to zero, it being understood
that such reduction does not limit the amount of damages or other relief to
which YSI may be entitled.
8. Further Assurances. The parties will use their respective best efforts
------------------
to implement the provisions of this Agreement and will, without further
consideration, promptly execute and deliver such additional documents or
instruments reasonably necessary to carry out the intentions of the parties
expressed herein.
9. Training Materials. The parties agree that all training materials
------------------
currently in the possession of YSI or the Golden Eagle trainers providing
training for YSI will remain in the possession of YSI after the Payment Date
pursuant to the License Agreement.
10. License Agreement and Assignment. The parties agree that the terms of
--------------------------------
the License Agreement and the Assignment shall remain in full force and effect.
-2-
<PAGE>
11. Indemnification. Golden Eagle shall indemnify and hold harmless YSI
---------------
from and against any and all claims, damages, losses, and costs (including
reasonable attorneys and experts fees) incurred by YSI arising out of or in
connection with any act or omission by Golden Eagle in the performance of its
obligations under the TSA prior to the date of this Agreement. YSI shall
indemnify and hold harmless Golden Eagle from and against any and all claims,
damages, losses, and costs (including reasonable attorneys and experts fees)
incurred by Golden Eagle arising out of or in connection with any act or
omission by YSI in the provision of training services from and after the date of
this Agreement that heretofore were performed by Golden Eagle pursuant to the
TSA.
12. Notices. All notices or other communications required to be given to
-------
the parties hereto shall be in writing and shall be delivered personally,
transmitted by facsimile, mailed-by registered or certified mail (return receipt
requested, postage prepaid) as follows:
If to YSI, to:
Youth Services International, Inc.
2 Park Center Court
Owings Mills, Maryland 21117
Attention: Timothy P. Cole, Chairman and CEO
FAX: (410) 356-8634
If to Golden Eagle, to:
Golden Eagle Education & Training, Inc.
148 E. Main Street
Westminster, Maryland 21157
Attention: Dr. David Dolch, Chairman and CEO
FAX: (410) 840-4407
13. Governing Law. The provisions of this Agreement shall be governed by,
-------------
and construed in accordance with the laws of the State of Maryland.
14. Miscellaneous. This Agreement constitutes the entire agreement
-------------
between the parties with respect to the subject matter hereof. This Agreement
shall not be assigned by either party without the written consent of the other
party. This Agreement is binding upon and shall insure to the benefit of the
parties hereto and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed as of the day and year first above written.
-3-
<PAGE>
Youth Services International, Inc.
By: /s/ Mark S. Demilio
--------------------
Mark S. Demilio, Senior Vice
President and General Counsel
Golden Eagle Education & Training, Inc.
By: /s/ Dr. David B. Dolch
----------------------
Dr. David Dolch, Chairman and
Chief Executive Officer
-4-
<PAGE>
EXHIBIT 10.99.6
AMENDMENT TO CONTRACT BUY-OUT AGREEMENT
This Amendment to Contract Buy-Out Agreement (the "Amendment"), dated as of
January 6, 1999 is made and entered into by and between Youth Services
International, Inc., a Maryland corporation ("YSI") and Golden Eagle Education &
Training, Inc. (formerly, "International Youth Institute, Inc."), a Maryland
corporation ("Golden Eagle"). This Amendment shall be deemed effective as of
December 21, 1998.
Explanatory Statement
---------------------
A. On December 21, 1998, YSI and golden Eagle entered into a Contract Buy-
Out Agreement (the "Agreement").
B. all terms not otherwise defined herein shall have the meanings ascribed
to them in the Agreement.
C. YSI and Golden Eagle desire to amend the Agreement as set forth herein.
Agreement
---------
Now, therefore, for good and valuable consideration, the explanatory
statement set forth above, which is incorporated into the body of this
Amendment, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 1 of the Agreement shall be deleted in its entirety and
replaced with the following:
"Termination of TSA. YSI and Golden Eagle terminate and rescind the
------------------
TSA in every respect effective as of December 31, 1998 (the
"Termination Date")."
2. Section 2 of the Agreement shall be deleted in its entirety and
replaced with the following:
"Buy-Out Amount. As full payment to Golden Eagle for the release and
--------------
discharge of the parties' respective obligations under the TSA, YSI
agrees to pay Golden Eagle the total sum of $1,150,000.00 as follows:
(i) YSI shall initiate a wire transfer of the sum of $775,000.00 to
Golden Eagle no later than 4:00 p.m. January 6, 1999; the $775,000
must be received in Golden Eagle's account no later than 4:00 p.m. on
January 7, 1999; and (ii) YSI shall pay to Golden Eagle by bank
treasurer's check or wire transfer the sum of $375,000.00 with such
funds being received by Golden Eagle on the earlier of (x) March 5,
<PAGE>
1999 and (y) the first business day following the announcement by the
Maryland Department of Juvenile Justice of the selection of the
preferred bidder of the Charles H. Hickey School Contract RFP No.
99JJ010.
3. Section 3 of the Agreement shall be deleted in its entirety.
4. Section 7 of the Agreement shall be deleted in its entirety and
replaced with the following:
"Compliance by Golden Eagle.
--------------------------
A. Golden Eagle hereby agrees that it and its officers,
individually or representing Golden Eagle in any capacity will not (a)
(i) assist, advise or consult with, (ii) team with, or (iii) lend its
name to or otherwise be a part of a bid proposal (as subcontractor,
consultant, reference or otherwise) of, any person or party in
connection with any proposal for any contract relating to current
operations of YSI or the renewal of any YSI contract, or (b) otherwise
violate or breach the noncompete provisions of the Assignment and
hereby represents and warrants that neither it nor any of its officers
has done any of the foregoing.
B. Golden Eagle agrees that any material violation by it and any
of its officers of the provisions of this Section 7 would enable YSI
to reclaim the amount paid by YSI to Golden Eagle under Section 2
hereof, in addition to any other legal or equitable relief to which
YSI may be entitled, provided, however, that the amount that YSI may
reclaim under the provisions of this paragraph shall be reduced by the
sum of two hundred thousand dollars ($200,000) on each anniversary of
the date of this agreement until such amount shall be reduced to zero,
it being understood that such reduction does not limit the amount of
damages or other relief to which YSI may be entitled."
5. Purchase of Equipment. On or before January 8, 1999, YSI shall pay to
---------------------
Golden Eagle the sum of $4,852.42 in consideration of the equipment set forth on
Schedule A attached hereto, all of which has previously been transferred by
Golden Eagle to YSI.
6. Representations and Warranties of YSI and Golden Eagle. YSI and Golden
------------------------------------------------------
Eagle are corporations duly organized, validly existing and in good standing
under the laws of the state of Maryland and both have full corporate power to
enter into and perform their obligations under this Amendment and the Agreement.
The execution, delivery and performance of this Amendment and the Agreement are
within the corporate power of YSI and Golden Eagle and have been duly authorized
by all necessary corporate action by YSI and Golden Eagle. This Amendment and
-2-
<PAGE>
the Agreement, as amended, are enforceable against YSI and Golden Eagle in
accordance with their respective terms.
7. Effect of this Amendment. Except as specifically set forth herein, the
------------------------
provisions of the Agreement shall remain in full force and effect as if this
Amendment had not been made. The Agreement, as hereby amended, is ratified and
confirmed.
8. Counterparts. This Amendment may be executed in several counterparts,
------------
each of which shall be deemed an original, but all of which shall constitute one
and the same document.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed as of the day and year first above written.
WITNESS: YOUTH SERVICES INTERNATIONAL, INC.
/s/ John E. Mentzer By: /s/ Mark S. Demilio
- ------------------- --------------------
Mark S. Demilio, Senior Vice President
and General Counsel
GOLDEN EAGLE EDUCATION &
TRAINING, INC.
/s/ William M. Murphy By: /s/ Dr. David B. Dolch
- --------------------- -----------------------
Dr. David Dolch, Chairman and Chief
Executive Officer
-3-
<PAGE>
GOLDEN EAGLE EDUCATION & TRAINING, INC. EQUIPMENT
(As used in conjunction with YSI TSA)
<TABLE>
<CAPTION>
12/31/98 CONTRACT
DATE OF ORIGINAL BOOK BUYOUT
LOCATION DESCRIPTION PURCHASE COST VALUE PRICE
- -------- ----------- -------- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Capital Equipment
- -----------------------------------------------------------------------------------------------------------------------------
Camp Washington Gateway P5-100 Desktop Computer 15-May-96 $ 2,409.13 $ 267.69 $ 267.69
- -----------------------------------------------------------------------------------------------------------------------------
Clarinda Academy HP 600C Color Inkjet Printer 10-Apr-96 $ 427.41 $ 199.57 $ 199.57
- -----------------------------------------------------------------------------------------------------------------------------
Clarinda Academy Gateway P5-100 Desktop Computer 15-May-96 $ 2,409.13 $ 267.69 $ 267.69
- -----------------------------------------------------------------------------------------------------------------------------
Hickey School Gateway P5-100 Desktop Computer 15-May-96 $ 2,174.28 $ 267.69 $ 267.69
- -----------------------------------------------------------------------------------------------------------------------------
Ken Gardiner's Home Office Toshiba P5-75 Notebook Computer 04-Jun-96 $ 2,174.28 $1,087.08 $1,087.08
- -----------------------------------------------------------------------------------------------------------------------------
Rick Avery's Home Office HP 5P Laser Printer 22-Apr-96 $ 1,002.15 $ 467.75 $ 467.75
- -----------------------------------------------------------------------------------------------------------------------------
Rick Avery's Home Office Gateway P5-100 Desktop Computer 15-May-96 $ 2,409.13 $ 267.69 $ 267.69
- -----------------------------------------------------------------------------------------------------------------------------
Rick Avery's Home Office Sharp Fax Machine 27-Feb-97 $ 344.84 $ 218.34 $ 218.34
------------------------------------------------------------------------------------------
Total - Capital Equipment $13,585.20 $3,043.50 $3,043.50
------------------------------------------------------------------------------------------
<CAPTION>
Expense Items
- -----------------------------------------------------------------------------------------------------------------------------
Camp Washington 2 Drawer File Cabinet 10-Oct-96 $ 69.98 $ 34.99
- -----------------------------------------------------------------------------------------------------------------------------
Camp Washington 2 Drawer File Cabinet 20-Nov-96 $ 71.66 $ 35.83
- -----------------------------------------------------------------------------------------------------------------------------
Camp Washington O/H Projector 03-Feb-97 $ 199.99 $ 99.99
- -----------------------------------------------------------------------------------------------------------------------------
Camp Washington 4 Drawer Putty File Cabinet 08-Sep-97 $ 229.33 $ 114.66
- -----------------------------------------------------------------------------------------------------------------------------
Chanute Transition Center Filing Cabinet 06-Nov-98 $ 89.00 $ 44.50
- -----------------------------------------------------------------------------------------------------------------------------
Clarinda Academy Iomega Zip Drive (External) 02-Oct-98 $ 146.99 $ 73.50
- -----------------------------------------------------------------------------------------------------------------------------
Cypress Creek Academy Black File Cabinet 20-Aug-97 $ 262.35 $ 131.18
- -----------------------------------------------------------------------------------------------------------------------------
Cypress Creek Academy Filing Cabinet 26-Jun-98 $ 264.99 $ 132.49
- -----------------------------------------------------------------------------------------------------------------------------
Everglades Academy 4 Drawer (25") File Cabinet 25-Aug-97 $ 214.89 $ 107.44
- -----------------------------------------------------------------------------------------------------------------------------
Hickey School 4 Drawer Putty Lateral File 21-Feb-97 $ 230.42 $ 115.21
- -----------------------------------------------------------------------------------------------------------------------------
Hickey School Gray Task Chair 27-Mar-97 $ 223.11 $ 111.56
- -----------------------------------------------------------------------------------------------------------------------------
Hickey School 4 Drawer Gray Lateral File 16-Jun-97 $ 230.42 $ 115.21
- -----------------------------------------------------------------------------------------------------------------------------
Hickey School HP Deskjet 500 Printer 01-May-98 $ 75.00 $ 37.50
- -----------------------------------------------------------------------------------------------------------------------------
Hillsborough Academy Black Storage Cabinet 10-Sep-97 $ 264.83 $ 132.42
- -----------------------------------------------------------------------------------------------------------------------------
Keweenaw Academy O/H Projector 09-Jan-97 $ 199.99 $ 99.99
- -----------------------------------------------------------------------------------------------------------------------------
Rick Avery's Home Office Iomega Zip Drive (External) 16-Aug-98 $ 125.39 $ 62.70
- -----------------------------------------------------------------------------------------------------------------------------
Rick Avery's Home Office Fax/Modem Card 26-Aug-98 $ 135.80 $ 67.90
- -----------------------------------------------------------------------------------------------------------------------------
Springfield Academy Flip Chart Easel 03-Dec-96 $ 144.99 $ 72.50
- -----------------------------------------------------------------------------------------------------------------------------
Springfield Academy O/H Projector 03-Dec-96 $ 199.99 $ 99.99
- -----------------------------------------------------------------------------------------------------------------------------
Springfield Academy 2 Drawer File Cabinet 09-Dec-96 $ 69.98 $ 34.99
- -----------------------------------------------------------------------------------------------------------------------------
Springfield Academy 2 Drawer File Cabinet 09-Dec-96 $ 69.98 $ 34.99
- -----------------------------------------------------------------------------------------------------------------------------
Tarklo Academy Literature Sorter 08-Oct-97 $ 98.76 $ 49.38
- -----------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Total - Expense Items $ 3,617.84 $1,808.92
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Total - All Equipment $17,203.04 $4,852.42
------------------------------------------------------------------------------------------
</TABLE>
Note: Capital equipment (computers, printers, etc.) sold at book value
as of 12/31/98
Expense items (file cabinets, o/h projectors, etc.) sold at 50%
of original cost
-4-
<PAGE>
EXHIBIT 10.104
September 23, 1998
Mr. Mark S. Demilio
2 Park Center Court
Owings Mills, MD 21117
Dear Mark:
In regard to the Change in Control Agreement (the "Agreement") dated as of
March 10, 1997 by and between Youth Services International, Inc. (the "Company")
and you, and the Employment Agreement (the "Employment Agreement") dated March
10, 1997 by and between the Company and you, it has been noted that certain
provisions therein have been subject to potential differing interpretations.
This letter is intended to clarify the meaning of such provisions in conjunction
with the proposed merger between the Company and Correctional Services
Corporation the parties agree to the following:
1. The execution of the Merger Agreement between the Company and CSC of even
date herewith constitutes a Change in Control under the Change in Control
Agreement.
2. Mr. Demilio will not continue employment with the Company as Senior Vice
President or as Chief Financial Officer after the closing of the merger
contemplated by the Merger Agreement (although it is understood that Mr.
Demilio and CSC will discuss and may agree that Mr. Demilio remain an
employee of the Company or become an employee of CSC after the closing).
The Notice of Termination under the Change in Control Agreement shall be
given as of the date of the closing of the merger and the date of the
closing of the merger also will be the Date of Termination under the Change
in Control Agreement.
3. Notwithstanding anything to the contrary in the Change in Control Agreement
or the Employment Agreement, and notwithstanding the date of closing of the
merger, the parties agree that the amount of severance payable to Mr.
Demilio under Section 2(b) of the Change in Control Agreement is $785,000.
4. Mr. Demilio will be bound by the non-compete and other provisions of
Section 8 of the Employment Agreement for the periods specified therein
from the date of the closing of the merger and additionally will not,
directly or indirectly, on his own behalf or as a
<PAGE>
Mr. Mark S. Demilio
September 23, 1998
Page 2
partner, officer, or employee of any person, firm or corporation, 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 (including any extension of his
employment that may be agreed as referenced in paragraph 2 above).
5. In consideration of the non-compete agreement set forth in Section 4 above,
as well as the provisions contained in Section 8 of the Employment
Agreement, CSC agrees to pay to Mr. Demilio $100,000 in 12 equal monthly
installments commencing on the first day of the month following the date of
the closing of the merger, subject to acceleration to the extent that such
acceleration does not create adverse accounting effects, and, in the event
of any breach of such provisions, CSC (or the Company) shall be entitled,
in addition to any other damages recoverable by CSC or the Company, to the
refund of such $100,000.
6. Upon consummation of the merger, CSC will cause the Company to honor the
Change in Control Agreement as clarified herein.
Please indicate your acceptance to the terms set forth herein by signing a
copy of this letter below.
CORRECTIONAL SERVICES CORPORATION
By: /s/ James F. Slattery
---------------------
AGREED and ACCEPTED
this 23rd day of September 1998
/s/ Mark S. Demilio
- -------------------
<PAGE>
Exhibit 10.106
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Second Amendment")
made as of the 31st day of October, 1997, by SIGNET BANK, successor by merger to
SIGNET BANK/MARYLAND (the "Bank"), and YOUTH SERVICES INTERNATIONAL, INC., a
Maryland corporation ("YSI"), and certain of its wholly owned subsidiaries,
namely: YOUTH SERVICES INTERNATIONAL OF IOWA, INC., a Maryland corporation
d/b/a Clarinda Academy; YOUTH SERVICES INTERNATIONAL OF TENNESSEE, INC., a
Maryland corporation d/b/a Reflections Treatment Agency; YOUTH SERVICES
INTERNATIONAL OF MARYLAND, INC., a Maryland corporation d/b/a Victor Cullen
Academy; YOUTH SERVICES INTERNATIONAL OF BALTIMORE, INC., a Maryland corporation
d/b/a Charles H. Hickey, Jr. School; YOUTH SERVICES INTERNATIONAL OF NORTHERN
IOWA, INC., an Iowa corporation d/b/a Forest Ridge; YSI OF CENTRAL IOWA, INC.,
an Iowa corporation d/b/a Woodward Academy; YSI OF UTAH, INC., a Utah
corporation; YOUTH SERVICES INTERNATIONAL OF SOUTH DAKOTA, INC., a South Dakota
corporation d/b/a Chamberlain Academy, Springfield Academy and Missouri River
Academy; YOUTH SERVICES INTERNATIONAL OF MISSOURI, INC., a Missouri corporation
d/b/a Tarkio Academy; and SOUTHWESTERN CHILDREN'S HEALTH SERVICES, INC., an
Arizona corporation d/b/a Parc Place, Inc., Promise House, Inc. and Touchstone
Community, Inc. (collectively, the "Original Borrowers").
Recitals
--------
A. The Original Borrowers and the Bank executed a Loan and Security Agreement
dated as of June 20, 1995 (the "Loan Agreement"), which generally provided for
the extension of a line of credit facility to the Original Borrowers.
B. On July 25, 1995, YOUTH SERVICES INTERNATIONAL OF NEW MEXICO, INC., a New
Mexico corporation d/b/a Desert Hills Center for Youth and Families of New
Mexico, entered into an Assumption Agreement evidencing its entry into the Loan
Agreement and its agreement to the terms and obligations thereunder.
C. YOUTH SERVICES INTERNATIONAL OF MAMMOTH, INC., a California corporation
and an Original Borrower, has now ceased business operations, dissolved under
California law, and is no longer a party to the Loan Agreement, the Line Credit
Note, or any of the Loan Documents, except to the extent any obligation
previously undertaken expressly survives termination of the borrowing
relationship.
<PAGE>
D. On or about December 12, 1996, YOUTH SERVICES INTERNATIONAL OF TEXAS,
INC., a Texas corporation d/b/a Desert Hills Center for Youth and Families of
Texas, YOUTH SERVICES INTERNATIONAL OF FLORIDA, INC., a Florida corporation
d/b/a Tampa Bay Academy, YOUTH SERVICES INTERNATIONAL OF VIRGINIA, INC., a
Virginia corporation d/b/a Camp Washington, DEVELOPMENTAL BEHAVIORAL
CONSULTANTS, INC., an Arizona corporation, INTROSPECT HEALTHCARE, CORPORATION,
an Arizona corporation d/b/a Desert Hills Center for Youth and Families, and
DESERT HILLS CENTER FOR YOUTH AND FAMILIES, INC., an Arizona corporation wholly-
owned by INTROSPECT HEALTHCARE, CORPORATION, each executed an Assumption
Agreement evidencing their agreement to be bound by the terms and conditions of
the Loan Agreement.
E. (The Original Borrowers (excluding YOUTH SERVICES INTERNATIONAL OF
MAMMOTH, INC.), YOUTH SERVICES INTERNATIONAL OF NEW MEXICO, INC., YOUTH SERVICES
INTERNATIONAL OF TEXAS, INC., YOUTH SERVICES INTERNATIONAL OF FLORIDA, INC.,
YOUTH SERVICES INTERNATIONAL OF VIRGINIA, INC., DEVELOPMENTAL BEHAVIORAL
CONSULTANTS, INC., INTROSPECT HEALTHCARE, CORPORATION and DESERT HILLS CENTER
FOR YOUTH AND FAMILIES, INC. are hereafter each referred to as a "Borrower,"
and collectively as the "Borrowers".)
F. The Borrowers and the Bank entered into a First Amendment to Loan and
Security Agreement on December 12, 1996 (the "First Amendment").
G. The Borrowers have requested the Bank to amend the Loan Agreement and the
Bank has agreed to do so upon the terms and conditions expressly set forth
below.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
Section 1. Defined Terms. All terms defined in the Loan Agreement shall have
-------------
the same meaning when used in this Second Amendment. As used hereafter, the
term "Loan Agreement" shall mean the Loan and Security Agreement dated June 20,
1995 as amended by the First Amendment and this Second Amendment. The Recitals
are incorporated in and a part of this Second Amendment.
Section 2. General Description of Amendments. At the request of the
---------------------------------
Borrowers, the Bank agrees to extend the maturity of the Line of Credit Note,
and the parties agree to amend certain other terms of the Loan Agreement all as
set forth below. The foregoing modifications and amendments shall be effected
by the execution of this Second Amendment and certain other instruments or
documents referred to below, and
2
<PAGE>
the Loan Agreement and all other Loan Documents are hereby amended to
incorporate the terms expressly provided herein.
Section 3. Amendments. Subject to satisfaction of the conditions of this
----------
Second Amendment, the Loan Agreement is amended in the following respects, and
shall be construed and interpreted to give effect to the modifications and
amendments expressly set forth herein.
(a) Section 6.20 is deleted in its entirety and the following
substituted in its stead:
Section 6.20. Minimum Quarterly Tangible Capital. The Borrowers
----------------------------------
shall attain, on a consolidated basis, and maintain a minimum quarterly
tangible capital as of the close of each fiscal quarter of $45,000,000.
(b) The Maturity Date of the Line of Credit Note shall be extended
until November 30, 1998, and such Maturity Date shall be reflected in the First
Allonge referred to in Section 7 below.
(c) The Bank hereby acknowledges its waiver of breaches of the
positive net profit covenant provided in Sections 6.22 of the Loan Agreement for
the quarterly periods ending March 31, 1997, June 30, 1997 and September 30,
1997.
(d) The Bank (i) consents to the release and discharge of YSI OF UTAH,
INC., SOUTHWESTERN CHILDREN'S HEALTH SERVICES, INC., YOUTH SERVICES
INTERNATIONAL OF NEW MEXICO, INC., YOUTH SERVICES INTERNATIONAL OF TEXAS, INC.,
YOUTH SERVICES INTERNATIONAL OF FLORIDA, INC., DEVELOPMENTAL BEHAVIORAL
CONSULTANTS, INC., INTROSPECT HEALTHCARE, CORPORATION, and DESERT HILLS CENTER
FOR YOUTH AND FAMILIES, INC. (collectively, the "Released Subsidiaries") as
"Borrowers" under the Loan Agreement and does hereby release and discharge each
of the Released Subsidiaries of and from their respective obligations under the
Loan Agreement, the Line of Credit Note, the Assumption Agreement and all other
Loan Documents, such release to be evidenced by the execution and delivery of
termination statements terminating the security interest of the Bank as to any
properties of the Released Subsidiaries in which the Bank presently holds a
perfected security interest; and (ii) hereby does release and discharge any and
all liens and security interests of the Bank in or on any of the shares of
capital stock of any of the Released Subsidiaries or Promise House, Inc.
Hereafter, the term "Borrowers" shall mean all of the Borrowers named in Recital
D excluding the Released Subsidiaries. The Bank further acknowledges and agrees
that Promise House, Inc. is not now and never has been a party to the Loan
Agreement or the Line of Credit Note.
3
<PAGE>
(e) The Bank hereby consents to the sale and transfer by YSI and its
subsidiary corporation of all of the issued and outstanding capital stock of the
Released Subsidiaries and of Promise House, Inc. to Youth and Family Centered
Services, Inc., and hereby waives any and all Events of Default which may arise
under the terms of the Loan Agreement, as amended hereby, by reason of such sale
and transfer, including, without limitation, any and all Events of Default which
may arise by reason of any breach by the Borrowers, or the failure of the
Borrowers to comply with, any of the covenants contained in Articles VI and VII
of the Loan Agreement, including, without limitation, those contained in
Sections 6.3, 6.6, 7.1 and 7.2 thereof.
Section 4. Representations and Warranties of Borrowers. Borrowers hereby
-------------------------------------------
represent and warrant to Bank that (i) execution of this Second Amendment has
been duly authorized by all requisite action of Borrowers; (ii) no consents are
necessary from any third parties for Borrowers' execution, delivery or
performance of this Second Amendment, (iii) this Second Amendment and the Loan
Agreement as amended hereby constitute the legal, valid and binding obligations
of Borrowers enforceable against Borrowers in accordance with their terms,
except to the extent that the enforceability thereof against Borrowers may be
limited by bankruptcy, insolvency or other laws affecting the enforceability of
creditors rights generally or by equity principles of general application, (iv)
except as otherwise disclosed to the Bank in writing, all of the representations
and warranties contained in Article V of the Loan Agreement, as amended hereby,
are true and correct in all material respects with the same force and effect as
if made on and as of the effective date of this Second Amendment, except that
with respect to the representations and warranties made regarding Financial
Statements, such representations and warranties are hereby made with respect to
the most recent Financial Statements delivered by Borrowers to Bank, (v) there
exists no Default which is continuing and no Event of Default has occurred, and
(vi) no Default or Event of Default will occur immediately or with the passage
of time or giving of notice as a consequence of this Second Amendment becoming
effective.
Section 5. Chief Executive Offices. The location of each Borrower's
-----------------------
original entry books and records and the place where its records relating to
Accounts are maintained is identified in Amended Schedule B to the Loan
Agreement.
Section 6. Reaffirmation. Borrowers hereby acknowledge and confirm that
-------------
(i) except as expressly amended hereby, the Loan Agreement and other Loan
Documents remain in full force and effect, (ii) the Loan Agreement, as amended
hereby, is in full force and effect, (iii) Borrowers have no defenses to their
respective obligations under the Loan Agreement and the other Loan Documents,
(iv) except to the extent released herein, the Liens of Bank under the Loan
Documents, continue in full force and effect and have the same priority as
before this Second Amendment, and (v) Borrowers
4
<PAGE>
have no claim against Bank arising from or in connection with the Loan Agreement
or the other Loan Documents.
Section 7. Allonge to Amended and Restated Master Revolving Promissory
-----------------------------------------------------------
Note. The terms of the Line of Credit Note shall be amended by the affixation of
- ----
a First Allonge to the Amended and Restated Master Revolving Promissory Note
executed and delivered by the Borrowers on December 12, 1996.
Section 8. Effect of Amendment. Except as hereby amended, the terms and
-------------------
conditions of the Loan Agreement and all other Loan Documents are hereby
approved, ratified and confirmed and shall remain in force and effect until all
principal, accrued interest and all other charges and costs due under the Loan
Agreement and any and all notes have been paid, in full. The execution and
delivery of this Second Amendment shall not constitute a novation, shall not
extinguish, terminate, affect of impair the obligations of the Borrowers, and
shall not waive, extinguish, terminate, affect or impair any security, right or
remedy of the Bank against the Borrowers, the Borrowers' property or any other
person obligated under the Loan Documents. The execution an delivery of this
Second Amendment shall not constitute a waiver of any provision of the Loan
Agreement, any of the other Loan Documents or any existing Default or Event of
Default, nor act as a release or subordination of the liens or security
interests of Lender in the Collateral.
Section 9. Effective Date. Regardless of the date of execution and
--------------
delivery of this Second Amendment or any other instrument referenced herein, it
is intended that the terms of this Second Amendment and the modification and
amendments provided for herein shall be effective as of October 31, 1997,
regardless of the date of actual execution.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Second Amendment the
date and year first above written.
WITNESS/ATTEST: SIGNET BANK
/s/ Corine C. Clash By: /s/ Warren F. Boutilier (SEAL)
- ------------------------ ---------------------------
Warren F. Boutilier
Vice President
YOUTH SERVICES INTERNATIONAL, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
TENNESSEE, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
[SIGNATURES CONTINUED]
6
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
MARYLAND, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
BALTIMORE, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
NORTHERN IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YSI OF CENTRAL IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
7
<PAGE>
YSI OF UTAH, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
SOUTH DAKOTA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
MISSOURI, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
VIRGINIA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
8
<PAGE>
SOUTHWESTERN CHILDREN'S HEALTH
SERVICES, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
NEW MEXICO, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
TEXAS, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
FLORIDA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
9
<PAGE>
DEVELOPMENTAL BEHAVIORAL
CONSULTANTS, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
INTROSPECT HEALTHCARE, CORPORATION
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ ---------------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
DESERT HILLS CENTER FOR YOUTH AND
FAMILIES, INC. (a wholly-owned subsidiary
of INTROSPECT HEALTHCARE,
CORPORATION)
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ------------------------ -----------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
[SIGNATURES END]
10
<PAGE>
Exhibit 10.107
FIRST ALLONGE TO
AMENDED AND RESTATED MASTER REVOLVING PROMISSORY NOTE
EXECUTED BY YOUTH SERVICES INTERNATIONAL, INC., YOUTH SERVICES
INTERNATIONAL OF IOWA, INC., YOUTH SERVICES INTERNATIONAL OF
TENNESSEE, INC., YOUTH SERVICES INTERNATIONAL OF MARYLAND, INC.,
YOUTH SERVICES INTERNATIONAL OF BALTIMORE, INC., YOUTH SERVICES
INTERNATIONAL OF NORTHERN IOWA, INC., YSI OF CENTRAL IOWA, INC.,
YOUTH SERVICES INTERNATIONAL OF SOUTH DAKOTA, INC., YOUTH
SERVICES INTERNATIONAL OF MISSOURI, INC., YSI OF UTAH, INC.,
SOUTHWESTERN CHILDREN'S HEALTH SERVICES, INC., YOUTH SERVICES
INTERNATIONAL OF NEW MEXICO, INC., YOUTH SERVICES INTERNATIONAL
OF TEXAS, INC., YOUTH SERVICES INTERNATIONAL OF FLORIDA, INC.,
DEVELOPMENTAL BEHAVIORAL CONSULTANTS, INC., INTROSPECT
HEALTHCARE, CORPORATION, DESERT HILLS CENTER FOR YOUTH AND
FAMILIES, INC. and YOUTH SERVICES INTERNATIONAL OF VIRGINIA, INC.
(the "ORIGINAL BORROWERS")
PAYABLE TO THE ORDER OF SIGNET BANK,
SUCCESSOR BY MERGER TO SIGNET BANK/MARYLAND,
DATED DECEMBER 12, 1996,
IN THE PRINCIPAL AMOUNT OF
TWENTY MILLION DOLLARS ($20,000,000)
(the "Promissory Note")
Recitals
--------
A. The Original Borrowers executed and delivered their Promissory
Note payable to the order of Signet Bank, successor by merger to Signet
Bank/Maryland, a Virginia banking corporation (the "Bank"), on December 12,
1996, in the principal amount of Twenty Million Dollars ($20,000,000).
B. Pursuant to that certain Second Amendment to Loan and Security
Agreement by and among the Original Borrowers and the Bank, of near or even date
herewith, certain of the Original Borrowers were released and discharged from
further liability under the Promissory Note. The undersigned, all of whom
confirm their continuing joint and several liability under the Promissory Note
(hereafter, the "Borrowers") and the Bank have agreed to amend the terms of the
loan (the "Loan") evidenced by the Promissory Note and certain other documents
(collectively, the "Loan Documents").
WITH THE CONSENT OF THE HOLDER, the Promissory Note identified in the
caption above is hereby amended as follows:
1. The term "Maturity Date" as used in the Promissory Note shall mean
November 30, 1998.
Page 1 of 4
<PAGE>
2. Subject to acceleration upon the occurrence of a default, the
Promissory Note shall mature and be absolutely due, in full, on the Maturity
Date, unless extended or renewed at the sole discretion of, and upon terms
agreeable to, the Bank.
3. Except as expressly amended and modified by this First Allonge,
all other terms and conditions of the Promissory Note shall remain in full force
and effect. This First Allonge shall not constitute a novation, shall not
extinguish, terminate, affect nor impair the Borrowers' obligations under the
Promissory Note, as hereby amended, and shall not extinguish, terminate, impair
or otherwise affect the lien and security interest created under the Loan
Documents. All terms used in this First Allonge not otherwise defined herein
shall have the meanings ascribed to those terms in the Promissory Note and/or
the Loan Documents. This First Allonge forms an integral part of the Promissory
Note to which it is attached and made a part of, and the two shall be read
together as one instrument.
WITNESS THE EXECUTION OF THIS FIRST ALLONGE effective as of the 31st
day of October, 1997.
WITNESS / ATTEST: YOUTH SERVICES INTERNATIONAL, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- --------------------
Mark S. Demilio
Senior Vice President -
Corporate Development and
General Counsel
YOUTH SERVICES INTERNATIONAL OF
IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YOUTH SERVICES INTERNATIONAL OF
TENNESSEE, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
Page 2 of 4
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
MARYLAND, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YOUTH SERVICES INTERNATIONAL OF
BALTIMORE, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YOUTH SERVICES INTERNATIONAL OF
NORTHERN IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YSI OF CENTRAL IOWA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YOUTH SERVICES INTERNATIONAL OF
SOUTH DAKOTA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
Page 3 of 4
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
MISSOURI, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
YOUTH SERVICES INTERNATIONAL OF
VIRGINIA, INC.
/s/ Carmen G. Schwartz By: /s/ Mark S. Demilio (SEAL)
- ---------------------- ---------------------
Mark S. Demilio
Vice President and Secretary
Page 4 of 4
<PAGE>
Exhibit 10.110
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Third Amendment")
made as of the 30th day of November, 1998 by and among FIRST UNION NATIONAL
BANK, successor to SIGNET BANK, successor by merger to SIGNET BANK/MARYLAND (the
"Bank"), and YOUTH SERVICES INTERNATIONAL, INC., a Maryland corporation ("YSI"),
and certain of its wholly-owned subsidiaries, namely: YOUTH SERVICES
INTERNATIONAL OF IOWA, INC., a Maryland corporation; YOUTH SERVICES
INTERNATIONAL OF TENNESSEE, INC., a Maryland corporation; YOUTH SERVICES
INTERNATIONAL OF MARYLAND, INC., a Maryland corporation; YOUTH SERVICES
INTERNATIONAL OF BALTIMORE, INC., a Maryland corporation; YOUTH SERVICES
INTERNATIONAL OF NORTHERN IOWA, INC., an Iowa corporation; YOUTH SERVICES
INTERNATIONAL OF SOUTH DAKOTA, INC., a South Dakota corporation; YOUTH SERVICES
INTERNATIONAL OF TEXAS, INC., a Texas corporation; YOUTH SERVICES INTERNATIONAL
OF MISSOURI, INC., a Missouri corporation; YOUTH SERVICES INTERNATIONAL OF
VIRGINIA, INC., a Virginia Corporation; YOUTH SERVICES INTERNATIONAL OF
DELAWARE, a Delaware corporation; YOUTH SERVICES INTERNATIONAL OF MINNESOTA, a
Minnesota corporation; YOUTH SERVICES OF ILLINOIS, a Illinois corporation; YOUTH
SERVICES INTERNATIONAL OF MICHIGAN, INC., a Michigan corporation; YOUTH SERVICES
INTERNATIONAL SOUTHEASTERN PROGRAMS, INC., a Maryland corporation; and YSI OF
CENTRAL IOWA, INC., an Iowa corporation (collectively, with YSI, the
"Borrowers").
Recitals
--------
A. The Bank and YSI and certain of YSI's wholly-owned subsidiaries executed a
Loan and Security Agreement dated June 20, 1995 (the "Loan Agreement") which
generally provided for the extension of a line of credit facility to YSI and
such subsidiaries.
B. The Bank and YSI and certain of YSI's wholly-owned subsidiaries entered
into a First Amendment to Loan and Security Agreement dated as of December 12,
1996 (the "First Amendment") and an Amended and Restated Master Revolving
Promissory Note (the "Line of Credit Note"), which generally amended certain
terms of the Loan Agreement and provided for the addition of certain wholly-
owned subsidiaries to the Loan Agreement, as amended.
C. The Bank and YSI and certain YSI's wholly-owned subsidiaries entered into
a Second Amendment to Loan and Security Agreement dated as of October 31, 1997
(the "Second Amendment") and a First Allonge to the Line of Credit Note which
<PAGE>
generally released and discharged certain of YSI's wholly-owned subsidiaries
that had executed the Loan Agreement and/or the First Amendment and the Line of
Credit Note.
D. The Bank issued a letter dated June 11, 1998 to YSI whereby the Bank
amended the Loan Agreement, as amended, to reduce the unused Line of Credit fee
(the "Letter Amendment").
E. Youth Services International of Texas, Inc., Youth Services International
of Delaware, Inc., Youth Services International of Minnesota, Inc., Youth
Services International of Illinois, Inc., Youth Services International of
Michigan, Inc., and Youth Services International Southeastern Programs, Inc.
(collectively, the "New Borrowers") are wholly-owned subsidiaries of YSI and
have this date executed an Assumption Agreement evidencing their agreement to be
bound by the terms of the Loan Agreement, as amended, and the Line of Credit
Note.
F. The Bank and the Borrowers agree to amend the Loan Agreement, as amended
by the First Amendment, the Second Amendment and the Letter Amendment, upon the
terms and conditions set forth herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
Section 1. Defined Terms. All terms defined in the Loan Agreement shall have
-------------
the same meaning when used in this Third Amendment. As used hereafter, the term
"Loan Agreement" shall mean the Loan and Security Agreement dated June 20, 1995
as amended by the First Amendment, the Second Amendment, the Letter Agreement
and this Third Amendment. The Recitals are incorporated in and a part of this
Third Amendment.
Section 2. Amendment. Subject to satisfaction of the conditions of this
---------
Third Amendment, the Loan Agreement is amended in the following respects, and
shall be construed and interpreted to give effect to the modifications and
amendments expressly set forth herein.
(a) The Maturity Date of the Line of Credit Note shall be extended to
February 28, 1999, and such Maturity Date shall be reflected in the Second
Allonge referred to in Section 6 below.
(b) The New Borrowers shall be, and hereby are, bound by the terms of the
Loan Agreement and Line of Credit Note, as amended, as if original signatories
thereto.
2
<PAGE>
The Borrower shall pay to the Bank an extension fee of Two Thousand Five Hundred
Dollars ($2,500) upon execution of this Third Amendment.
Section 3. Representations and Warranties of Borrowers. Borrowers hereby
-------------------------------------------
represent and warrant to Bank that (i) execution of this Third Amendment has
been duly authorized by all requisite action of Borrowers; (ii) no consents are
necessary from any third parties for Borrowers' execution, delivery or
performance of this Third Amendment, (iii) this Third Amendment and the Loan
Agreement as amended constitute the legal, valid and binding obligations of
Borrowers enforceable against Borrowers in accordance with their terms, except
to the extent that the enforceability thereof against Borrowers may be limited
by bankruptcy, insolvency or other laws affecting the enforceability of
creditors rights generally or by equity principles of general application, (iv)
except as otherwise disclosed to the Bank in writing, all of the representations
and warranties contained in Article V of the Loan Agreement, as amended hereby,
are true and correct in all material respects with the same force and effect as
if made on and as of the effective date of this Third Amendment, except that
with respect to the representations and warranties made regarding Financial
Statements, such representations and warranties are hereby made with respect to
the most recent Financial Statements delivered by Borrowers to Bank, (v) there
exists no default which is continuing and no Event of Default has occurred other
than those that have been expressly waived by the Bank, and (vi) no default or
Event of Default will occur immediately or with the passage of time or giving of
notice as a consequence of this Third Amendment becoming effective.
Section 4. Chief Executive Offices. The location of each Borrower's original
-----------------------
entry books and records and the place where its records relating to Accounts are
maintained as identified in the Loan Agreement is, and continues to be, accurate
and complete.
Section 5. Reaffirmation. Borrowers hereby acknowledge and confirm that (i)
-------------
except as expressly amended hereby, the Loan Agreement and other Loan Documents
remain in full force and effect, (ii) the Line of Credit Note evidences the
indebtedness outstanding and owing to the Bank (which as of November 30, 1998 is
0), (iii) Borrowers have no defenses to their respective obligations under the
Loan Agreement and the other Loan Documents, (iv) the Liens of the Bank under
the Loan Documents continue in full force and effect and have the same priority
as before this Third Amendment, and (v) Borrowers have no claim against Bank
arising from or in connection with the Loan Agreement or the other Loan
Documents.
Section 6. Allonge to Amended and Restated Master Revolving Promissory Note.
----------------------------------------------------------------
The terms of the Line of Credit Note shall be amended by the affixation of a
Second Allonge to the Amended and Restated Master Revolving Promissory Note
executed and delivered on December 12, 1996.
3
<PAGE>
Section 7. Effect of Amendment. Except as hereby amended, the terms and
-------------------
conditions of the Loan Agreement and all other Loan Documents are hereby
approved, ratified and confirmed and shall remain in force and effect until all
principal, accrued interest and all other charges and costs due under the Loan
Agreement and any and all notes have been paid, in full. The execution and
delivery of this Third Amendment shall not constitute a novation, shall not
extinguish, terminate, affect or impair the obligations of the Borrowers, and
shall not waive, extinguish, terminate, affect or impair any security, right or
remedy of the Bank against the Borrowers, the Borrowers' property or any other
person obligated under the Loan Documents. The execution and delivery of this
Third Amendment shall not constitute a waiver of any provision of the Loan
Agreement, any of the other Loan Documents or any existing default or Event of
Default, nor act as a release or subordination of the Liens and security
interests of Bank in the Collateral.
Section 8. Effective Date. Regardless of the date of execution and delivery
--------------
of this Third Amendment or any other instrument referenced herein, it is
intended that the terms of this Third Amendment and the modification and
amendments provided for herein shall be effective as of November 30, 1998,
regardless of the date of actual execution.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto execute this Second Amendment the date
and year first above written.
WITNESS/ATTEST: FIRST UNION NATIONAL BANK
/s/ James E. Davis By: /s/ Kevin Mahon (SEAL)
- ------------------ -----------------
Kevin Mahon
Vice President
YOUTH SERVICES INTERNATIONAL, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Senior Vice President - -
Chief Financial Officer and
General Counsel
YOUTH SERVICES INTERNATIONAL OF IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF TENNESSEE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
5
<PAGE>
YOUTH SERVICES INTERNATIONAL OF MARYLAND, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF BALTIMORE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF NORTHERN IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YSI OF CENTRAL IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
6
<PAGE>
YOUTH SERVICES INTERNATIONAL OF VIRGINIA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF SOUTH DAKOTA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF MISSOURI, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF TEXAS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF DELAWARE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
7
<PAGE>
YOUTH SERVICES INTERNATIONAL OF MINNESOTA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF ILLINOIS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF MICHIGAN, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL SOUTHEASTERN
PROGRAMS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ ---------------------
Mark S. Demilio
Vice President
[SIGNATURES END]
8
<PAGE>
ACKNOWLEDGMENTS
STATE OF MARYLAND, CITY/COUNTY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY, that on this 15 day of December, 1998, before me,
the undersigned, a Notary Public of the State aforesaid, personally appeared
Kevin Mahon, who acknowledged himself to be the Vice President of FIRST UNION
NATIONAL BANK, successor by merger to SIGNET BANK, and that he, as such Vice
President, being authorized so to do, executed the foregoing instrument for the
purposes therein contained, by signing the name of the corporation by himself as
Vice President.
/s/ Teresa L. Glatt
-------------------
Notary Public
My Commission Expires:
[SEAL]
STATE OF MARYLAND, CITY/COUNTY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY, that on this 15 day of December, 1998, before me,
the undersigned, a Notary Public of the State aforesaid, personally appeared
Mark S. Demilio, who acknowledged himself to be the Senior Vice President - -
Chief Financial Officer and General Counsel of Youth Services International,
Inc., a corporation, and that he, as such Senior Vice President - - Chief
Financial Officer and General Counsel, being authorized so to do, executed the
foregoing instrument for the purposes therein contained, by signing the name of
the corporation by himself as Senior Vice President - - Chief Financial Officer
and General Counsel.
/s/ Teresa L. Glatt
-------------------
Notary Public
My Commission Expires:
[SEAL]
9
<PAGE>
STATE OF MARYLAND, CITY/COUNTY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY, that on this 15 day of December, 1998, before me,
the undersigned, a Notary Public of the State aforesaid, personally appeared
Mark S. Demilio, who acknowledged himself to be the Vice President of Youth
Services International of Iowa, Inc., Youth Services International of Tennessee,
Inc., Youth Services International of Maryland, Inc., Youth Services
International of Baltimore, Inc., Youth Services International of Northern Iowa,
Inc., YSI of Central Iowa, Inc., Youth Services International of Virginia, Inc.,
Youth Services International of South Dakota, Inc., Youth Services International
of Missouri, Inc., Youth Services International of Texas, Inc., Youth Services
International of Delaware, Inc., Youth Services International of Minnesota,
Inc., Youth Services International of Illinois, Inc., Youth Services
International of Michigan, Inc., and Youth Services International Southeastern
Programs, Inc. and that he, as Vice President of each such corporation, being
authorized so to do, executed the foregoing instrument for the purposes therein
contained, by signing the name of each of the corporations by himself as Vice
President.
/s/ Teresa L. Glatt
-------------------
Notary Public
My Commission Expires:
[SEAL]
10
<PAGE>
Exhibit 10.111
SECOND ALLONGE TO
AMENDED AND RESTATED MASTER REVOLVING PROMISSORY NOTE
EXECUTED BY YOUTH SERVICES INTERNATIONAL, INC. ("YSI") AND CERTAIN OF ITS
WHOLLY-OWNED SUBSIDIARIES
(the "ORIGINAL BORROWERS")
PAYABLE TO THE ORDER OF FIRST UNION NATIONAL BANK,
SUCCESSOR TO SIGNET BANK,
successor by merger to SIGNET BANK/MARYLAND (THE "BANK"),
DATED DECEMBER 12, 1996,
IN THE PRINCIPAL AMOUNT OF
TWENTY MILLION DOLLARS ($20,000,000)
(the "Promissory Note")
Recitals
--------
A. The Original Borrowers executed and delivered their Promissory Note
payable to the order of the Bank on December 12, 1996, in the principal amount
of Twenty Million Dollars ($20,000,000).
B. Pursuant to the terms of a First Amendment to Loan and Security
Agreement dated December 12, 1996 (the "First Amendment"), which amended the
terms of a Loan and Security Agreement dated June 20, 1995 by and among the Bank
and certain of the Original Borrowers (the "Loan Agreement"), the Original
Borrowers jointly and severally affirmed or reaffirmed all obligations under the
Loan Agreement including the payment obligations evidenced by the Promissory
Note.
C. Pursuant to that certain Second Amendment to Loan and Security Agreement
dated October 31, 1997 (the "Second Amendment") by and among certain of the
Original Borrowers and the Bank, the parties agreed to (i) release and discharge
certain of the Original Borrowers from further liability under the Promissory
Note, and (ii) amend certain terms of the borrowing, and the Original Borrowers
excluding those released and discharged from liability (the "Remaining
Borrowers") executed and delivered a First Allonge to Amended and Restated
Master Revolving Promissory Note (the "First Allonge") to further evidence such
amendments.
D. Pursuant to that certain letter dated June 11, 1998 from the Bank to
YSI, the Bank amended the Promissory Note, as amended, to reduce the unused Line
of Credit fee (the "Letter Amendment").
E. As of the date hereof, Youth Services International of Texas, Inc.,
Youth Services International of Delaware, Inc., Youth Services International of
Minnesota, Inc., Youth Services International of Illinois, Inc., Youth Services
International of Michigan, Inc., and Youth Services International Southeastern
Programs, Inc. (the "New Borrowers") have executed an Assumption Agreement
wherein each of the New Borrowers agrees to be jointly and severally liable for
all obligations of payment and performance arising under, related to, or
evidenced by, the Loan Agreement and
Page 1 of 6
<PAGE>
Promissory Note, as now or hereafter amended, restated, modified or extended
(the New Borrowers and the Remaining Borrowers are hereafter referred to as the
"Borrowers").
F. The Borrowers have now requested the Bank to extend the Maturity Date of
the Promissory Note and have executed and delivered a Third Amendment to Loan
and Security Agreement (the "Third Amendment") and this Second Allonge to
Amended and Restated Master Revolving Promissory Note (the "Second Allonge") in
furtherance thereof.
WITH THE CONSENT OF THE HOLDER, the Promissory Note identified in the
caption above, as amended by the First Allonge and the Letter Agreement, is
hereby amended as follows:
1. The term "Maturity Date" as used in the Promissory Note shall mean
February 28, 1999.
2. Subject to acceleration upon the occurrence of a default, the Promissory
Note shall mature and any amounts outstanding thereunder shall be absolutely
due, in full, on the Maturity Date, unless extended or renewed at the sole
discretion of, and upon terms agreeable to, the Bank.
3. The undersigned Borrowers hereby affirm or reaffirm their continuing
joint and several liability for all obligations due under the Promissory Note.
4. Except as expressly amended and modified by this Second Allonge, all
other terms and conditions of the Promissory Note, as amended by the First
Allonge and the Letter Agreement, shall remain in full force and effect. This
Second Allonge shall not constitute a novation, shall not extinguish, terminate,
affect or impair the Borrowers' obligations under the Promissory Note, as hereby
amended, and shall not extinguish, terminate, impair or otherwise affect the
lien and security interest created under the Loan Agreement. All terms used in
this Second Allonge not otherwise defined herein shall have the meanings
ascribed to those terms in the Promissory Note and/or the Loan Agreement, as
amended. This Second Allonge constitutes an integral part of the Promissory Note
to which it is attached and made a part of, and the two shall be read together
as one instrument.
Page 2 of 6
<PAGE>
WITNESS THE EXECUTION OF THIS FIRST ALLONGE on this 15th day of December,
1998, and effective as November 30, 1998.
WITNESS / ATTEST: YOUTH SERVICES INTERNATIONAL, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Senior Vice President - -
Chief Financial Officer
General Counsel
YOUTH SERVICES INTERNATIONAL OF
IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
TENNESSEE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
MARYLAND, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
Page 3 of 6
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
BALTIMORE, INC.
/s/ James E. Davis By:/s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF NORTHERN
IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YSI OF CENTRAL IOWA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
SOUTH DAKOTA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
MISSOURI, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
Page 4 of 6
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
VIRGINIA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
TEXAS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
DELAWARE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
MINNESOTA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
ILLINOIS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
Page 5 of 6
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
MICHIGAN, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL
SOUTHEASTERN PROGRAMS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Vice President
[SIGNATURES END]
Page 6 of 6
<PAGE>
Exhibit 10.112
ASSUMPTION AGREEMENT
THIS ASSUMPTION AGREEMENT (the "Agreement") is made as of this 30th day of
November, 1998, by YOUTH SERVICES INTERNATIONAL OF TEXAS, INC., a Texas
corporation; YOUTH SERVICES INTERNATIONAL OF DELAWARE, INC., a Delaware
corporation; YOUTH SERVICES INTERNATIONAL OF MINNESOTA, INC., a Maryland
corporation; YOUTH SERVICES INTERNATIONAL OF ILLINOIS, INC., a Maryland
corporation; YOUTH SERVICES INTERNATIONAL OF MICHIGAN, INC., a Michigan
corporation and YOUTH SERVICES INTERNATIONAL OF SOUTHEASTERN PROGRAMS, INC., a
Maryland corporation (collectively, the "Obligors"), YOUTH SERVICES
INTERNATIONAL, INC., a Maryland corporation ("YSI"), and FIRST UNION NATIONAL
BANK, successor to SIGNET BANK, successor by merger to SIGNET BANK/MARYLAND (the
"Bank").
Recitals
--------
A. The Bank and YSI and certain of YSI's wholly-owned subsidiaries
executed a Loan and Security Agreement dated June 20, 1995 (the "Loan
Agreement") as amended by a First Amendment to Loan and Security Agreement dated
December 12, 1996, a Second Amendment to Loan and Security Agreement dated
October 31, 1997, a Letter from the Bank dated June 11, 1998 and a Third
Amendment to Loan and Security Agreement dated as of even date herewith
(collectively, the "Loan Agreement").
B. The indebtedness authorized in the Loan Agreement is evidenced by a
Master Revolving Promissory Note dated as of June 20, 1995, which was amended
and restated in an Amended and Restated Master Revolving Promissory Note dated
December 12, 1996, and two allonges, in the maximum principal amount of Twenty
Million Dollars ($20,000,000) (collectively, the "Promissory Note"), and the
liability among the Borrowers is joint and several. At the time of entering
into the Loan Agreement, the parties contemplated that from time to time an
additional corporate party would be permitted to become a "Borrower" under the
Loan Agreement and to assume the Obligations of the Borrowers under the Loan
Agreement as evidenced by the Promissory Note.
C. The Obligors each desire to become entitled to the benefits of the Loan
Agreement and to assume all obligations and covenants to repay all of the
Obligations of the Borrowers thereunder upon the terms provided for in the Loan
Agreement, the Promissory Note and all other Loan Documents.
<PAGE>
NOW, THEREFORE, the parties hereto, for valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, intending to be legally bound,
agree as follows:
Section 1. Recitals and Definitions. The Recitals above are incorporated
------------------------
in and are a part of this Agreement. All capitalized terms used in this
Agreement shall have the meanings ascribed to those terms in the Loan Agreement,
unless otherwise expressly defined herein.
Section 2. Assumption of Obligations. Each of the Obligors hereby
-------------------------
assumes, and promises to repay, all Obligations described in the Loan Agreement,
as now or hereafter existing, including all principal, interest, fees, charges
and expenses provided in the Promissory Note. The liability of each Obligor
shall be joint and several with YSI and all other Borrowers and Obligors. The
terms of the Loan Agreement, Promissory Note and Loan Documents, as amended,
restated, modified, or extended, are expressly incorporated herein by this
reference and constitute a part of this Agreement as if fully set forth herein,
and the Obligors acknowledge and agree to all of the terms, provisions and
conditions thereof. Without limiting the generality of the foregoing, each
Obligor (a) specifically nominates, constitutes and appoints YSI as its agent
and attorney in fact to execute and deliver any and all documentation required
by or related to any of the Loan Documents, such power constituting a power
coupled with an interest and is irrevocable, and (b) acknowledges and agrees to
be bound by the terms of Section 10.16 of the Loan Agreement which provides for
the right of each Borrower (including the Obligors) to obtain reimbursement from
each other Borrower (including the Obligors) for any payment made by any such
party in respect of the Obligations, to the extent that such payment exceeds the
benefit realized by such party from the Loan. Notwithstanding the above, each
Obligor acknowledges that its liability is joint and several with all other
Borrowers and Obligors.
Section 3. Representations of Obligors. The Obligors represent and
---------------------------
warrant to the Bank as follows:
3.1 Name, Powers. (a) The true legal name and place of
------------
incorporation of each Obligor is as stated in the beginning of this Agreement.
Each Obligor is in good standing under the laws of the State of its
incorporation, and is authorized to own its properties and conduct its business
as now being conducted.
3.2 Inducement. The Obligors join in the execution of this
----------
Agreement to induce the Bank to make Advances under the Loan Agreement for the
benefit of the Obligors and all other Borrowers. Each Obligor makes all
representations and warranties set forth in the Loan Agreement as to itself. The
Bank is justified in relying upon the representations and covenants of each
Obligor under the Loan Agreement.
2
<PAGE>
Section 4. Status of Monetary Obligations. As of the date of November 30,
------------------------------
1998, the outstanding and unpaid principal balance due under the Promissory Note
is $0.00.
Section 5. YSI Consent. YSI joins in the execution of this Assumption
-----------
Agreement to evidence its request that the Obligors be added as Borrowers under
the Loan Agreement and Promissory Note, and agrees to be bound by all of the
terms, conditions and provisions of the Loan Agreement with respect to the
Obligors.
Section 6. Bank's Consent. The Bank joins in the execution of this
--------------
Agreement to evidence its consent to the joinder of the Obligors as Borrowers
under the Loan Agreement and Promissory Note.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals the day
first above written.
WITNESS/ATTEST: YOUTH SERVICES INTERNATIONAL OF
TEXAS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
DELAWARE, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
3
<PAGE>
YOUTH SERVICES INTERNATIONAL OF
MINNESOTA, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
ILLINOIS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL OF
MICHIGAN, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
YOUTH SERVICES INTERNATIONAL
SOUTHEASTERN PROGRAMS, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ -------------------
Mark S. Demilio
Vice President
[SIGNATURES CONTINUED]
4
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
/s/ James E. Davis By: /s/ Mark S. Demilio (SEAL)
- ------------------ --------------------
Mark S. Demilio
Senior Vice President - -
Chief Financial Officer and
General Counsel
FIRST UNION NATIONAL BANK
/s/ James E. Davis By: /s/ Kevin Mahon (SEAL)
- ------------------ -----------------
Kevin Mahon
Vice President
[SIGNATURES END]
5
<PAGE>
EXHIBIT 10.113
FORM OF
-------
EXCHANGE AGENT AGREEMENT
------------------------
February ____, 1999
American Stock Transfer &
Trust Company
40 Wall Street
New York, New York 10005
Ladies and Gentlemen:
At the effective time (the "Effective Time") of the merger (the
"Merger") of Palm Merger Corp. ("Merger Sub"), a wholly owned subsidiary of
Correctional Services Corporation ("CSC"), with and into Youth Services
International, Inc. ("YSI") pursuant to the Agreement and Plan of Merger dated
as of September 23, 1998, as amended (the "Merger Agreement"), among CSC, YSI
and Merger Sub, a copy of which has been previously furnished to you, each
issued and outstanding share of common stock, par value $.01 per share, of YSI
("YSI Common Stock"), will be converted into the right to receive 0.375 shares
of common stock, par value $.01 per share, of CSC ("CSC Common Stock") and cash
(without interest) in lieu of fractional shares based on the average closing
price of CSC Common Stock for the twenty trading days immediately preceding the
day of the Effective Time. You will be notified of the Effective Time by no
later than the first business day following the Effective Time.
YSI has delivered or will deliver to you a copy of the letter of
transmittal (the "Letter of Transmittal") to be sent to holders of record of
shares of YSI Common Stock ("YSI Stockholders"), (ii) copies of all other
documents or materials, if any, to be forwarded to YSI Stockholders, (iii) a
certified copy of resolutions adopted by the Board of Directors of YSI
authorizing the Merger, (iv) a list showing the names and addresses of all YSI
Stockholders as of the Effective Time and the number of shares of YSI Common
Stock held by each YSI Stockholder immediately prior to the Effective Time and
(v) a list of certificates (including certificate numbers) representing shares
of YSI Common Stock that have been or are, as of such date, lost, stolen,
destroyed or replaced or restricted as to transfer (noting the text of the
restrictive legends applicable thereto) or with respect to which a stop transfer
order has been noted (such lists being herein referred to as the "Lists").
As soon as practicable after the Effective Time, you (in your capacity
as the Exchange Agent, defined below) will mail to each YSI Stockholder (a) a
notice advising such holder of the effectiveness of the Merger and the
applicable terms of the exchange effected thereby, (b) a Letter of Transmittal
with instructions, (c) a self-addressed return envelope, (d) tax certification
guidelines and (e) any other material deemed appropriate by YSI and CSC.
This will confirm the appointment by YSI and CSC of American Stock
Transfer & Trust Company as the exchange agent (the "Exchange Agent") provided
for in the Merger
<PAGE>
Agreement and, in that capacity, the authorization of the Exchange Agent to act
as agent for YSI Stockholders for the purpose of receiving from CSC the CSC
Common Stock and cash to be issued in exchange for shares of YSI Common Stock
and transmitting the same to the YSI Stockholders upon satisfaction of the
conditions set forth herein. Your duties, liabilities and rights as Exchange
Agent are as set forth herein and will be governed, in addition, by the
applicable terms of the Merger Agreement.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following:
1. Examination of Letter of Transmittal.
------------------------------------
You are to examine Letters of Transmittal, certificates representing
shares of YSI Common Stock and other documents delivered or mailed to you by or
for YSI stockholders to ascertain, to the extent reasonably determined by you,
whether:
(a) the Letters of Transmittal appear to be duly executed and properly
completed in accordance with the instructions set forth therein;
(b) the certificates for shares of YSI Common Stock appear to be
properly surrendered and, if applicable, endorsed for transfer;
(c) the other documents, if any, used in the exchange appear to be
duly executed and properly completed and in the proper form; and
(d) the certificates for shares of YSI Common Stock are free of
restrictions on transfer or stop orders except as set forth on the Lists.
In the event you ascertain that any Letter of Transmittal or other
document has been improperly completed or executed, that any of the certificates
for shares of YSI Common Stock are not in proper form or some other irregularity
exists, you shall attempt to resolve promptly the irregularity and may use your
best efforts to contact the appropriate YSI Stockholder by whatever means of
communication you deem most expedient to correct the irregularity and, upon
consultation with CSC, shall endeavor to take such other reasonable action as
may be necessary to cause such irregularity to be corrected, and the
determination of any questions referred to CSC or its counsel by you as to the
validity, form and eligibility, as well as the proper completion or execution of
the Letters of Transmittal and other documents, shall be final and binding and
you may rely thereon as provided in Section 12(a) hereof. Any costs of
contacting YSI Stockholders reasonably incurred for the purpose of correcting
irregularities shall be incurred for the account of CSC.
2. Exchange of Shares.
------------------
As soon as practicable after the Effective Time and after surrender to
you of all certificates for shares of YSI Common Stock registered to a
particular record holder or holders (and only after surrender of all such
----
certificates) and the return of a properly completed and
2
<PAGE>
signed Letter of Transmittal relating thereto, you shall cause to be issued and
distributed to the holder(s) in whose name such certificates were registered (or
such other person as shall have been specified pursuant to the terms hereof) (i)
the whole number of shares of CSC Common Stock issuable pursuant to the Merger
Agreement, registered in the name of such holder(s) and (ii) a check in lieu of
any fractional share (the "Cash Amount"). CSC shall provide you the amount of
cash sufficient to make all payments for fractional shares.
Until so surrendered, each certificate which immediately prior to the
Effective Time represented outstanding shares of YSI Common Stock shall, at and
after the Effective Time, entitle the holder(s) thereof only to receive, upon
surrender of it and all other identically registered certificates, the
certificates representing shares of CSC Common Stock and the Cash Amount
contemplated by the preceding paragraph.
No dividends or other distributions otherwise payable after the
Effective Time to a holder of record of certificates representing shares of CSC
Common Stock shall be paid to such holder unless and until such holder shall
have surrendered all certificates representing shares of YSI Common Stock
registered to such holder. The Exchange Agent shall hold any such dividends or
other distributions not paid to such holders pursuant to the requirements of the
foregoing sentence and shall (subject to applicable escheat laws) pay such
dividends and distributions to each holder of record entitled thereto after such
holder shall have surrendered all certificates for shares of YSI Common Stock
registered to such holder. No interest shall be payable to such holders on
dividends or distributions held by the Exchange Agent.
If any certificates representing shares of CSC Common Stock are to be
issued in, or a Cash Amount is to be paid to, a name other than that in which
the certificate for shares of YSI Common Stock surrendered in exchange therefor
is registered, it shall be a condition of the issuance or payment thereof that
the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such exchange shall pay
to you any transfer or other taxes required or shall establish to your
satisfaction that such tax has been paid or is not payable.
Certificates to be delivered by mail shall be forwarded by first class
mail under the Exchange Agent's blanket surety bond. The Exchange Agent
represents that such surety bond protects YSI, CSC and the Exchange Agent from
loss or liability arising by virtue of the non-receipt or non-delivery of such
certificates. It is understood that the market value of securities in any one
shipment sent by first class mail under this procedure will not be in excess of
$250,000. In the event the market value shall exceed $250,000, the securities
shall be mailed by registered mail and shall be insured separately for the
replacement value thereof at the time of mailing.
3. Lost, Stolen or Destroyed Certificates.
--------------------------------------
In the event that any YSI Stockholder claims that any certificate
representing shares of YSI Common Stock is lost, stolen or destroyed, the
Exchange Agent shall mail to such stockholder an affidavit of loss and an
indemnity bond, in form reasonably acceptable to CSC. The Exchange Agent shall
make the distribution of certificates representing shares of CSC
3
<PAGE>
Common Stock only upon receipt of the proper completion and execution of such
affidavit of loss and an indemnity bond.
4. Reports.
-------
The Exchange Agent shall furnish, until otherwise notified, monthly
(or more frequently if requested by YSI or CSC) reports to YSI and CSC showing
(for the current report period, any prior report periods and in total) the
number of shares of YSI Common Stock surrendered as well as the number of shares
of CSC Common Stock issued, and Cash Amount in lieu of fractional shares paid,
in exchange therefor.
5. IRS Filings.
-----------
You shall arrange to comply with all requirements under the tax laws
of the United States, including those relating to missing Tax Identification
Numbers and withholding, and shall issue and file any appropriate Internal
Revenue Service ("IRS") reports and forms (e.g., Forms 1099 and 1099B). The
parties acknowledge that you may be required to withhold (and pay to the IRS)
certain amounts from cash paid in lieu of fractional shares and cash dividend
payments to holders who have not supplied their correct Taxpayer Identification
Number or required certification.
6. Restricted Certificates of YSI Common Stocks.
---------------------------------------------
As set forth above, YSI will deliver to you the Lists which will set
forth, among other things, certificates representing shares of YSI Common Stock
that have been or are, as of the date of such Lists, restricted as to transfer
(noting the text of the restrictive legends applicable thereto). The Lists
shall also set forth any legend or legends to be placed on certificates
representing CSC Common Stock to be issued in exchange for such certificates,
and you shall place such legends on such certificates as directed in the Lists.
In the event a certificate bearing a restrictive legend that is not included in
the Lists is presented, you are instructed to delay issuance of a certificate
representing shares of CSC Common Stock issuable in exchange therefor pending
instructions from CSC.
7. Restricted Certificates of CSC Common Stock.
-------------------------------------------
Each of the persons listed on Schedule A hereto may be deemed an
"affiliate" of YSI within the meaning of Rule 145 under the Securities Act of
1933, as amended, and applicable rules and regulations promulgated by the
Securities and Exchange Commission.
You are hereby authorized and instructed to place on the face of each
of the certificates representing shares of CSC Common Stock issued to each of
the aforesaid persons in exchange for the shares of YSI Common Stock held by
them a legend reading in its entirety as follows:
4
<PAGE>
"The shares represented by this certificate were received on
______________, 1999 in a transaction governed by Rule 145 under
the Securities Act of 1933, as amended, by a person who may be
deemed an "affiliate" as the term is used in Rule 145 and may not
be transferred otherwise than pursuant to the provisions of Rule
145 or as otherwise allowed by the provisions of the undertaking
given by such person to Correctional Services Corporation at such
time.
The shares represented by this certificate were received on
____________, 1999 in a merger expected to qualify as a pooling-
of-interests for accounting and financial reporting purposes by a
person who may be deemed an "affiliate" as the term is used in
Rule 145 of the Securities Act of 1933, as amended, and for
purposes of applicable interpretations regarding the pooling-of-
interests method of accounting and may not be transferred until
such time as financial results covering at least 30 days of
combined operations of Correctional Services Corporation and
Youth Services International, Inc. after the effective time of
the merger have been published."
8. Copies of Documents.
-------------------
You shall take such action, at CSC's expense, as CSC may reasonably
request from time to time with respect to the distribution of copies of the
Letter of Transmittal to persons designated by CSC.
9. Receipt or Disposal.
-------------------
Letters of Transmittal and telegrams, telexes, facsimile transmissions
and other materials submitted to you by YSI Stockholders shall be preserved by
you until delivered to or otherwise disposed of in accordance with CSC's
instructions at or prior to the termination hereof.
10. Maintenance of Records.
----------------------
You will keep and maintain complete and accurate ledgers showing all
shares of YSI Common Stock received by you, CSC Common Stock delivered by you
and Cash Amounts paid by you. You are authorized to cooperate with and furnish
information to any organization or its legal representatives designated from
time to time by YSI or CSC in any manner reasonably requested by any of them in
connection with the Merger.
5
<PAGE>
11. Delivery of Surrendered Shares of YSI Common Stock.
--------------------------------------------------
All certificates for shares of YSI Common Stock surrendered to you
shall be retained by you and, following exchange thereof for CSC Common Stock
and any Cash Amount, shall be forwarded to CSC or elsewhere as directed by CSC.
12. Exchange Agent's Duties and Obligations.
---------------------------------------
As Exchange Agent, you:
(a) will have no duties or obligations other than those specifically
set forth herein, or as may subsequently be agreed to in writing by you, CSC and
YSI;
(b) will be regarded as making no representations or warranties and
having no responsibilities regarding the validity, sufficiency, value or
genuineness of any certificates for shares of YSI Common Stock surrendered to
you or the shares of YSI Common Stock represented thereby; will not be required
or requested to make any representations as to the validity, value or
genuineness of certificates for CSC Common Stock or shares of CSC Common Stock
represented thereby; and will not be responsible in any manner whatsoever for
the correctness of the statements made in the Merger Agreement or in any related
prospectus or other document furnished to you by YSI or CSC;
(c) will not be obligated to institute or defend any third party
action, suit or legal proceeding in connection with the Merger, or your duties
hereunder, or take any other action which might in your judgment involve, or
result in, expense or liability to you, unless YSI or CSC shall first furnish
you an indemnity satisfactory to you;
(d) may rely on, and shall be protected in acting upon, any
certificate, instrument, opinion, representation, notice, letter, telegram or
other document delivered to you and believed by you in good faith to be genuine
and to have been signed by the proper party or parties;
(e) may rely on, and shall be protected in acting upon, written or
oral instructions given by any officer of, or any party authorized by, CSC with
respect, to any matter relating to your actions as Exchange Agent;
(f) may consult with counsel satisfactory to you (including counsel
for YSI or CSC), and the written advice or opinion of such counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by you hereunder in good faith and in accordance with such
advice or opinion of such counsel; and
(g) may retain an agent or agents of your choice to assist you in
performing your duties and obligations hereunder, at your cost and without
relieving you of any liability hereunder.
6
<PAGE>
13. Termination of Exchange Agent's Duties and Obligations.
------------------------------------------------------
This agreement shall terminate upon demand by YSI or CSC at which time
all undistributed certificates representing shares of CSC Common Stock, cash to
be paid in lieu of fractional shares, and any dividends and distributions in
respect of CSC Common Stock shall be delivered by the Exchange Agent to CSC.
14. Indemnification of Exchange Agent.
----------------------------------
YSI and CSC hereby covenant and agree to reimburse, indemnify and hold
you harmless from and against any and all claims, actions, judgments, damages,
losses, liabilities, costs, transfer or other taxes, and expenses (including
without limitation reasonable attorneys' fees and expenses) incurred or suffered
by you, or to which you may become subject and not resulting from, any
negligence, bad faith or willful misconduct on your part, arising out of or
incident to this Agreement or the administration of your duties hereunder, or
arising out of or incident to your compliance with the instructions set forth
herein or with any instructions delivered to you pursuant hereto, or as a result
of defending yourself against any claim or liability resulting from your actions
as Exchange Agent, including any claim against you by any tendering YSI
Stockholder, which covenant and agreement shall survive the termination hereof.
You hereby represent that you will notify YSI and CSC by letter, or facsimile
confirmed by letter, of any receipt by you of a written assertion of a claim
against you, or any action commenced against you, within ten (10) business days
after your receipt of written notice of such assertion or your having been
served with the summons or other first legal process giving information as to
the nature and basis of action. However, your failure to so notify YSI and CSC
shall not operate in any manner whatsoever to relieve YSI and CSC from any
liability which they may have on account of this Section 14 if no prejudice
occurs. At their election, YSI and CSC may assume the conduct of your defense
in any such action or claim at their sole cost and expense. In the event that
YSI and CSC elect to assume the defense of any such action or claim and confirm
to you in writing that the indemnity provided for in this Section 14 applies to
such action or claim, YSI and CSC shall not be liable for the fees and expenses
of any counsel thereafter retained by you.
15. Compensation and Expenses.
-------------------------
For services rendered as Exchange Agent hereunder, your fees are
approved as set forth in Schedule B to this agreement.
16. Modification.
-------------
Subject to Section 12(a) hereof, (i) the instructions contained herein
may be modified or supplemented only by authorized representatives of each of
YSI and CSC and (ii) any inconsistency between this Agreement and the Merger
Agreement shall be resolved in favor of the Merger Agreement.
7
<PAGE>
17. Notices.
--------
Except as otherwise provided herein, no notice, instruction or other
communication by one party shall be binding upon the other party unless hand-
delivered or sent by certified mail, return receipt requested. Notice to you
shall be sent or delivered to your above-noted address or such other addresses
as you shall hereafter designate in writing in accordance herewith. Notice to
CSC and YSI shall be sent or delivered to the following address (or such other
address as designated by CSC or YSI, as the case may be, in writing in
accordance herewith):
If to CSC:
Correctional Services Corporation
1819 Main Street, Suite 1000
Sarasota, Florida 34236
Attention: James F. Slattery
with a copy to:
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Attention: Seth I. Truwit, Esq.
Youth Services International, Inc.
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
Attention: Mark S. Demilio, Esq.
with a copy to:
Hogan & Hartson L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
Attention: Michael J. Silver, Esq.
18. Governing Law; Binding Upon Successors and Assigns.
--------------------------------------------------
This agreement shall be construed and enforced in accordance with the
laws of the State of New York, without regard to the principles thereof
respecting conflicts of laws, and shall inure to the benefit of, and the
obligations created hereby shall be binding upon, the successors and assigns of
the parties hereto.
8
<PAGE>
CORRECTIONAL SERVICES CORPORATION
By:______________________________________
Name:
Title:
YOUTH SERVICES INTERNATIONAL, INC.
By:______________________________________
Name:
Title:
ACCEPTED AND AGREED:
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:__________________________________
Name:
Title:
9
<PAGE>
EXHIBIT 10.114
Construction/Installment Purchase and Management Services Contract by and among
CSC, the State of Nevada, Department of Human Resources, Nevada Real Property
Corporation and Clark & Sullivan construcors -- Rite of Passage, Inc. dated
February 12, 1999.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
RECITALS................................................................ 1
ARTICLE 1............................................................... 3
DEFINITIONS............................................................ 3
ARTICLE 2............................................................... 7
TERM OF CONTRACT....................................................... 7
Period of Management Agreement....................................... 7
Period of Purchase Agreement......................................... 8
ARTICLE 3............................................................... 9
CONSTRUCTION / INSTALLMENT PURCHASE.................................... 9
Facility Design and Construction..................................... 9
Land Acquisition..................................................... 9
Cost, Financing and Purchase Price................................... 10
Installment Purchase Agreement (Lease-Purchase Financing Agreement).. 12
Equipment, Fixtures and Furnishings.................................. 32
Facility Capacity.................................................... 32
Additional Consideration............................................. 32
Lease Agreement...................................................... 32
ARTICLE 4............................................................... 33
FACILITY AND EQUIPMENT................................................. 33
Possession of Facility............................................... 33
Possession of Moveable Equipment..................................... 33
Additional Property.................................................. 33
SCD Inventory........................................................ 33
Maintenance.......................................................... 33
Access by State...................................................... 34
Expansion............................................................ 34
Replacement Equipment................................................ 34
ARTICLE 5............................................................... 35
OPERATION OF FACILITY.................................................. 35
General Duties and Obligations....................................... 35
Custody of Residents................................................. 35
Operational Plan..................................................... 37
Security And Control................................................. 38
Sanitation/Hygiene................................................... 38
Hygiene Items........................................................ 39
Classification....................................................... 39
Programs and Services................................................ 39
Work Programs........................................................ 44
Emergency............................................................ 44
Access to Courts and Hearings........................................ 44
Grievance Procedure.................................................. 44
Discipline........................................................... 45
Laundry.............................................................. 45
Transportation....................................................... 45
Mail................................................................. 45
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Telephones........................................................... 45
Food Service......................................................... 45
Library.............................................................. 45
Volunteer Program.................................................... 46
Visitation........................................................... 46
Revenue Programs..................................................... 46
Records Inspection, Audit & Ownership................................ 46
ACA and NCCHC Accreditation.......................................... 47
Telecommunications................................................... 47
Data Processing Services............................................. 47
Admission, Orientation, Personal Property and Release................ 47
ARTICLE 6............................................................... 47
EMPLOYEES OF INDEPENDENT CONTRACTOR.................................... 47
Independent Contractor............................................... 47
Personnel............................................................ 48
Training............................................................. 48
Vacancies............................................................ 49
Subcontracts and Assignment.......................................... 50
Use of Force......................................................... 50
Limited Right to Employ.............................................. 50
ARTICLE 7............................................................... 50
CONTRACT MONITORS...................................................... 50
Contract Monitor..................................................... 50
Construction Monitor Role............................................ 51
ARTICLE 8............................................................... 52
COMPENSATION AND ADJUSTMENTS........................................... 52
Start-up Period...................................................... 52
Per Diem Rate........................................................ 52
Payment.............................................................. 52
Billing.............................................................. 52
Per Diem Inflation Adjustments....................................... 52
Compensation for Additional Services................................. 53
Failure to Agree on Compensation for Additional Services............. 53
Utilities............................................................ 53
Performance Bond..................................................... 53
Fiscal Management.................................................... 54
ARTICLE 9............................................................... 54
INDEMNIFICATION AND INSURANCE.......................................... 54
Indemnification...................................................... 54
Insurance............................................................ 54
BUILDER................................................................ 55
Workers' Compensation and Employer's Liability Insurance............. 55
Commercial General Liability Insurance............................... 56
Business Automobile Liability Insurance.............................. 56
Umbrella or Excess Liability Insurance............................... 56
Performance & Payment Bond........................................... 57
Builders Risk Insurance.............................................. 57
Boiler & Machinery Insurance......................................... 58
MANAGEMENT CONTRACTOR.................................................. 58
Workers' Compensation and Employer's Liability Insurance............. 58
Commercial General Liability Insurance............................... 59
Professional Liability Insurance..................................... 59
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Umbrella or Excess Liability Insurance............................... 60
Performance Bond..................................................... 60
Commercial Property & Business Interruption Insurance................ 60
Boiler & Machinery Insurance......................................... 61
General Requirements................................................. 61
Evidence of Insurance................................................ 62
Subcontractor Insurance.............................................. 63
Defense/immunity..................................................... 63
Notice of Claims..................................................... 64
ARTICLE 10.............................................................. 64
DEFAULT AND TERMINATION................................................ 64
Default or Termination............................................... 64
Notice............................................................. 64
State Termination Without Cause.................................... 64
State Non-appropriation Without Cause.............................. 64
State Immediate Termination for Cause.............................. 64
Cause Termination for an Event of Default.......................... 65
Time to Cure......................................................... 65
Force Majeure ....................................................... 66
Remedy for Default or Termination.................................... 66
Waiver............................................................... 66
ARTICLE 11.............................................................. 66
DISPUTES............................................................... 66
Dispute Resolution................................................... 66
ARTICLE 12.............................................................. 67
MISCELLANEOUS.......................................................... 67
Non-discrimination................................................... 67
Binding Nature....................................................... 67
Invalidity and Severability.......................................... 67
Prohibition Against Assignment....................................... 67
Counterparts......................................................... 67
Interpretation....................................................... 67
Terminology and Definitions.......................................... 68
Venue................................................................ 68
Release.............................................................. 68
Amendment............................................................ 68
Scope of Contract.................................................... 68
Jurisdiction......................................................... 68
Laws of Nevada....................................................... 68
Liquidated Administrative Adjustments................................ 68
Government Obligations............................................... 69
Notices.............................................................. 69
EXHIBITS AND ATTACHMENTS................................................ 72
</TABLE>
iii
<PAGE>
SECURE JUVENILE TREATMENT FACILITY
CONSTRUCTION / INSTALLMENT PURCHASE
AND MANAGEMENT SERVICES CONTRACT
THIS CONSTRUCTION / INSTALLMENT PURCHASE AND MANAGEMENT SERVICES
CONTRACT, is made on February 2, 1999, effective upon approval by the State
Board of Examiners and satisfaction of all conditions expressed herein, by and
between the STATE OF NEVADA, DEPARTMENTS OF ADMINISTRATION AND HUMAN RESOURCES,
HEREINAFTER REFERRED TO AS "DOA", 209 East Musser Street, Blasdel Building, Room
200, Carson City, Nevada 89701, political subdivisions of the State of Nevada,
the NEVADA REAL PROPERTY CORPORATION ("CORPORATION"), a Nevada non-profit
corporation, as designated by the office of the State Treasurer, Capitol
Building Capitol Complex, Carson City Nevada, 89710, CLARK & SULLIVAN
CONSTRUCTORS RITE OF PASSAGE, INC., ("Builder"), a Nevada licensed building
contractor design/build team, 905 Industrial Way, Sparks, Nevada 89431, and
CORRECTIONAL SERVICES CORPORATION ("CONTRACTOR") a Florida for-profit
corporation, 1819 Main Street, Suite 1000, Sarasota, Florida 34236, and
incorporates by reference, whether created before, concurrent or after execution
and approval, in the subsequent descending order of constructive intent: All
EXHIBITS 1 THROUGH 8; and (ATTACHMENT A) the Contractor's RFP Response for sale,
design/build and operations of the real property and proposed improvements dated
June 30, 1998, and any amendments and/or best and final offer; (ATTACHMENT B)
the Builder's best and final offer to develop and construct the Facility on
Contractor's site and pursuant to Builder's construction plans, as amended;
(ATTACHMENT C) the RFP Amendment(s): No. 1, dated April 27, 1998; No. 2, dated
June 18, 1998; No. 3, dated May 22, 1998; (ATTACHMENT D) the RFP No. 1018 dated
April 20, 1998; and, (ATTACHMENT E) the executed Indenture of Trust. This entire
contract and its component parts shall be construed consistent with the
legislative intent of Senate Bill 495 (1997 session). This contract includes
jointly or severally enforceable component parts that are hereinafter referred
to as: the Design, and Construction Agreement ("CONSTRUCTION AGREEMENT"); and
the Installment Purchase Agreement ("PURCHASE AGREEMENT" OR "IP AGREEMENT"); the
Facility Lease Agreement ("LEASE AGREEMENT"); and the Management Services
Agreement ("MANAGEMENT AGREEMENT"), which collectively shall be referred to as
("AGREEMENT" OR "CONTRACT").
RECITALS
WHEREAS, DOA, pursuant to Senate Bill 495, 1997 Statutes of Nevada
p.2738, as adopted by the 1997 Nevada State Legislature, has the authority to
issue a Request for Proposal and enter into a Contract with a private vendor for
construction, and/or operation and installment purchase of a secure juvenile
correctional facility;
WHEREAS, DOA, Purchasing Division issued a Request for Proposal No.
1018 for Site Acquisition, Design, Construction and/or Operation of a Secure
Juvenile Treatment Facility ("RFP") on April 20, 1998; and
WHEREAS, Contractor submitted a response to the RFP and has been
selected to provide operation services defined herein; and Builder has agreed to
develop and construct ON Contractor's site, utilizing the proposed Builder's
construction plans, as amended;
1
<PAGE>
NOW, in consideration of the mutual promises and covenants contained
herein, DOA Corporation, Builder and Contractor hereby agree as follows:
2
<PAGE>
ARTICLE 1
DEFINITIONS
ACA - means the American Correctional Association.
- ---
ACA Standards - means the applicable Accreditation Standards for juvenile
- -------------
correctional institutions existing upon the effective date of this Contract and
as the same may be modified, amended or supplemented in the future, as published
by the ACA.
Accreditation - means formal review and approval by agencies which promulgate
- -------------
standards and guidelines relating to the delivery of correctional services in
juvenile institutions. Specifically included are the accreditation programs of
the American Correctional Association and the National Commission on
Correctional Health Care.
Additional Services - means those additional operation and management services
- -------------------
required to be furnished by Contractor pursuant to post-Contract effective date
changes in Standards as defined in this Agreement, which cause a demonstrable
increase in the annualized cost of operating and managing the Facility.
Agreement or Contract - means this contract, together with all attachments and
- ---------------------
exhibits hereto, and all amendments and modifications hereto.
Architect - means the firm named in this Contract which employs or contracts the
- ---------
services of a legal resident registered architect of Nevada or an individual
legal resident architect of Nevada. In the instance of a firm, the term
"Architect" shall include the Project Architect.
Authorized Representative - means any person at the time designated in writing
- -------------------------
to act for and on behalf of a party to this Agreement, which designation has
been furnished to the other party hereto. In the case of Contractor, such
designation shall be signed by its President or Chief Executive Officer. In the
case of the State, the Director of the Department of Administration is hereby
designated as its authorized representative at any time, the Director may
designate any additional person(s) as its authorized representative(s) by
delivering to Contractor a written designation signed by the Director. Such
designation shall remain effective until revoked in writing by the Director.
Biennium - means a State legislative appropriation period of two (2) fiscal
- --------
years.
Board - means the Board of Examiners.
- -----
Case Worker - means a caseworker and is also known as case manager or social
- -----------
worker. The minimum requirements for a caseworker include graduation from a two-
year masters level program in social work or counseling and guidance.
3
<PAGE>
Case Work Supervisor - means the supervisor of case workers must be licensed by
- --------------------
the State of Nevada to provide professional therapy; e.g. Licensed Clinical
Social Worker, Clinical Psychologist.
Codes - means all federal, state and local codes applicable to the Facility.
- -----
Construction Monitor - means the person designated by the State who will be the
- --------------------
official liaison between the State and Contractor on all matters pertaining to
the design and construction of the Facility.
Contract Monitor - means the person designated by the State who will be the
- ----------------
official liaison between State and Contractor on all matters pertaining to
auditing and reporting regarding Contractor's compliance with the terms of this
Management Agreement.
Court Orders - mean any orders or judgments issued by a court of competent
- ------------
jurisdiction, any stipulations, agreements, or plans, entered into in connection
with litigation that are applicable to the operations, management or maintenance
of the Facility and relate to the care and custody of Residents.
Critical Post - means a Post that is of particular concern due to Facility
- -------------
security or safety to the Residents or staff. Each such Post shall be set forth
in the Operational Plan and the Staffing Pattern.
Deadly Force - means the use of force which may reasonably result in death or
- ------------
serious injury. It shall be construed consistent with ACA Standards.
Debt Service - means the required payments towards the retirement of the public
- ------------
debt created under a Trust Indenture (as defined in Section 3.4) to finance the
construction, acquisition, lease and installment purchase of the Facility
constructed, equipped and furnished pursuant to the Construction / Installment
Purchase Agreement, which total amount may not exceed the debt authorized by SB
495.
Direct Care Worker - means any position which has security, custody and direct
- ------------------
contact with juveniles as the primary job responsibility. These positions are
line level positions. Positions such as counselor, recreation worker, teacher,
and supervisor are not considered to satisfy the requirement for direct care
worker positions in meeting minimum staffing ratios.
Disability Requirements - means all programs and services must meet all
- -----------------------
applicable State and federal requirements for access to and delivery of services
to the disabled, including but not limited to the Americans with Disabilities
Act and the Individuals with Disabilities Education Act.
Emergency - means any event where the life, health or safety of any Resident or
- ---------
the general public is threatened by circumstances that exist at the Facility and
which circumstances appear, in the sole discretion of the State, to be out of
the Contractor's ability to control.
4
<PAGE>
Event of Default - means a breach, bad faith cancellation or the persistent or
- ----------------
repeated failure or refusal by the party to substantially fulfill any of its
obligations under this Contract (the IP Agreement not included), unless excused
or justified by this Agreement, Unforeseen Circumstances as defined in this
Agreement, or other party's default ("Event of Default" is defined separately in
Section 3.4).
Facility - means the Secure Juvenile Treatment Facility to be designed and
- --------
constructed in southern Nevada including, without limitation, physical
improvements upon the land paid for by either the DOA, Builder, Contractor or
the Corporation, including without limitation preliminary and final updated
construction plans, studies or surveys related thereto, the land and any
easements, appurtenances or other rights to the use of the land, and any
furnishings, fixtures, equipment, systems, machines, computers, software, data,
files, buildings, vehicles, apparatus or equipment used in connection therewith.
Facility Capacity - means the number of Residents by cell, by dorm and overall
- -----------------
capacity who can be located at the Facility as defined or identified in the
final construction plans accepted by DOA.
Fiscal Year - means any of the one (1) year periods, beginning on July 1 and
- -----------
ending on June 30, used for budgeting purposes by the State of Nevada.
Force Majeure - means the failure of performance of any of the terms and
- -------------
conditions (except the IP agreement) resulting from acts of God, acts of public
enemies, declared disaster or emergency orders of any kind of the Government of
Nevada or the United States of America, or any of their departments, agencies or
officials, or any civil or military authority ("Force Majeure" is defined
separately in Section 3.4).
Grievance Procedure - means the method by which Residents may address complaints
- -------------------
about the conditions of their incarceration to administrative staff.
IEP - means an Individual Education Plan.
- ---
IP Agreement - means the Installment Purchase Agreement as defined in Article 3,
- ------------
Section 3.4, including the signature page and the relevant exhibits attached to
this contract.
In-Patient Hospital Costs - means those costs incurred upon and during admission
- -------------------------
to a hospital licensed by the State of Nevada or another state.
ITP - means an Individual Treatment Plan.
- ---
Minimum Contractor Payment - means the product of the Per Diem Rate times the
- --------------------------
number of Residents as defined in this Management Agreement who are assigned to
the Facility for any Resident Day(s) during the billing month according to the
daily count sheet for each day of the billing month.
5
<PAGE>
NCCHC Standards - means the applicable Accreditation standards for the juvenile
- ---------------
correctional institutions specifically, and generally for correctional facility
health care services, that exist upon the effective date of this Contract and as
the same may be modified, amended or supplemented in the future, as published by
the National Commission on Correctional Health Care.
Non-Deadly Force - means the use of force which a reasonable person would not
- ----------------
expect to result in either death or serious bodily injury.
Operations and Management Services - means those services to be performed by the
- ----------------------------------
Management Agreement Contractor subsequent to the Services Commencement Date,
which identify the expectations, obligations and requirements of this Contract
to provide the day-to-day operation, maintenance and management of the Facility,
including the Residents housed therein.
Per Diem Rate - means the original Management Agreement negotiated per diem and
- -------------
any subsequent adjustments thereto and shall have the meaning more fully set
forth in Article 8, "Compensation and Adjustments."
Post - means a work location to be staffed according to an approved Staffing
- ----
Pattern.
Resident - means any juvenile assigned by the State to the Facility for
- --------
incarceration or evaluation, pursuant to applicable laws, rules and regulations
of the State of Nevada, or accepted under the State's policy and procedures for
housing such juvenile. Resident shall include those accepted under contract
between the State and another state, political subdivision or from the federal
government.
Resident Day - means the basis for management services billing and is further
- ------------
defined as each calendar day, or part thereof, during which a Resident is
assigned to the Facility and which Resident is counted as present during the
daily Resident count, including those assigned Residents that are the
responsibility of the Facility, but may be physically located at another
location for mental or physical health services, hospitalization, education, or
court appearances. When an Resident is assigned at the Facility, the Contractor
will be paid the Per Diem Rate for the first day of assignment, but not the last
day of the Resident's assignment.
Response - means the Contractor's and Builder's bid proposals offered to DOA
- --------
under RFP No. 1018, including any adjustments or amendments and any best and
final offer(s) to the original response.
RFP - means the DOA, Purchasing Division Request for Proposal No. 1018 dated
- ---
April 20, 1998, together with any addenda, attachments, exhibits or amendments
thereto.
SCD - means Services Commencement Date which is the first day that any Resident
- --- --------------------------
is assigned by the State to the Facility and any one (1) or more Residents are
incarcerated by the Contractor at the Facility.
6
<PAGE>
Special Education Teacher - means a special education teacher who must be
- -------------------------
credentialed and/or certified by the State of Nevada to teach in special
education classrooms and/or provide educational services to children with formal
Individual Education Programs.
Standards - means applicable federal and state laws, codes, statutes,
- ---------
regulations, constitutional requirements, court orders, ACA Standards and NCCHC
Standards.
Start Up Period - means the period of time between the effective date of SB 495
- ---------------
and the Services Commencement Date.
State - means, except in the case of the IP Agreement, the State of Nevada, the
- -----
Department of Administration, the Department of Human Resources and the
respective divisions, officers, employees, and immune contractors as defined in
NRS 41.0307 ("State" is defined separately under Section 3.4).
Subcontract - means any contract between the original Contractor and a third
- -----------
party for the provision of items or services which the original Contractor
itself has contracted to perform, except purchase orders for standard commercial
equipment, products or services.
Teacher - means a teacher who must be credentialed by the State of Nevada to
- -------
teach at the high school level. Recreation workers can be used to meet the
minimum staffing ratio if they are credentialed as physical education teachers.
Term - means the duration of any or all of the component parts of this
- ----
Agreement, except the IP Agreement, as specified in Article 2, "Term of
Contract" (The "Term" of the IP Agreement is set forth separately in Section
3.4).
Unforeseen Circumstance - means an event, exclusive of Per Diem Rate adjustment
- -----------------------
and compensation for additional services as set forth in Article 8, beyond the
reasonable contemplation of both parties (a mutual mistake of a material nature)
at the time of the execution of this Contract that materially alters the
financial conditions or the purpose upon which the Management Agreement is
based.
ARTICLE 2
TERM OF CONTRACT
Section 2.1 PERIOD OF MANAGEMENT AGREEMENT. The availability of Section 3.4
------------------------------
Financing, a certificate of occupancy of the Facility issued by the proper
authority and legislative appropriation shall be conditions precedent to the
Management Agreement. The Term of the Management Agreement shall commence upon
approval by the State Board of Examiners and shall, in the absence of an
intervening termination or non-appropriation, conclude as follows:
(a) Except for the Facility's land, design, construction, personal property
and equipment to be purchased through Debt Service as defined in this
Agreement, the Term of the Management Agreement shall be conditioned upon
the actual successive biennial
7
<PAGE>
appropriations by the Nevada State Legislature, which non-appropriation at
any time shall require termination.
(b) This Management Agreement shall strictly conform to the Federal
requirements for a "Qualified Management Contract" as set forth in Internal
Revenue Service, Revenue Procedure 97-13 or any subsequent revenue
procedure, rule or law. The Term will be controlled by all such revenue
procedure requirements, including without limitation:
(i) in years one (1) through three (3) the contract shall only be
-------------------------
terminated for cause or non-appropriation;
(ii) a one (1) year contract renewal option in year four (4), which
------------------------------------------------------
renewal will be at the sole discretion of the DOA, and if
renewed, the contract may be terminated with or without cause
or for non-appropriation; and
(iii) a second one (1) year renewal option in year five (5), which
----------------------------------------------------
renewal will be at the sole discretion of the DOA, and if
renewed, the contract may be terminated with or without cause
or for non-appropriation.
(c) If Contractor desires that the contract not be renewed for any
anticipated renewal period, Contractor must provide at least 180 days prior
written notice. Any failure to provide such prior notice shall be grounds
for breach of contract and the State may look to the Contractor, the
Performance Bond or both for any resulting damages.
(d) During year 5 the management contract will be reopened by the State for
public bidding for a new qualified management contract to begin in year six
(6), or otherwise as the State may desire. The Contractor may bid, but
there are no assurances that it will be the successful bidder.
(e) The Per Diem Rate is not negotiable for any renewal period except as
otherwise provided for in this Agreement.
(f) Default and Termination are more fully set forth in Article 10 of this
Agreement.
Section 2.2 PERIOD OF PURCHASE AGREEMENT. Construction will commence upon all
necessary approvals of this Agreement and all necessary state and local
government approvals of the land development project and construction. The
period of construction and purchase shall conform to the terms of the accepted
Response, and as amended in this Contract, for development and construction,
lease and installment purchase as set forth in Section 3.4. The availability of
Section 3.4 Financing is a condition precedent to the Purchase Agreement, the
Lease Agreement and the Management Agreement.
8
<PAGE>
ARTICLE 3
CONSTRUCTION / INSTALLMENT PURCHASE
Section 3.1 FACILITY DESIGN AND CONSTRUCTION. The Facility will be designed,
--------------------------------
constructed and equipped on Contractor's site in accordance with the Builder's
plans and specifications set forth in Builder's best and final offer to
construct the Facility (Attachment B). The Facility shall be constructed as two
(2) 48-bed residential units (totaling 96 beds) and an integrated central core
unit, which is designed and equipped to support potential future expansion by
two (2) additional 48-bed residential units (total expansion capacity to 192
beds). However, classroom space shall be constructed for 96 students. The
Contractor will act as the land developer and the Builder will act as the prime
contractor for the design, construction and equipping of the Facility. A post-
construction set of as-built UPDATED PLANS AND SPECIFICATIONS shall be approved
in writing by DOA prior to final payment of the Construction Agreement, and such
Updated Plans and Specifications shall be incorporated into this Agreement as
EXHIBIT 1.
(a) The Facility will be completed in its entirety and the Service
Commencement Date shall NOT BE LATER than 365 days from close of sale of
Section 3.4 Certificates. Should Builder fail to meet this schedule,
liquidated damages of Five Thousand Dollars ($5,000.00) per day may at the
State's discretion be assessed for each day this time is exceeded, unless a
design change extension for a specific number of days is mutually agreed to
in writing.
(b) Without prior written consent of the Director of DOA, the maximum
number of Residents to be housed in the Facility shall be limited to the
limit identified for each cell and multi-person dorm on the Facility's
updated plans submitted and approved.
(c) Within sixty (60) days of completion of construction and at no
additional cost to State, the Builder will furnish DOA a copy of the as-
built plans and specifications and a preliminary title report, showing that
title is clear of all liens and encumbrances except those expressly
approved in writing by DOA or otherwise evidenced by executed lien
releases.
Section 3.2 LAND ACQUISITION. The Facility shall be located on a 13 acre tract
----------------
located at NWC Ann Road and Hollywood Blvd., Clark County, Nevada (westerly
portion of Assessor's Parcel Number 12327801002). A LEGAL DESCRIPTION of the
property and a copy of the TITLE INSURANCE POLICY shall be attached hereto as
EXHIBIT 2 at a time required by the Treasurer's bond counselor or the State.
(a) Contractor, who has an option to purchase the subject land, will be
responsible to obtain and convey by grant, bargain and sale deed to the
Corporation clear title to the real property upon which the approved
Facility will be built. Contractor shall appear before the Corporation in
the recorded chain of title. Pursuant to Section 3.4, the Corporation shall
hold insured legal title to the Facility during the term of the IP
Agreement with the State of Nevada named as an additional insured. As part
of the purchase price Builder will be responsible to obtain all necessary
approvals, including without limitation special use permits and other state
and local government approvals. Contractor will be responsible to provide
for
9
<PAGE>
title insurance to the Corporation and the State, as an additional insured,
at the time of close of escrow for sale to the Corporation. Escrow shall
close the same day as the sale of the Section 3.4 Certificates to the
State's securities underwriter. At any time and any manner not inconsistent
with Section 3.4 and the Trust Indenture the State may direct the
Corporation to convey title to the land and improvements to the State of
Nevada.
(b) Contractor shall be solely responsible to indemnify and defend the
State and Corporation against any claims, causes of action or fines,
including reasonable attorneys fees and costs, for any Hazardous Wastes or
Substances that are discovered on or in the land that pre-existed the
conveyance of the land to the State or the Corporation. The term "hazardous
wastes or substances" is used herein in its very broadest sense and
includes, but is not limited to, petroleum based products, paints and
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCBs and other chemical products. All parties agree to
properly handle and dispose of hazardous wastes or substances in full
accord with law and each party agrees to fully indemnify and defend the
other, including reasonable attorneys' fees and costs for any wrongful
handling or disposal, not the other party's fault, during the respective
party's actual possession or entry to the land or Facility.
Section 3.3 COST, FINANCING AND PURCHASE PRICE. Depending upon the terms of the
accepted proposal, any development or construction prior to the execution and
delivery of the Certificates described in Section 3.4 hereof shall be at the
sole risk of the one so acting. Contractor shall be required to remove any title
liens or encumbrances with respect to the Project that are deemed by the State
to be incompatible with the execution and delivery of such Certificates. Prior
to the execution and delivery of such Certificates, the Contractor agrees that
the costs of land acquisition shall be an initial responsibility borne by the
Contractor. Builder agrees that the costs of development, equipment,
furnishings, improvements, and construction shall be an initial responsibility
borne by the Builder. The proceeds derived from the execution and delivery of
the Certificates pursuant to the IP Agreement shall be the only vehicle for
DOA's payment for the purchase price with all development, architects' and
construction costs included. The Management Agreement shall not be used to pass
on any such costs.
The total Facility costs, which shall be deemed the PURCHASE PRICE of the
Facility, shall be: Fourteen Million Seven Hundred Forty-Five Thousand Two
Hundred Fifteen and no/100 ($14,745,215.00).
(a) The State will provide its own long-term, tax-exempt financing for the
facility through the execution and delivery of the Certificates. The State
intends that the obligation to pay Base Payments (as defined in Section 3.4
hereof) will constitute a GENERAL OBLIGATION DEBT of the State and will be
payable from the annual tax imposed for the payment of the obligations of
the State from the consolidated bond interest and redemption fund or by
other legislative act. The sale of these Certificates will fund a
construction account -- the principal and interest of which will be
sufficient to meet construction draws as they come due on the project.
Project costs will include all of the costs included in the contract with
the Contractor, as real estate seller, and Builder, as the design/build
team. A reasonable reserve or the sale of additional Certificates for
10
<PAGE>
State-initiated change orders may be included in or added to the
construction account. Change orders not initiated by the State and change
orders required to correct errors and omissions in design or
constructibility will be the sole obligation of the Builder. Any
construction delays, disputes or breach shall not relieve or abate the
State's duty to make general obligation Base Payments.
(b) Funds raised through the sale of the Certificates will be held by the
Treasurer or by an independent trust bank, at the State's discretion. The
State will invest or direct the investment of these funds as permitted by
law. After close of escrow on the purchase, the State will disburse the
proceeds of the financing to the Builder based on a no-sooner-than draw
schedule provided by the Builder, as amended through negotiation. EXHIBIT
8, BUILDER'S CONSTRUCTION DRAW SCHEDULE. Notwithstanding the draw schedule
estimates, payment of project costs are subject to the successful
completion of each milestone related to that construction draw. Title and
title insurance will be transferred to the State and the Corporation as an
additional insured upon close of escrow, and the payment of the first draw,
which will occur at close of escrow, will also include payment of the
agreed upon site acquisition costs. The State will withhold the retention,
which shall appear in the Builder's Construction Draw Schedule, until the
Project is delivered free and clear of all liens by subcontractors and
other parties performing work under the contract with the State. Retention
will be withheld only on construction materials, labor, equipment and
subcontractor items. Retention will be withheld at 10% until the Facility
is 50% complete. At 50% completion, retention shall be reduced to 5%
through Service Commencement Date (SCD).
(c) The Contractor and Builder shall cooperate with the State and
Corporation by providing information and executing those legal documents
deemed necessary for the successful completion of the legal and disclosure
obligation of the State. Any demonstrable costs of any extraordinary
cooperation will be reimbursed.
(d) In order to limit the State's cost exposure to architectural and
engineering design errors and omissions for the Builder's proposed design,
as amended, the State requires that the Builder contract directly with
Architect for design services and assume full financial responsibility for
change orders to the approved design, except for those change orders that
are optional and initiated by the State. The Builder will be responsible
for recovering any such non-State change order amounts under its contract
with the Architect.
(e) Builder may alter or change participants in its design/build team
provided no additional cost is claimed and the Corporation and the State
are indemnified and held harmless from any disputes or resulting claims by
any current, past, or future design/build team participant. Changes to the
team require State consent, which consent shall not be unreasonably
withheld.
(f) The Purchase Price is a guaranteed maximum price with a fixed fee of
$656,255 included. Any savings will be split between the State and Builder
(50% to each party). The State will have full audit rights for the project.
11
<PAGE>
Section 3.4 INSTALLMENT PURCHASE AGREEMENT ("LEASE-PURCHASE FINANCING
AGREEMENT"). On the date of execution and delivery of the Certificates,
Contractor shall convey clear and marketable insured title in the Facility to
the Corporation in a manner acceptable to the Treasurer and its bond counsel.
Contractor shall bear the cost of conveying such title and title insurance to
the Corporation, and the State as additional insured. The Corporation shall hold
title and hereby grants an unrestricted leasehold to the State in the Facility.
The State shall act as the Corporation's general agent to make all financing,
spending, design and development decisions and to supervise the construction of
the Facility by a construction monitor selected by the State, and the State
shall manage and maintain the Facility unless it subcontracts its management
and/or maintenance of the Facility to any other management contractor(s). The
term of such lease and agency shall continue until the terms of repayment of the
Certificates shall have been satisfied. Whereupon, the Corporation shall convey
all rights title and interests in the Facility back to the State of Nevada
acting by and through the Department of Administration (hereinafter "State").
The Corporation Builder, and the Contractor shall fully cooperate with the State
and the Trustee in the execution of any documents required by the State or the
Trustee. While the Certificates remain outstanding, the rights and
responsibilities of the State, the Corporation, the Builder, the Contractor, and
the owners of the Certificates shall conform as follows:
(a) INSTALLMENT PURCHASE AGREEMENT ("IP AGREEMENT") DEFINITIONS: All words
and phrases in this Section 3.4 shall have the same meaning as in this
Contract. In construing the IP Agreement, the following definitions shall
prevail. In addition, the following terms will have the meanings specified
below unless the context clearly requires otherwise:
Additional Certificates - means any certificates of participation,
-----------------------
other than the 1999 Certificates, issued pursuant to the Indenture
evidencing proportionate undivided interests in the rights to receive
Base Payments.
Additional Payments - means any redemption premium payable with
-------------------
respect to the Certificates, the reasonable and customary expenses
(including reasonable attorneys' fees and expenses) and fees of the
Trustee in connection with the Certificates, and any taxes or any
other expenses including, but not limited to, licenses, permits, state
and local sales and use or ownership taxes, recording taxes or
property taxes which the Corporation or the Trustee is required to pay
as a result of this IP Agreement.
Agreement Term - means the term of this IP Agreement as determined
--------------
pursuant to the terms set forth in this Section 3.4.
Base Payments - means the payments payable by the State pursuant to
-------------
this IP Agreement during the IP Agreement Term, which constitute the
principal and interest payments payable by the State for and in
consideration of the right to use and the option to purchase the
Project during the IP Agreement Term.
Board - means the State Board of Examiners of the State of Nevada.
-----
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Bond Act - means the State Securities Law, cited as NRS 349.150
--------
through 349.364, as amended.
Certificates - mean, collectively, the 1999 State of Nevada General
------------
Obligation Certificates and any Additional Certificates issued
pursuant to the Indenture.
Certificate Year - means the period commencing on the date of initial
----------------
delivery of the 1999 Certificates and ending on June 30, 1999, and
thereafter the twelve (12) month period of each year commencing on
July 1 and ending on the next June 30.
Code - means the Internal Revenue Code of 1986, as amended.
----
Corporation - means the Nevada Real Property Corporation, a Nevada
-----------
nonprofit corporation or other such Nevada nonprofit corporation as
the Treasurer shall designate, which shall hold legal title to the
facility.
Event of Default - means one or more events of default as defined in
----------------
this Section 3.4.
Financing Statements - means the Uniform Commercial Code--Financing
--------------------
Statements-Form UCC-1 or any other form acceptable to the Trustee.
Force Majeure - means, without limitation, the following: acts of God,
-------------
strikes, lockouts or other industrial disturbances; acts of public
enemies; orders of restraints of any kind of the government of the
United States of America or of the State or any of their departments,
agencies or officials or any civil or military authority;
insurrection; riots; landslides; earthquakes; fires; storms; droughts;
floods; explosions; breakage or accidents to machinery, transmission
pipes or canals; or any other cause or event not within the control of
the State.
Indenture - means the Trust Indenture between the Corporation and the
---------
Trustee, as amended or supplemented from time to time pursuant to
which the Certificates are executed and delivered.
Independent Counsel - means an attorney duly admitted to practice law
-------------------
before the highest court in any state and who is not an employee of
the Corporation, the Trustee or the State.
IP Agreement - means this Installment Purchase Agreement (Lease-
------------
Purchase Financing Agreement) on the date it is approved by the State
Board of Examiners, and any amendments or supplements hereto.
NRS - means the Nevada Revised Statutes.
---
Owners - means the registered owners of the Certificate.
------
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1999 Certificates - means the Nevada Real Property Corporation, State
-----------------
of Nevada General Obligation Certificates (Secure Juvenile Treatment
Facility Project), Series 1999 executed and delivered pursuant to the
Indenture in the aggregate principal amount of the Section 3.3
Purchase Price, evidencing proportionate undivided interest in rights
to receive Base Payments.
Participant or Registered Owner - of a Certificate means the
-------------------------------
registered owner of any Certificate as shown in the registration books
of the Trustee.
Permitted Encumbrances - means, as of any particular time, (a) liens
----------------------
for taxes and assessments not then delinquent; (b) this IP Agreement
and the Indenture; (c) utility, access and other easements and right
of way, restrictions and exceptions which do not, in the opinion of
the State Representative, interfere with or impair the Project; (d)
any Financing Statements filed to perfect security interests pursuant
to the Indenture or this IP Agreement; and (e) such minor defects,
irregularities, encumbrances and clouds on title as normally exist
with respect to property of the general character of the Project and
are consented to by the State.
Project - means the Project generally described in this entire
-------
Contract for the Facility, constructed, acquired, installed and
equipped with the proceeds of the 1999 Certificates, as may be amended
from time to time by the State and the Corporation.
Project Act - means Senate Bill 495, 1997 Statutes of Nevada p.2738.
-----------
Purchase Option Price - means the amount payable, at the option of the
---------------------
State for the purpose of price terminating this IP Agreement and
purchasing the Project, which amount shall be equal to the amount then
necessary to discharge the Indenture pursuant to the terms of this
Section 3.4 plus, under either (a) or (b), unpaid fees or expenses
payable by the Trustee. At the State's option, amounts then on deposit
in any fund created or provided for under the Indenture or this IP
Agreement, including without limitation a new appropriation by the
Nevada Legislature, except amounts on deposit in the Rebate Fund
created under the Indenture or required to be deposited in the Rebate
Fund, may be credited toward the Purchase Option Price.
State - means the State of Nevada.
-----
State Representative - means the person or persons at the time
--------------------
designated to act on behalf of the State for the purpose of performing
any act under this IP Agreement or the Indenture by a written
certificate furnished to the Trustee and the Corporation containing
the specimen signature of such person or persons and signed on behalf
of the State.
Supplemental Bond Act - means NRS Chapter 348, as amended.
---------------------
14
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Taxes - means annual general (ad valorem) taxes.
-----
Treasurer - means the Treasurer of the State of Nevada.
---------
Trustee - means a national banking association designated by the
-------
Treasurer, acting in the capacity of the trustee for the Owners
pursuant to the Indenture, and any successor thereto appointed under
the Indenture.
Trustee Representative - means the person or persons at the time
----------------------
designated to act on behalf of the Trustee for purposes of performing
any act on behalf of the Trustee under the Indenture of this IP
Agreement by a written certificate furnished to the State and the
Corporation containing the specimen signature of such person or
persons and signed on behalf of the Trustee by the duly authorized
officer of the Trustee.
(b) REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE STATE. The State
represents, covenants and warrants for the benefit of the Trustee, the
Owners and the Corporation as follows:
(i) The State has duly authorized and taken the necessary acts
(including all required approvals) required prior to the execution and
delivery of this IP Agreement.
(ii) Neither the execution and delivery of this IP Agreement or the
consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions hereof
conflicts with or results in a breach of terms, conditions, or
provisions of any restriction or any agreement or instrument to which
the State is now a party or by which the State is bound or constitutes
a default under any of the foregoing, nor conflicts with or results in
a violation of any provision of law governing the State, and no
representation, covenant or warranty herein is false, misleading or
erroneous in any material respect.
(iii) There is no action, suit, proceeding, inquiry or investigation,
at law or equity, before or by any court, public board or body, known
to be pending or threatened against or affecting the State, nor to the
best of the knowledge of the State is there any basis therefor,
wherein an unfavorable decision, ruling or finding would materially
and adversely affect the transactions contemplated by the State in
connection with this IP Agreement or which would adversely affect, in
any way, the validity or enforceability of this IP Agreement or any
material agreement or instrument to which the State is a party, used
or contemplated for use in the consummation of the transactions
contemplated hereby.
(iv) The State will fully and faithfully perform all the duties and
obligations which the Corporation has covenanted and agreed in the
Indenture to cause the State to perform and any duties and obligations
which the State or the Corporation is required in the Indenture to
perform. The foregoing shall not apply to any duty or
15
<PAGE>
undertaking of the Corporation which by its nature cannot be delegated
or assigned.
(c) REPRESENTATIONS, COVENANTS AND WARRANTIES OF CORPORATION. The
Corporation represents, covenants and warrants for the benefit of the
State, the Trustee and the Owners as follows:
(i) The Corporation is a nonprofit corporation duly created,
existing and in good standing under the laws of the State, is duly
qualified to do business in the State, has all necessary power to
construct, acquire and equip the Project and to enter into this IP
Agreement, is possessed of full power to own and hold real and
personal property and to agree and sell the same as Corporation, and
has duly authorized the execution and delivery of this IP Agreement.
(ii) Neither the execution and delivery of this IP Agreement or the
consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions hereof
conflicts with or results in a breach of the terms, conditions, or
provisions of any restriction or any agreement or instrument to which
the Corporation is now party or by which the Corporation is bound or
constitutes a default under any of the foregoing, nor conflicts with
or results in a violation of any provision of law governing the
Corporation, and no representation, covenant or warranty herein is
false, misleading or erroneous in any material respect.
(iii) There is no action, suit, proceeding, inquiry or investigation,
at law or in equity, before or by any court, public board or body,
known to be pending or threatened against or affecting the
Corporation, nor to the best of the knowledge of the Corporation is
there any basis therefor, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the transactions
contemplated by the Corporation in connection with this IP Agreement
or which would adversely affect, in any way, the validity or
enforceability of this IP Agreement or any material agreement or
instrument to which the IP Agreement is a party, used or contemplated
for use in the consummation of the transactions contemplated hereby.
(d) COMMENCEMENT & TERMINATION OF IP AGREEMENT TERM. The IP Agreement Terms
shall commence as of April 1, 1999. The IP Agreement shall terminate upon
the earliest of any of the following events:
(i) The purchase by the State of the Project as provided in this
Section 3.4 and the discharge of the Indenture, as is provided in
Article VI of the Indenture;
(ii) An Event of Default and termination of the IP Agreement by the
Trustee under this Section 3.4; or
16
<PAGE>
(iii) The date which constitutes the date on which all Base Payments
and Additional Payments required hereunder shall have been paid in
full.
Termination of the IP Agreement Term pursuant to (i) or (iii) shall
terminate all obligations of the State under this IP Agreement, and shall
terminate the State's rights of possession under this IP Agreement (except
to the extent of any conveyance to the State pursuant to this Section 3.4).
(e) ENJOYMENT OF THE PROJECT. The Corporation hereby covenants that the
State shall during the IP Agreement Term peaceably and quietly have and
hold and enjoy the Project without suit, trouble or hindrance from the
Corporation, except as expressly required or permitted by this IP Agreement
or the Indenture. The Corporation shall not interfere with the quiet use of
enjoyment of the Project by the State during the IP Agreement Term, so long
as the IP Agreement Term shall be in effect. The Corporation shall, at the
request of the State and at the cost of the State, join and cooperate fully
in any legal action in which the State asserts its right to such possession
and enjoyment, of which involves the imposition of any taxes or other
governmental charges on or in connection with the Project. In addition, the
State may at its own expense join in any legal action affecting its
possession and enjoyment of the Project, and shall be joined (to the extent
legally possible, and at the expense of the State) in any action affecting
its liabilities hereunder.
(f) BASE PAYMENTS. The State shall pay Base Payments directly to the
Trustee for distribution to the Owners in accordance with the Indenture
during the IP Agreement Term, on the due dates set forth in EXHIBIT 7, the
Base Rentals and Purchase Option Price Schedule, attached hereto and made
part hereof, as it may be amended hereunder. The Base Payments shall be in
the amount, which, together with other moneys available to the Trustee
therefor, will enable the Trustee to pay the amount payable on January 1
and July 1 of each year as the principal of (whether at maturity or upon
prepayment or acceleration or otherwise) and interest on the Certificates
as provided in the Indenture. There shall be credited against the amount of
Base Payments otherwise payable hereunder amounts equal to:
(i) the portion of the proceeds of the sale of the Certificates which
is deposited in the Certificate Fund created under the Indenture as
accrued interest;
(ii) earnings derived from the investment of the Certificate Fund
during the six-month period prior to the date on which such Base
Payments are required to be made to the Trustee, to the extent such
earnings are not required to be deposited in the Rebate Fund; and
(iii) any other moneys required under the Indenture to be deposited in
the Certificate Fund. The Base Payments to be paid by the State shall
be in consideration for the financing of the acquisition,
construction, equipping and use of the Project by the State.
17
<PAGE>
If the State has performed all of its obligations under this IP Agreement,
it will have the option to prepay or provide for the prepayment of the
Purchase Option Price on or after July 1, 2009, in full or in part on 45
days notice to the Trustee, at a prepayment price equal to the then
applicable redemption price of the Certificates, including any required
redemption premium, plus accrued interest to the redemption date, pursuant
to the Indenture.
In the event of any partial prepayment of Certificates prior to maturity,
the Base Payments shall be recalculated by the Trustee, so that the
installments of Base Payments shall be equal to the amount necessary to pay
the principal of and interest components of the Certificates coming due on
each January 1 or July 1 thereafter until payment of the Certificates in
full, as provided in the Indenture.
(g) ADDITIONAL PAYMENTS. All Additional Payments shall be paid by the State
when due directly to the person to which such Additional Payments are owed.
The State may, at the expense and in the name of the State, in good faith
contest any such Additional Payments, but shall not be entitled to any
offset.
(h) ADVANCES. In the event that the State shall fail to pay any Additional
Payments during the IP Agreement Term, the Trustee may (but shall be under
no obligation to) pay such Additional Payments, which Additional Payments,
together with interest thereon at the rate of interest borne by the
Certificates, the State agrees to reimburse to the Trustee.
(i) MANNER OF PAYMENT. The Base Payments and, if paid, the Purchase Option
Price, shall be paid to the Trustee at its principal corporate trust
office. Notwithstanding any dispute between the State and the Corporation,
the Trustee, any Owner, or any other person, the State shall, during the IP
Agreement Term, make all payments of Base Payments and Additional Payments
when due and shall not withhold any Base Payments or Additional Payments
pending final resolution of such dispute, nor shall the State assert any
right of set-off or counterclaim against its obligation to make such
payments required hereunder. No action or inaction on the part of the
Corporation or the Trustee shall affect the State's obligation to pay all
Base Payments and Additional Payments during the IP Agreement Term.
(j) DISPOSITION OF BASE PAYMENTS. Upon receipt by the Trustee of each
payment of Base Payments, the Trustee shall apply the amount of such Base
Payments in the following manner and order:
(i) FIRST, the amount of such payment of Base Payments designated and
paid as interest under EXHIBIT 7, BASE RENTALS AND PURCHASE OPTION
PRICE SCHEDULE, attached hereto and made part hereof and as it may be
amended hereunder, plus the amount of any post due interest on the
Certificates, shall be deposited in the Interest Account of the
Certificate Fund.
(ii) SECOND, the remaining portion of such payment of Base Payments
shall be deposited in the Principal Account of the Certificate Fund.
18
<PAGE>
(k) BASE PAYMENTS GENERAL OBLIGATIONS. All of the Base Payments shall
constitute general obligations of the State, which hereby pledges its full
faith and credit for their payment pursuant to the Project Act. All Base
Payments shall be payable from Taxes or by other legislative act as
provided herein.
(l) LIMITATIONS UPON SECURITY. Pursuant to section, 349.250, Bond Act, the
Base Payments are not secured by an encumbrance, mortgage or other pledge
of property of the State, including the Project, except the proceeds of
Taxes and any other moneys pledged for the Base Payments. No property of
the State, including the Project, subject to such exception, shall be
liable to be forfeited or taken in payment of the Base Payments.
(m) CONSOLIDATED BOND FUND. Pursuant to section 349.236, bond Act, payment
of the Base Payments shall be made from the Consolidated Bond Fund of the
State, under the provisions of NRS 349.080 through 349.140, except to the
extent any provision is otherwise made for such payment by the Project Act,
other legislative act or this IP Agreement.
(n) GENERAL TAX LEVIES. There shall be levied in the calendar year 1999 and
annually thereafter until all of the Base Payments shall have been fully
paid, satisfied and discharged, a Tax on all property, both real and
personal, subject to taxation within the boundaries of the State, fully
sufficient together with the revenue which will result from the application
of the rate to the net proceeds of minerals, to pay the Base Payments,
without regard to any statutory tax limitations now or thereafter existing,
but subject to the limitations imposed by NRS 361.453, and by Section 2 of
Article 10 of the Constitution of the State, and after there are made due
allowance for probable delinquencies, except to the extent revenues are
otherwise available.
(o) BUDGET PROVISIONS. In the preparation of the budget for the State, the
State Legislature shall first make proper provisions through the levy of
sufficient Taxes for the payment of the interest on and the retirement of
the principal of the bonded indebtedness of the State, including, without
limitation, the Base Payments subject to the limitations imposed by Section
2 or Article 10 of the Constitution of the State and by NRS 361.453, and
the amount of money necessary for this purpose shall be a first charge
against all revenues received by the State.
(p) PRIORITIES FOR BASE PAYMENTS. As provided in NRS 361.463, in any year
the total Taxes levied against the property in the State by all overlapping
units within the boundaries of the State may exceed the limitation imposed
by NRS 361.453 and it shall become necessary for that reason to reduce the
levies made by any of those units, the reduction so made shall be in Taxes
levied by such units (including, without limitation, the State) for
purposes other than the payment of their bonded indebtedness, including
interest thereon. The Taxes levied for the payment of bonded indebtedness
and the interest thereon enjoy a priority over taxes levied by each such
unit (including, without limitation, the State), for all other purposes
where reduction is necessary in order to comply with the limitation imposed
by NRS 361.453.
19
<PAGE>
(q) CORRELATION OF LEVIES. Such Taxes shall be levied and collected in the
same manner and at the same time as other Taxes are levied and collected.
The proceeds of Taxes levied to pay the interest component of the Base
Payments shall be kept by the Treasurer in a special fund designated as the
"State of Nevada General Obligation Installment Base Payments Series 1999
Tax Fund--Interest," and the proceeds of Taxes levied to pay the principal
component of the Base Payments shall be kept in a special fund designated
as the "State of Nevada General Obligation Installment Base Payment Series
1999 Tax Fund--Principal." Such funds shall be used for no other purpose
than the payment of interest and principal component of the Base Payments,
respectively, as the same become due.
(r) USE OF GENERAL FUND. Any Base Payments coming due at any time when
there are on hand from such Taxes (and any other available moneys)
insufficient funds to pay the same shall be promptly paid when due from
general funds on hand belonging to the State, reimbursement to be made for
such general funds in the amounts so advanced when the Taxes have been
collected, pursuant to section 346.242, Bond Act.
(s) USE OF OTHER FUNDS. Nothing in this IP Agreement prevents the State
from applying any funds (other than Taxes) that may be available for that
purpose to the payment of the Base Payments, including without limitation
any funds described in the Project Act, and upon such payment, the levy or
levies herein provided may thereupon to that extent be diminished, pursuant
to section 349.244, Bond Act.
(t) LEGISLATIVE DUTIES. In accordance with sections 349.238 through
349.244, Bond Act, it shall be the duty of the State Legislature, at the
time and in the manner provided by law for levying other taxes of the
State, if such action shall be necessary to effectuate the provisions of
this IP Agreement, to ratify and carry out the provisions of this IP
Agreement with reference to the annual levy and collection of such Taxes;
and the State Legislature shall require the officers of the State to levy,
extend and collect such Taxes in the manner provided by law for the purpose
of creating funds for the payment of the Base Payments.
(u) APPROPRIATION OF TAXES. In accordance with section 349.248, Bond Act,
there is specially appropriated the proceeds of such Taxes to the payment
of the Base Payments; and such appropriations shall neither be repealed nor
such Taxes postponed or diminished (except as otherwise expressly provided)
until the Base Payments have been wholly paid.
(v) LIMITATIONS UPON RECOURSE. Pursuant to section 349.252, Bond Act, no
recourse shall be had for the payment of the Base Payments or for any claim
based thereon or otherwise upon this IP Agreement, against any individual
member of the Board, or any officer, employee or other agent of the State,
past, present, or future, either directly or indirectly through the Board,
or otherwise, whether by virtue of any constitution, statute, or rule of
law, or by the enforcement of any penalty, or otherwise, all such
liability, if any, being by the acceptance of this IP Agreement and the
Certificates specially waived and released.
20
<PAGE>
(w) LIMITATIONS UPON CONTRACT. The enforceability of the obligations of the
State hereunder is subject to the reasonable exercise in the future by the
State and its governmental bodies of the police power inherent in the
sovereignty of the State and to the exercise by the United States of the
powers delegated to it by the United States Constitution.
(x) DISCLAIMER OF WARRANTIES. NEITHER THE TRUSTEE NOR THE OWNERS MAKE ANY
WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE,
DESIGN, CONDITION, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
FITNESS FOR USE OF THE PROJECT OR ANY OTHER REPRESENTATION OR WARRANTY WITH
RESPECT TO THE PROJECT. In no event shall the Trustee or the Owners be
liable for any direct or indirect, incidental, special or consequential
damages in connection with or arising out of this IP Agreement or the
existence, furnishings, functioning or use by the State of any item,
product or service provided for herein.
(y) CORPORATION, STATE AND TRUSTEE REPRESENTATIVE AUTHORITY. Whenever under
the provisions hereof the approval of the Corporation, the State or the
Trustee is required to take some action at the request of the other, unless
otherwise provided, such approval or such request shall be given for the
Corporation by the Corporation Representative, for the state by the State
Representative, and for the Trustee by the Trustee Representative, and the
Corporation, the State and the Trustee shall be authorized to act on any
such approval or request.
(z) STATE ACKNOWLEDGMENT OF THE ASSIGNMENT. The State acknowledges and
consents to the assignment by the Corporation to the Trustee, pursuant to
the Indenture, of all rights, title and interest of the Corporation in, to
and under this IP Agreement with respect to the Base Payments, and to the
delegation by the Corporation to the Trustee, pursuant to the Indenture, of
all duties of the Corporation under this IP Agreement.
(aa) FEDERAL TAX MATTERS.
(i) The IP Agreement Term does not exceed the estimated useful life of
the Project.
(ii) The State will not take or permit, or omit to take or cause to be
taken, any action that would adversely affect the exclusion from gross
income for federal income tax purposes of the designated interest
component of Base Payments payable by the State and, if it should take
or permit, or omit to take or cause to be taken, any such action, the
State shall take or cause to be taken all lawful actions within its
power necessary to rescind or correct such actions or omissions
promptly upon having knowledge thereof. The State specifically
covenants:
(1) At least one of the following two conditions will be
satisfied: (a.) less than 10% of the proceeds of the Certificates
(reduced by costs of issuance and any amounts deposited in any
reasonably required reserve fund) will be
21
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used directly or indirectly in the business of a person other
than a state or governmental unit or (b.) less than 10% of the
principal or interest components of the Base Payments is directly
or indirectly (x) secured by an interest in property used or to
be used in a private business or any interest in payments made
with respect to such property or (y) to be derived from payments
made with respect to property, or borrowed money, used or to be
used in a private business;
(2) Less than 5% of the proceeds of the Certificates (reduced by
costs of issuance and any amounts deposited in any reasonably
required reserve fund) will be used by nongovernmental persons
for a use unrelated to the Project;
(3) It will not loan directly or indirectly more than 5% or $5
million (whichever is less) of the proceeds of the Certificates
to nongovernmental persons;
(4) It will not enter into any management contract with respect
to the Project unless it obtains an opinion of nationally
recognized bond counsel that such management contract will not
impair the exclusion form gross income for federal income tax
purposes of the interest component of the Base Payments;
(5) The State and the Corporation acknowledge that the continued
exclusion of the interest component of the Base Payments from
gross income for federal income tax purposes depends, in part,
upon compliance with the arbitrage limitations imposed by Section
148 of the Code. The State and the Corporation covenant that they
will comply with all the requirements of Section 148 of the Code,
including the rebate requirements and that they shall not permit
at any time any of the proceeds of a Loan or other funds of the
State to be used, directly or indirectly, to acquire any asset or
obligations, the acquisition of which would cause the
obligations of the State hereunder to be "arbitrage bonds" for
the purposes of Section 148 of the Code; and
(6) The obligation of the State to make payments of Base Payments
are not and shall not be "federally guaranteed" as defined in
Section 149(b) of the Code.
(bb) NO REPEAL OF BOND ACT. Pursuant to section 349.256, Bond Act, the
faith of the State is hereby pledged that the Project Act, the Bond Act,
the Supplemental Bond Act and any other law supplemental or otherwise
pertaining thereto, and any other act concerning this IP Agreement or the
Taxes, or both, shall neither be repealed nor amended nor otherwise
directly or indirectly modified in such a manner as to impair adversely any
outstanding Certificates, until all the Certificates have been discharged
in full or provision for their payment and redemption has been fully made.
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<PAGE>
(cc) CONTINUING DISCLOSURE UNDERTAKING.
(i) This paragraph (cc) constitutes the written undertaking of the
State for the benefit of the Certificate holders (which, for the
purposes of this paragraph only, include the beneficial owners of the
Certificates); such written undertaking is required in order to allow
the Purchaser of the Certificates to comply with Rule 15c2-12
promulgated by the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act of 1934, as amended, (17 CFR Part
240 (S) 240.15c2-12) (the "Rule").
(ii) For purposes of this paragraph (cc), following definitions apply:
(1) Annual Financial Information - means the financial
information and operating data with respect to the State
contained in the tables identified by asterisk under the heading
"TABLES" set forth in the Official Statement delivered at least
annually to each Repository pursuant to subparagraph (iii)
hereof, including Audited Financial Statements, or if Audited
Financial Statements are not available, unaudited financial
statements of the State prepared in accordance with Generally
Accepted Accounting Principles, followed by Audited Financial
Statements as soon a practicable thereafter.
(2) Audited Financial Statements - means the State's annual
financial statements, prepared in accordance with Generally
Accepted Accounting Principles and audited by a firm of certified
public accountants or the legislative auditor as required by the
laws of the State.
(3) Event Information - means the information delivered pursuant
to subparagraph (v) hereof.
(4) NRMSIR - means each nationally recognized municipal
securities information repository recognized by the SEC from time
to time pursuant to the Rule.
(5) Official Statement - means the Official Statement, dated as
of its date of delivery to the Purchaser, delivered in connection
with the original issue and sale of the Certificates.
(6) Repository - means (a.) each NRMSIR and (b.) any SID.
(7) SID - means any State Information Depository operated or
designated by the State that receives information from all
issuers within the State. As of the Date of this undertaking, no
SID exists in the State.
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(8) MSRB - means the Municipal Securities Rulemaking Board. The
current address of the MSRB is 1640 King Street, #300,
Alexandria, Virginia 22314.
(iii) Commencing with the Fiscal Year ending June 30, 1999, the State
agrees to provide or cause to be provided the Annual Financial
Information to each Repository. Such Annual Financial Information for
each Fiscal Year shall be provided to each Repository on or before
March 31 of the following calendar year.
(iv) The State may provide or cause to be provided Annual Financial
Information and Audited Financial Information by specific reference to
documents previously provided to each Repository or filed with the
SEC; provided, however, that if the document so referenced is a final
official statement within the meaning of the Rule, such final official
statement must be available from the MSRB.
(v) The State shall provide or cause to be provided, in a timely
manner, to the MSRB and any SID, notice of any of the following events
with respect to the Certificates, if such event is material:
(1) Principal and interest payment delinquencies.
(2) Nonpayment related to defaults.
(3) Unscheduled draws on debt service reserves, if any,
reflecting financial difficulties.
(4) Unscheduled draws on credit enhancements, if any, reflecting
financial difficulties.
(5) Substitution of credit or liquidity providers, if any, or
their failure to perform.
(6) Adverse tax opinions or events affecting the tax-exempt
status of the Certificates.
(7) Modifications to rights of Certificate holders.
(8) Certificate calls.
(9) Defeasances.
(10) Release, substitution or sale of property securing repayment
of the Certificates.
(11) Rating changes.
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(vi) the State shall provide or cause to be provided, in a timely
manner to the MSRB and any SID, notice of any failure of the State to
timely provide the Annual Financial Information and Audited Financial
Statements as specified in subparagraph (iii) of this paragraph (cc).
(vii) The obligation of the State hereunder shall be for the benefit
of the Certificate holders. Unless otherwise required by law, no
Certificate holder shall be entitled to damages resulting from the
State's noncompliance with its undertaking set forth in this paragraph
(cc); however, Certificate holders may take action to require
performance of such obligation by any judicial proceeding available.
Breach of the undertakings of the State hereunder shall not constitute
and Event of Default hereunder and any rights and remedies provided in
the Event of Default are not applicable to a breach of the obligation
of the State hereunder.
(viii) The undertaking contained in this paragraph (cc) shall be in
effect from and after the issuance and delivery of the Certificates
and shall extend to the earlier of:
(1) the date all principal and interest components of the
Certificates shall have been deemed paid pursuant to the terms
of the Indenture;
(2) the date that the State shall no longer constitute and
"obligated person" within the meaning of the Rule; or
(3) the date on which those portions of the Rule which
required this written undertaking are held to be invalid by a
court of competent jurisdiction in a non-appealable action,
have been repealed retroactively or otherwise do not apply to
the Certificates.
(vx) This paragraph (cc) may be amended from time to time by order
of the Treasurer without the consent of the holders of the
Certificates if such amendment would not, in and of itself, cause the
undertaking herein (or action of the Purchaser in reliance on the
undertaking herein) to violate the Rule, as amended or officially
interpreted from time to time by the Securities and Exchange
Commission, as determined by nationally recognized bond counsel. The
State shall provide notice of such amendment to each Repository with
its Annual Financial Information.
(dd) TITLE TO THE PROJECT. Except personal or other property purchased by
the State at its own expense, title to the Project and any and all
additions and modifications to or replacements of any portion of the
Project shall be held in the name of the Corporation, subject only to
Permitted Encumbrances, until conveyed as provided in Article VI of the
Indenture or under this IP Agreement, notwithstanding:
(i) the occurrence of one or more Events of Default;
(ii) the occurrence of any event of damage, destruction, condemnation
or construction defect or title defect; or
25
<PAGE>
(iii) the violation by the Corporation (or by the Trustee as assignee
of the Corporation pursuant to the Indenture) of any provision of this
IP Agreement.
(ee) NO ENCUMBRANCE, MORTGAGE OR PLEDGE OF PROJECT. The Corporation shall
not permit any mechanic's or other lien to be perfected or remain against
the Project, except with the prior written consent of the State. The
Corporation shall promptly, at its own expense, take such action as may be
necessary to duly discharge any such mortgage, pledge, lien, charge,
encumbrance or claim not, consented to by the State which it shall have
created, incurred or suffered to exist.
(ff) CONVEYANCE OF THE PROJECT. The Corporation shall transfer and convey
to the State the Project, in the manner provided in paragraph (gg) of this
IP Agreement, provided, however, that prior to such transfer and
conveyance, either:
(i) The State shall have paid in full all Base Payments and
Additional Payments required hereunder, in which case, the term of
this IP Agreement shall have expired; or
(ii) The Indenture shall have been discharged as provided in Article
VI of the Indenture.
The State is hereby granted the option to terminate the IP Agreement Term
and/or to purchase the Project upon payment by the State of the then
applicable Purchase Option Price. The State shall give notice to the
Corporation of its intention to exercise such option not less than thirty
(30) days prior to the date on which the option is to be exercised and
shall deposit with the Trustee on the date of exercise an amount equal to
Purchase Option Price.
(gg) MANNER OF CONVEYANCE. At the closing of any purchase or other
conveyance of the Project pursuant to paragraph (ff) of this IP Agreement,
the Corporation and the Trustee shall execute and deliver to the State, or
an assignee of the State, at the expense of the State or such assignee of
the State, all necessary documents assigning, transferring and conveying
good and marketable title to the Project as the Project then exists,
subject to the following:
(i) any Financial Statements, indicating the Corporation as the
debtor and the Trustee as secured party, filed to perfect any security
interests granted under the Indenture;
(ii) Permitted Encumbrances; and
(iii) any lien or encumbrance created by action of the State.
(hh) ESCROWED DOCUMENTS. In order to facilitate the State's enforcement of
the Corporation's obligations to convey the Project to the State under the
circumstances
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provided in paragraph (ff) of this IP Agreement, the Corporation shall
deposit in escrow with the Trustee, concurrently with the delivery of the
Certificates, the bill of sale and cancellation of IP Agreement relating to
the Project, in the form satisfactory to the State. The Trustee shall, upon
payment of the Purchase Option Price or of all Base Payments or upon
discharge of the Indenture as provided in paragraph (ff) of this IP
Agreement, date a release the cancellation of IP Agreement to the State for
recording.
(ii) ASSIGNMENT BY CORPORATION; REPLACEMENT OF CORPORATION. The
Corporation's rights under this IP Agreement, including rights to receive
and enforce payments hereunder, have been assigned to the Trustee pursuant
to the Indenture. In the event of any bankruptcy, insolvency, or other
similar proceeding as to the Corporation, or in any other event which in
the judgment of the Trustee materially impairs the ability of the
Corporation to serve as Corporation under this IP Agreement or as grantor
under the Indenture, the Trustee may, to the extent permitted by law,
replace the Corporation with such other entity as it deems appropriate. In
any such event the Corporation shall cooperate with the Trustee in
conveying title to the Project and any all other right, title and interest
of the Corporation in, to and under this IP Agreement and the Indenture to
such successor entity as the Trustee may designate.
(jj) ASSIGNMENT AND SUBLEASING/SUBCONTRACTING BY THE STATE. This IP
Agreement may not be assigned by the State for any reason. However, the
Project may be subleased/subcontracted, as a whole or in part, by the
State, without the necessity of obtaining the consent of the Corporation,
the Trustee or any Owners; subject, however, to each of the following
conditions:
(i) The Project may be subleased or subcontracted, in whole or in
part, only to an agency or department or political subdivision of the
State, or to another entity or entities if, in the opinion of
nationally recognized bond counsel acceptable to the Trustee, such
sublease or subcontract will not impair the exclusion from federal
income tax of the designated interest component of Base Payments
payable by the State;
(ii) This IP Agreement, and the obligations of the State hereunder,
shall, at all times during the IP Agreement Term, remain obligations
of the State, notwithstanding any sublease or subcontract;
(iii) The State shall furnish or cause to be furnished to the
Corporation and the Trustee a copy of any sublease or subcontract
agreement; and
(iv) No sublease or subcontract by the State shall cause the Project
to be used for any purpose which would adversely affect the exclusion
from federal income taxation of the designated interest component of
the Base Payments payable by the State, or which would violate the
constitution, statutes or laws of the State.
(kk) RESTRICTIONS ON SALE OF THE PROJECT. The State and the Corporation
agree that, except for:
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(i) the Corporation's assignment of this IP Agreement to the
Trustee pursuant to the Indenture;
(ii) any exercise by the Trustee or the Corporation of the remedies
afforded by this IP Agreement;
(iii) the Trustee's right to replace the Corporation pursuant to this
IP Agreement and any conveyances required by reason of such
replacement; and
(iv) any conveyance to the State pursuant to paragraph (ff) of this
IP Agreement;
the Corporation will not sell, assign, transfer or convey the Project or
any portion thereof during the IP Agreement Term without the consent of the
State.
(ll) EVENTS OF DEFAULT DEFINED. The following shall be "Events of Default"
under this IP Agreement and the term "Default" shall mean, whenever is used
in this IP Agreement found in Section 3.4 of the Contract, any one or more
of the following events:
(i) Failure by the State to pay any Base Payments at the time
specified herein.
(ii) Failure by the State to pay any Additional Payments or to
observe and perform any covenants, conditions or agreement on its part
to be observed or performed, except as otherwise allowed by this IP
Agreement, for a period of thirty (30) days after written notice
specifying such failure and requesting that it be remedied shall have
been given to the State by the Trustee unless the Trustee shall agree
in writing to an extension of such time prior to its expiration;
provided, however, if the failure stated in the notice cannot be
corrected within the applicable period, the Trustee will not
unreasonably withhold its consent to an extension of such time if
corrective action is instituted by the State within the applicable
period and diligently pursued until such failure is corrected.
(iii) The voluntary initiation by the State of any proceeding under
any federal or state law relating to bankruptcy, insolvency,
arrangement, reorganization, readjustment of debt or any other form of
debtor relief, or the initiation against the State of any such
proceeding which shall remain undismissed for sixty (60) days, or the
entry by the State into an agreement of composition with creditors or
the failure generally by the State to pay its debts as they become
due.
(iv) The occurrence of an Event of Default under the Indenture.
The provisions of subparagraph (ii) of this paragraph (ll) are subject to
the following limitations: if by reason of Force Majeure the State is
unable in whole or in part to carry out any of its agreements contained
herein (other than its obligations contained in paragraphs (f) through (w)
of this IP Agreement), the State shall not be deemed in default during the
continuance of such inability.
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<PAGE>
The State agrees, however, to remedy with all reasonable dispatch the cause
or causes preventing the State from carrying out its agreement, provided
that the settlement of strikes and other employee-related disturbances
shall be entirely within the discretion of the State and the State shall
not be required to make settlement of strikes, lockouts and other employee-
related disturbances by acceding to the demands the opposing party or
parties when such course is in the judgment of the State unfavorable to the
State.
(mm) REMEDIES ON DEFAULT. Whenever any Event of Default shall have happened
and be continuing, the Trustee may take one or any combination of the
following remedial steps:
(i) If the Certificates have been declared immediately due and
payable pursuant to Section 7.02 of the Indenture, by written notice
to the State and with the prior written consent of the securities
insurer, if any, declare an amount equal to all amounts then due and
payable on the Certificates, whether by acceleration of maturity (as
provided in the Indenture) or otherwise, to be immediately due and
payable as liquidated damages under this IP Agreement and not as a
penalty, whereupon the same shall become immediately due and payable;
(ii) Have reasonable access to and inspect, examine and make copies
of the books and records and accounts of the State during regular
business hours of the State if reasonably necessary in the opinion of
the Trustee; or
(iii) Take whatever action at law or in equity may appear necessary
or desirable to collect the amounts then due and thereafter to become
due, or to enforce performance and observance of any obligation,
agreement or covenant of the State under this IP Agreement.
Any amounts collected pursuant to action taken under this paragraph shall
be paid into the Certificate Fund and applied in accordance with the
provisions of the Indenture.
(nn) NO REMEDY EXCLUSIVE. No remedy herein conferred upon or reserved to
the Trustee, on behalf of the Corporation, is intended to be exclusive, and
every such remedy shall be cumulative and shall be in addition to every
other remedy given hereunder and every remedy now or hereafter existing at
law or in equity. No delay or omission to exercise any right or power
accruing upon any default shall impair any such right or power and any such
right and power may be exercised from time to time and as often as may be
deemed expedient. In order to entitle the Trustee, on behalf of the
Corporation, to exercise any remedy reserved in paragraphs (ll) through
(qq), it shall not be necessary to give any notice, other than such notice
as may be required in paragraphs (ll) through (qq).
(oo) WAIVERS. In the event that any agreement contained herein should be
breached by either party and thereafter waived by the other party, such
waiver shall be in writing, shall be limited to the particular breach so
waived and shall not be deemed to waive any other breach hereunder.
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<PAGE>
In view of the assignment of the Corporation's rights under this IP
Agreement to the Trustee pursuant to the Indenture, the Corporation shall
not have the right to waive any Event of Default hereunder without the
consent of the Trustee and the insurer, if any; and the waiver of any Event
of Default hereunder by the Trustee shall constitute a waiver of such Event
of Default by the Corporation, without the necessity of any action of or
consent by the Corporation, except that there shall be no waiver of an
Event of Default under paragraph (ll)(i) of this IP Agreement without the
prior written consent of the registered owners of all the Certificates at
the time outstanding. A waiver of an Event of Default under the Indenture
shall constitute a waiver of the corresponding Event of Default under this
Agreement; provided that no such waiver shall extend to or affect any
subsequent or other Event of Default under this IP Agreement or impair any
right consequent thereon.
(pp) AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. In the event that
either party hereto shall default under any of the provisions hereof and
the nondefaulting party shall employ attorneys or incur other expenses for
the collection of Base Payments and Additional Payments, or the enforcement
of performance or observance of any obligation or agreement on the part of
the defaulting party herein contained, the defaulting party agrees that it
shall pay on demand therefor to the nondefaulting party the fees of such
attorneys and such other expenses so incurred by the nondefaulting party,
to the extent that such attorneys' fees and expenses may be determined to
be reasonable by a court of competent jurisdiction.
(qq) WAIVER OF APPRAISEMENT, VALUATION, STAY, EXTENSION AND REDEMPTION
LAWS. The Corporation and the State agree, to the extent permitted by law,
that in the case of a termination of the IP Agreement Term by reason of an
Event of Default, neither the Corporation nor the State nor any one
claiming through or under either of them shall or will set up claim or seek
to take advantage of any appraisement, valuation, stay, extension or
redemption laws now or hereafter in force in order to prevent or hinder the
enforcement of the Indenture; and the Corporation and the State, for
themselves and all who may at any time claim through or under either of
them, each hereby waives, to the full extent that it may lawfully do so,
the benefits of all such laws.
(rr) MISCELLANEOUS.
(i) IP Agreement Notices. All notices, certificates or other
--------------------
communications hereunder shall be sufficiently given and shall be
deemed given when delivered or mailed by certified or registered mail,
postage prepaid, addressed as follows: If to the CORPORATION, to the
Chief Deputy Treasurer, Capitol Building, Capitol Complex, 101 North
Carson Street, Suite 4, Carson City, Nevada 89701; if to the TRUSTEE,
to its address as indicated in the Indenture; if to the STATE, to
Director of the Department of Administration, 209 East Musser Street,
Blasdel Building, Room 200, Carson City, Nevada 89701. Any of the
foregoing may, by notice given hereunder to each of the other,
designate any further or different addresses to which subsequent
notices, certificates, requests or other communications shall be sent
hereunder.
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(ii) Binding Effect. This IP Agreement shall inure to the benefit of
--------------
and shall be binding upon the Corporation and the State and their
respective successors and assigns, subject, however, to the
limitations contained in this IP Agreement.
(iii) Amendments, Changes and Modifications. Except as otherwise
-------------------------------------
provided in this IP Agreement or the Indenture, subsequent to the
delivery of the Certificates and prior to the discharge of the
Indenture, in addition to necessary State approvals, this IP Agreement
may not be effectively amended, changed, modified or altered without
the written consent of the Trustee and the Certificate insurer, if
any, as provided in the Indenture.
(iv) Amounts Remaining in Funds. It is agreed by the parties hereto
--------------------------
that any amounts remaining in the Certificate Fund or any other fund
or account created under the Indenture other than the Rebate Fund,
upon termination of the Agreement Term, and after payment in full of
the Certificates (or provision for payment thereof having been in
accordance with the provisions of this IP Agreement) and fees and
expenses of the Trustee in accordance with this IP Agreement, shall be
paid to the State by the Trustee as an overpayment of Base Payments in
accordance with the terms of the Indenture.
(v) Net Agreement. This IP Agreement shall be deemed and construed
-------------
to be a "net lease," and the State shall pay absolutely net during the
IP Agreement Term, Base Payments, Additional Payments and all other
payments required hereunder, free of any deductions and without
abatement, deduction or set-off (other than credits against Base
Payments expressly provided for in this IP Agreement).
(vi) Payments Due on Holidays. If the date for making any payments
------------------------
or the last day for performance of any act or the exercising of any
right, as provided in this IP Agreement, shall be a legal holiday or a
day on which banking institutions in the city in which the principal
corporate trust office of the Trustee is located are authorized by law
to remain closed, such payment may be made or act performed or right
exercised on the next preceding day that is not a legal holiday or a
day on which such banking institutions are not authorized by law to
remain closed with the same force and effect as if done on the nominal
date provided in this IP Agreement.
(vii) Severability. In the event that any provision of this IP
------------
Agreement, other than the requirement of the State to pay Base
Payments and the requirement of the Corporation to provide quiet
enjoyment of the Project and to convey the Project to the State under
the conditions set forth in this IP Agreement, shall he held invalid
or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provision
hereof.
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(viii) Execution in Counterparts. This IP Agreement may be
-------------------------
simultaneously executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.
(vx) Applicable Law. This IP Agreement shall be governed by and
--------------
construed in accordance with the laws of the State.
(x) Captions. The captions or headings in Section 3.4 are for
--------
convenience only and in no way define, limit or describe the scope or
intent of any provisions of this IP Agreement.
Section 3.5 EQUIPMENT, FIXTURES AND FURNISHINGS. Consistent with its proposed
-----------------------------------
EFF budget, the Builder is required to provide all equipment, fixtures and
furnishings necessary to operate the Facility for its intended purpose and the
same shall be included in the purchase under this Agreement. The Builder and
Contractor are required to maintain, inventory and account for all EFF.
Section 3.6 FACILITY CAPACITY. Without prior written approval from DOA,
-----------------
Contractor will not exceed the design capacity for each housing room or dorm
beyond the capacity identified in the updated plans accepted by DOA. The DOA may
require the Facility to exceed its design capacity.
Section 3.7 ADDITIONAL CONSIDERATION. In addition to other consideration set
------------------------
forth in this Agreement, either the Contractor or the Builder, as appropriate,
shall be financially responsible for the following:
(a) If at the request of Contractor or Builder, any State representative
attends any meetings, conferences, site reviews or other similar necessary
travel, Contractor or Builder agrees to reimburse the State for the actual
costs incurred.
(b) Monthly payments for Construction and Contract Monitors as set forth
in Article 7 of this Agreement.
Section 3.8 LEASE AGREEMENT.
---------------
(a) In the event that Contractor shall own the real property and
improvements during construction or otherwise, the State or the Corporation
shall have the unrestricted leasehold right to occupy the land and Facility
and to accomplish any State or Corporation rights contemplated by this
Contract. The leasehold rights shall include without limitation the right
to construct, occupy and run the Facility or otherwise contract with the
Contractor or another for operations, maintenance and management services.
(b) Upon the execution and delivery of any of the Certificates, consistent
with the terms of the Installment Purchase Agreement as set forth in
Section 3.4 of this Contract, the Corporation shall grant to the State an
unlimited and unrestricted leasehold in the Facility for the terms and
conditions anticipated under this entire Contract.
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ARTICLE 4
FACILITY AND EQUIPMENT
Section 4.1 POSSESSION OF FACILITY. Except as otherwise provided in this
----------------------
Agreement, on the Services Commencement Date ("SCD"), the Management Agreement
Contractor shall enjoy the benefits of the exclusive possession of the State's
leasehold in real property and improvements to the Facility for the term and
purposes not inconsistent with this Agreement, subject to the State's and the
Corporation's unlimited right to enter and inspect same for operation,
maintenance and management of the Facility.
Section 4.2 POSSESSION OF MOVEABLE EQUIPMENT. On the SCD, the Contractor shall
--------------------------------
enjoy exclusive use and possession, subject to the terms of this Agreement, of
all of the Facility's movable equipment and perishables purchased by either the
Builder, Contractor or the DOA. At the termination or conclusion of this
Contract all equipment, both fixed and moveable shall be returned to the DOA.
Section 4.3 ADDITIONAL PROPERTY. Any additional equipment, that is not merely
-------------------
replacements for damaged or destroyed equipment, purchased by the Contractor
during the term of this Agreement may be purchased by the DOA at the termination
or conclusion of the Management Agreement at the Contractor's cost, less
depreciation using the straight line method over a five (5) year period. Non-
perishable supplies purchased by the Contractor during the term of this
Agreement may be purchased by DOA at a negotiated price at the termination or
conclusion of the Management Agreement. Perishable supplies will become the
property of DOA upon termination or conclusion of the Management Agreement.
Section 4.4 SCD INVENTORY. At least one (1) week prior to the SCD, DOA, the
-------------
Builder (and the Management Agreement Contractor) will conduct a joint inventory
to ascertain that the property and equipment listed in the Contract, as updated
and approved by DOA during construction, is in place at the Facility. Any
deficiencies in inventory shall be cured within sixty (60) days after SCD. The
SCD INVENTORY shall be incorporated into this Agreement as EXHIBIT 3.
Section 4.5 MAINTENANCE. At all times during the existence of Contractor's
-----------
actual possession and use rights under the Management Agreement and at its own
expense Contractor shall:
(a) provide all maintenance, including a preventive maintenance program,
which will maintain, preserve and keep the physical structure, fixtures and
equipment in good repair, working order and condition;
(b) meet all warranty and maintenance requirements. The State of Nevada,
or its agent will have the right to review the maintenance program planned
by the Contractor and to audit the program at any time;
(c) comply with reasonable audit recommendations;
(d) maintain the physical structure of the Facility and all moveable and
tangible personal property contained therein, including all equipment and
fixtures purchased for this Facility
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pursuant to this Agreement in accordance with applicable Court Orders, and
ACA Standards. Conduct all ordinary routine maintenance and will in so
doing maintain, preserve and keep the Facility and all such equipment in
good repair, working order and condition, subject to normal wear and tear,
and will from time to time make or cause to be made all necessary and
proper repairs, including those identified by self-monitoring and State
inspections such that all replacements and renewals shall thereupon become
part of the Facility. It is specifically understood and agreed that
Contractor will keep maintenance records using forms acceptable to DOA.
During the term of this Agreement, DOA shall have no responsibility,
financial or otherwise, with respect to maintenance of the Facility. The
responsibility for maintenance of the Facility shall be the sole
responsibility of the Contractor;
(e) subject to prior written approval of DOA, which approval shall not
unreasonably be withheld, have the authority to remodel the Facility or
make substitutions, alterations, additions, modifications and improvements
to the Facility from time to time, and the same shall become part of the
Facility;
(f) promptly after the occurrence of any damage to or loss of a Facility,
including those from a Force Majeure, that materially affects the continued
operation of such Facility, notify DOA of such loss or damage and DOA and
Contractor shall jointly assess the nature and extent of such damage or
loss and, as soon as practicable thereafter, determine whether it is
practicable and desirable to rebuild, repair or restore such damage or
loss. DOA shall determine that such rebuilding, repairing or restoring is
practicable and desirable; and
(g) operate and maintain the Facility in compliance with the Standards.
Section 4.6 ACCESS BY STATE. The Contract Monitor, the Director or a Deputy
---------------
Director of the Department of Human Resources, the Director or a Deputy Director
of the DOA, the Administrator a relevant supervisor of the Nevada Division of
Child and Family Services, the Director or an Assistant Director of the Nevada
Department of Prisons, the Attorney General or her Deputies, the Nevada Division
of Investigation, the Inspector General of the Nevada Department of Prisons,
local government law enforcement agencies or any other their respective
investigative units will have reasonable access at all times, with or without
notice, to Residents and staff, to all areas of the Facility and to all records
concerning construction, the renovation, repair, maintenance, management and
operation of the Facility. All other relevant State employees, on official
business, will have access to the Facility, equipment and records during normal
business hours (8 a.m. to 5 p.m.) and with twenty-four (24) hours notice.
Section 4.7 EXPANSION. The Builder shall construct the Facility in a manner
---------
that allows for future expansion of beds without significant core unit changes
as set forth in Section 3.1.
Section 4.8 REPLACEMENT EQUIPMENT. On and after SCD the Contractor will replace
---------------------
any stolen, damaged or inoperable equipment, and equipment that is lost, stolen,
destroyed or inoperable beyond repair with equipment having like functional
ability, life expectancy and quality. Such replacement equipment shall be added
to the Section 4.4, SCD Inventory. Damaged
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<PAGE>
or inoperable equipment replaced by Contractor shall be disposed of by
Contractor. Contractor shall identify to DOA and keep separately inventoried all
machinery and equipment that is ancillary to or supplemental to but not an
integral part of the original Section 4.4, SCD Inventory, which is purchased by
Contractor. Such ancillary or supplemental machinery and equipment shall remain
the property of Contractor and shall be removable by Contractor provided that
such removal does not impair the operation of the original Section 4.4, SCD
Inventory, to which it had been ancillary or supplemental.
ARTICLE 5
OPERATION OF FACILITY
---------------------
Section 5.1 GENERAL DUTIES AND OBLIGATIONS . During the existence of the
Management Agreement, the Contractor shall provide the Operation and Management
Services set out herein and will operate, maintain and manage the Facility in
compliance with this Contract and the Standards. Only Residents accepted by the
State pursuant to State contracts and Standards may be housed in the Facility.
It is understood and agreed that the State will sign all Intergovernmental
Agreements (IGAs) presented to it by Contractor, provided these agreements are
not otherwise inconsistent with the requirements of this Contract and meet the
State's placement criteria for this Facility. It is the intent of all parties of
this Agreement that the Contractor, in its operation of the Facility under the
approved OPERATIONAL PLAN, incorporated into this Agreement as EXHIBIT 4, shall
comply with Standards and fully consider State policy statements and
recommendations. The Contractor may, however, establish non-State policies and
procedures in its Operational Plan so long as the operations and management
services attain goals established by such State policy statements or
recommendations.
(a) Program Day: The Facility shall operate on a 16 hour programming day
-----------
for all 7 days of the week. The daily schedule shall show how time is
allocated for programs, services and activities. At a minimum, education
shall be provided as set forth in Section 5.9(a) of this Agreement;
physical activity for 2 hours per day including one hour outside (weather
permitting); 1 hour of visiting per week; 1 hour of individual counseling
per week; and 1 hour case planning with the case manager per month.
Section 5.2 CUSTODY OF RESIDENTS. SCD will be ten (10) days after the Facility
--------------------
is available for use and occupancy, at which time the State will begin the
change of custody of Residents as they are assigned to the Facility.
(a) Admission, Screening and Orientation: The Contractor is obligated to
accept all Residents referred to the Facility by the State. The State will
conduct an assessment and screening which will determine the most suitable
placement in every case. This assessment will be part of the process for
the State accepting referrals from other jurisdictions. However, in the
event that the State is unable to refer sufficient Residents to occupy 95%
of the available beds in the Facility Capacity during any 30 day period
following 60 days after the Service Commencement Date, the State and the
Contractor agree to cooperate in the solicitation and contracting for non-
State Residents from other jurisdictions, including without limitation the
federal government consistent with Section 5.2(b) of this Contract.
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(i) Contractor's program will not have any right of refusal for any
Resident referred by the State of Nevada, including Resident sent
pursuant to existing contracts between that another jurisdiction and
the State of Nevada.
(ii) Cases being referred subsequent to a dispositional order or
sentence by the Court will be already have been subjected to a
screening process by the State of Nevada. That process will assure
that the case is appropriate for the level of security and programs
offered by the facility. It will be the responsibility of the
Contractor to provide an additional assessment process in order to
determine the specific assets and needs of the individual and to
develop an Individual Treatment Plan (ITP). All assessments must be
done and the ITP must be established within 14 days of admission. The
Contractor must describe the assessment process to be used and the
kind of program to be offered to the Resident pending completion of
the assessment and ITP plan preparation.
(iii) All newly admitted Residents shall be given an orientation to
the Facility, receive a copy of the rules and expectations of the
Facility (such as in a Handbook for Residents), receive a copy and
have explained to them in language they can understand, their rights
and responsibilities, and receive a tour of the Facility and an
introduction to key staff on duty for familiarization purposes.
(b) Non-State and Federal Resident Contracting. Upon prior approval by
------------------------------------------
the State, Contractor may act as the State's agent to bind the State to
agreements with other jurisdictions, other states or the federal government
for the sole purpose of providing sufficient Residents to fill 95% of the
Facility Capacity on a monthly average basis as follows:
(i) Unless a reasonable plan of segregation is approved by the
State, each such Resident shall be appropriate for the existing
population and treated equally with the other Residents pursuant to
this Section 5.2 and this Contract.
(ii) The State will only pay the Contractor an alternative per diem
per for such Resident consistent with the terms and conditions of this
Contract as follows: Other jurisdictions shall pay the State at least
equal to the Per Diem Rate paid per Resident to the Contractor.
However, if another jurisdiction agrees to pay more than the Per Diem
Rate of this Contract (non-state Per Diem), the State shall pay
Contractor for such other jurisdiction Residents an alternative per
diem per Resident calculated: (Non-state Per Diem Per Diem Rate) *20%
+ Per Diem Rate = alternative per diem. All net profits from a
difference between the Per Diem Rate and the rate paid by the other
jurisdiction shall be the exclusive property of the State.
(iii) Agreements with other jurisdictions shall be short-term,
providing State priority use of the beds in the Facility upon
reasonable notice to the other
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jurisdiction.
(iv) Contractor further agrees that any Resident accepted under a
contract with a federal government agency will be housed in the
Facility: (1) on a space-available, first come, first served basis
pursuant to which such federal government agency will be charged the
same amount for each such Resident as other persons who enter into
similar contracts in connection with the Facility; and, (2) pursuant
to a contract of a term of not more than 90 days which such federal
government agency has no right to renew; provided, however, that the
Contractor, the State or the Corporation may renew such agreement
indefinitely.
(c) Discharges and Releases: The State shall prior authorize all releases
of Residents from the Facility.
(i) Contractor must use the ITP in recommending release dates and
provide for discharge planning, including an integrated discharge
planning process implemented with aftercare workers of the State.
Transition of services for the Residents must assure continuity into
the community.
Section 5.3 OPERATIONAL PLAN. Contractor will provide a written policies and
----------------
procedures manual and preliminary Post (including Critical Post) duties for
operation of the Facility, which will meet the requirements of the Standards and
which will include procedures for all operational activities as well as
Emergencies and special or unusual situations. Minimum staffing ratios as set
forth below shall be complied with. A draft manual and preliminary Post duties,
will be submitted to the State one hundred twenty (120) days prior to the SCD.
The State will review the manual and Post duties and return comments no later
than sixty (60) days before the first day Residents are assigned at the
facility. The final draft of the policies and procedures will be sent to the
State for review no later than forty-five (45) days after SCD, and if no changes
are made within forty-five (45) days of State's receipt of the final draft, the
manual and Post duties will be deemed accepted.
(a) Contractor will not deviate in any material respect from its approved
Operational Plan in the provision of the Operation and Management Services
without prior written approval of the State, which approval shall not be
unreasonably withheld.
(b) The Contractor's request for deviation from such established
Operational Plan shall be in writing and directed to the Department of
Human Resources. Approval for deviation must similarly be in writing.
(c) Final Post duties will be submitted to the State ninety (90) days
following the SCD. All security Posts will have Post duties which have been
approved by the State. It will contain sufficient detail to ensure the
security person filling the position can accomplish all required tasks. A
written record will be maintained which contains acknowledgment in the form
of the employee's signature indicating that each person assigned to a
security position or Post had reviewed the Post duties and understood the
contents therein.
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(d) Minimum Staffing Ratios:
-----------------------
(i) Direct Care Staff - There shall be a minimum of one direct
care staff person on duty for every 8 juveniles (1:8) during the 16
hours when juveniles are awake, and one direct care staff on duty
for every 16 juveniles during the 8 hours at night (1:16).
(ii) Teachers, General Education - There shall be one teacher for
every 16 juveniles (1:16) who do not have a formal Individual
Education Program (IEP).
(iii) Teachers, Special Education - There shall be one teacher for
every 8 juveniles (1:8) who have a formal IEP.
(iv) Case Workers - There shall be at least one case worker for
every 24 juveniles.
(v) Unit Coverage - There shall be at least one (1) direct care
worker in each unit any time there is a juvenile present in the
unit.
(vi) Recreation Worker - There shall be at least one (1)
recreation worker assigned to the facility.
Section 5.4 SECURITY AND CONTROL. In addition to Facility design security,
--------------------
Contractor will provide adequate security and control with respect to Residents
in accordance with the Operational Plan, the Standards and this Contract.
(a) The Operational Plan must include, but is not limited to,
identification of the Contractor's perimeter security, screening of
visitors, central control, the use of restraints (hard and/or soft), riot
control, and the use of chemical (Mace, pepper spray) or electronic (Taser)
agents for controlling behavior. The plan must include policies regarding
the control, access and storage of firearms and explosives.
(b) The Operational Plan must address the use of protective custody,
isolation and/or time-out policies and procedures. If done as part of the
behavior management program, it must be clear where this takes place, the
length of time and the procedure for authorization. If isolation is done
for medical reasons, the role of the health care staff must be identified.
Section 5.5 SANITATION/HYGIENE. Consistent with specifications, Builder (in
------------------
equipping the Facility) and Contractor (in operating the Facility) will provide
for sanitation and hygiene of the Facility in conformity with the Standards.
Minimally, this will include full Resident laundry services, Resident clothing,
Resident bedding, heating, cooling, lighting, pest control and garbage disposal.
Sheets and pillowcases will be changed weekly. Bedding (blankets) will be
changed monthly. Each newly admitted Resident shall be given a cleaned mattress
as well as freshly laundered bedding.
Section 5.6 RESIDENT ACCOMMODATIONS. Consistent with specifications, Builder
-----------------------
(in equipping the Facility) and Contractor (in operating the Facility) will
provide to each proposed Resident, at a
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minimum, a bed, mattress, pillow, study desk, adequate bed linen, towels, chair,
adequate lighting, unrestricted access to a toilet, and storage space. Sleeping
areas or rooms shall not be used as program areas and their use must be limited
to clean-up, personal hygiene and sleeping.
Section 5.7 HYGIENE ITEMS. Contractor will provide each Resident soap,
-------------
toothbrush, toothpaste or powder, comb, toilet paper, deodorant, and shaving
materials. Such hygiene items will be replenished as required by need. Residents
shall be provided a haircut at least monthly. Sufficient quantities and types of
clothing will be maintained by the Contractor to allow for changes at prescribed
intervals. Residents will not wear their personal clothing unless it is part of
a behavior management program. Each newly admitted Resident shall be given
cleaned clothing. Inner clothing, socks and towels will be changed daily. Outer
clothing will be changed at least three times a week.
Section 5.8 CLASSIFICATION. Contractor will classify Residents in accordance
--------------
with the Operational Plan's security issues, Post duties and Critical Post
duties. The State must approve in writing the initial classification and custody
level or any subsequent changes in custody level.
(a) Residents that pose a danger to other Residents must be classified and
segregated to ensure appropriate security and safety in both the activities
and housing of other Residents.
Section 5.9 PROGRAMS AND SERVICES. Contractor will provide programs for
---------------------
Residents as follows:
(a) Education: It is required that a comprehensive education program be
---------
provided for each Resident. Assessment for and, if eligible, development of
Individual Education Plans (IEP) is a requirement. The education program
needs to address the opportunity for academic instruction and/or
remediation to either graduate from high school, pass a proficiency test or
obtain a GED. The educational program must provide for:
. Evaluation regarding educational achievement and ability
. ITPs that include education services, and the IEP if applicable
. Instructional opportunity at least through the equivalency of
high school
. Instruction in basic living survival skills
Educational services must provide for a minimum of 5 hours per day, 5 days
per week of academic/vocational instruction and 1 hour per day of physical
education. School is to be provided a minimum of 250 days per year.
Contractor shall maintain an educational plan and records regarding
performance and progress, specific course listings, and specialized
equipment (e.g., computer lab and network, Internet access).
(b) Vocational Training:
-------------------
(i) In order for the Residents to leave the program and re-enter the
community with a reasonable chance of establishing a crime-free
lifestyle, it is necessary for them to be able to be employed. Entry
into unskilled jobs, those jobs which do not provide a career path
into skilled occupations, are not the kinds of
39
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employment that will make a difference. It is necessary to identify
semi-skilled jobs that lead to journey level skilled jobs. While union
apprenticeship programs represent one way to gain entry into this
level of job market, there are others; this program must likewise be
one.
(ii) The State of Nevada has conducted a labor survey and determined
that the following jobs are going to be in demand and are reasonable
for Residents in the program to receive training. The Contractor is
encouraged to suggest other vocations for training.
. Construction trades
. Culinary trades
. Hospitality/hotel/casino management trades
. Consumer electronics trades
(iii) The vocational program should provide an opportunity for career
exploration, vocational development, job training, effective work
habits, and actual job-related experience which can be documented and
used as a reference. Each Resident, as a part of the development of
the ITP, will be considered for placement in one or more vocational
programs, depending upon age, aptitude, interest and length of stay
before release. The Contractor must maintain a list of equipment
considered appropriate for each vocation shop being considered and
include a list of certifications which can be awarded for proficiency
(such as welding).
(c) Substance Abuse: The Contractor will be responsible for the development
---------------
of a substance abuse program for all Residents. Its focus will include
alcohol, prescription drugs, illegal drugs and inhalants; and will provide
education, counseling, support groups and relapse prevention. Family
involvement should be considered as well as assisting in making community
linkages for a smooth transition upon release.
(d) Social and Group Living: The Contractor is responsible for developing
-----------------------
a program which provides information and support to the juveniles in the
context of improving the quality of, and the ability to respond to, the
group living situation. It should allow the individual to become more
tolerant and effective in social and group living situations that they may
later encounter in the community. Examples of topics can include cultural
diversity, values training, sexual roles and responsibilities, social roles
and responsibilities, and mentoring/volunteering.
(e) Living Group Management: It is important for each Resident to take an
-----------------------
active part in improving the quality of the relationships within the living
group. The described techniques or approaches provided for in the
Contractor's RFP Response will be used to teach appropriate group support
and the development of a positive group spirit.
(f) Family Living: Visiting by relatives is a key ingredient in the
-------------
successful re-integration of some Residents and needs to be given careful
attention by the Contractor.
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Not only is the time important, in terms of accessibility for families that
work or have long distances to travel, but the environment that is provided
in which visiting can take place is important. It would be desirable to
have case managers available during visiting times in order to make more
frequent contact with the families and facilitate a strengthening of the
family unit. Other components of a Family Living program may include family
life training, parenting skills and child abuse prevention.
(g) Self-Awareness and Enrichment: An improved concept of self and a
-----------------------------
decrease in the need to control situations in order to feel protected from
harm are some of the changes that will allow Resident to function more
effectively. The Contractor will have program elements that will address
this program area. Tools and techniques should included anger management,
confidence and team building exercises, physical assessments and weight
control/management.
(h) Healthy Living: As part of the health program, services must be offered
--------------
which encourage Residents to break harmful and unhealthful habits and to
adopt a new focus on healthy living. Components of this program must
include smoking cessation, stress management, exercise and agility classes,
and diet and nutrition counseling.
(i) Case Management: Every Resident assigned to the Facility will have a
---------------
case manager assigned to them. The case manager will coordinate the
development and maintenance of the Individual Treatment Plan (ITP). Case
managers will see each Resident on their caseload for a minimum of 1 hour a
month to review progress and make changes to the ITP. The case manager will
also prepare a staff review of each case on a quarterly basis.
The case manager will be responsible for maintaining progress notes in the
institutional files of each Resident. Progress notes must relate to the ITP
and be entered at least on a monthly basis into the case file. Case
managers will solicit information from other staff who have contact with
the Resident and who might have relevant information about the Residents
progress (or lack of progress) and the factors which contributed to the
current status. Case managers will have similar responsibilities for
detention placements as well as commitments.
(j) Individual Treatment Plan:
-------------------------
(i) Each Resident assigned to the Facility will have an Individual
Treatment Plan (ITP) prepared. The ITP shall include education,
counseling, social, physical, health, and mental health needs. The
development of the ITP will identify the kinds of programs and
services which the Resident most needs at any given point in their
stay. It becomes the "prescriptive package" which is unique to the
individual and documents the individualized nature of the treatment
services of the Facility. Residents shall have input into the
development of their ITP and be involved in the process whenever
changes are considered. A sample of the format of the ITP is to be
provided.
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(ii) Each new case will be staffed by a Treatment Team. This team will
consist of the case manger, the case manager supervisor, a
psychologist, a health professional and an educator, at a minimum.
After the ITP is created, it is reviewed by the Treatment Team at
least quarterly. The review process will be used to up-date and revise
ITPs. Having the Residents present for at least part of the review
meeting is encouraged.
(k) Counseling and Guidance: The Contractor shall develop and provide a
-----------------------
comprehensive counseling and guidance program that meets the needs of this
population. Contractor will comply with their RFP Response regarding
program philosophy and methods of delivery as well as the minimum number of
hours of weekly involvement for each Resident. It may be done as
individual, group or a combination, depending upon the overall philosophy.
In addition, the program must have appropriate ways of addressing family
counseling, crisis intervention and suicide prevention.
(l) Victim Issues: The Contractor must include an approach that will
-------------
improve the Residents understanding and appreciation of, and sensitivity
to, the harm done to victims, victims' families and the community in
general as a result of serious and violent crime. Program elements may
include community restitution, mediation, or payment of direct restitution
from any earnings.
(m) Behavior Management System: The Contractor shall have a behavior
--------------------------
management system and it shall be incorporated into all activities. It must
recognize the variety of ITPs and the treatment needs and the importance of
consistency and fundamental equity. The behavior management system must be
used in considering how promotion or status is adjusted based upon
behavior.
(n) Recreation and Leisure Time: The availability of large muscle
---------------------------
recreation every day is imperative. In addition to that, however, the
program will provide opportunities for other recreational activities,
games, hobbies and crafts. There shall be no reliance on television outside
of the use for educational purposes. The recreation program should teach
the constructive use of leisure time and engage the Residents in finding
and exploring new areas of interest.
(o) Religion: Each Resident has the right to access the religious program
--------
which allows them to follow their faith. Builder will provide adequate
space within the Facility for religious services and programs in compliance
with Standards.
(p) Medical and Mental Health: The Contractor shall be responsible,
-------------------------
financially and otherwise, for the medical, dental, laboratory,
pharmaceutical, optometry, auditory, related transportation and mental
health services at the facility and/or at any such necessary outside health
care provider, including In-Patient Hospital Costs. However, when any such
individual Resident's outside-the-Facility costs during a single continuous
term of Facility confinement (including all costs for transportation and
security supervision) exceeds $10,000.00, the State and the Contractor
shall share equally in all medically necessary costs incurred by the
Contractor above the
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<PAGE>
$10,000.00 sum paid. The $10,000 threshold shall be objectively documented
by the Contractor to the State's satisfaction. The threshold shall be
determined at the sole discretion of the State at fair and reasonable
rates, including without limitation managed care rates for juveniles, but
not at billed charges for health care services.
The Facility shall be staffed with sufficient, qualified medical,
psychiatric, dental, technical and support personnel. The Builder shall
equip and Contractor shall maintain medical beds and mental health beds in
the Facility consistent with this Contract. The Contractor shall make
provisions for the delivery on-site or otherwise secure off-site reasonable
and necessary medical, psychiatric, vision and dental care. Such services
include, but are not limited to provisions for hospitalizations, outpatient
care, laboratory and radiology services, pharmaceutical, specialty and
consultant services, preventive health care including immunizations,
Hepatitis B testing and TB testing. Contractor will observe protocols for
tracking and treatment of communicable diseases including without
limitation, TB, Hepatitis, HIV, AIDS and STDs. Health care shall be
provided consistent with Standards, including without limitation those
specified by the National Commission on Correctional Health Care (NCCHC).
Specific areas to provide include:
(i) Emergency medical, psychiatric and dental services will be
available on a 24-hour basis, including on-call, ambulance
transportation and emergency treatment or hospitalization.
(ii) Complete and accurate medical records will be prepared and
maintained in compliance with law, policies and procedures, Standards
and NCCHC. Medical records are the property of the State of Nevada.
Complete health record files shall include, without limitation, the
following: recording of initial screening, immunization record, all
findings, diagnosis, treatments, dispositions, prescribed medications
and their administration, laboratory, x-ray and diagnostic studies,
release of information forms, place, date and time of health care
encounters, health service reports including, without limitation,
specialty consultation, treatment plans, progress reports, admission
and discharge summaries of hospitalization and other termination
summaries.
(iii) Medical emergency drills for staff will be conducted quarterly
to assure adequate response of staff to emergency situations.
(iv) Contractor shall have a mechanism for the review of care
provided to assure the quality and adequacy of services being
provided. It will be part of a Continuous Quality Improvement Plan
that shall be maintained by the Contractor.
(v) All employees or professional staff will be licensed or
certified in accordance with applicable Nevada law and regulation. A
copy of each license or certificate will be maintained by the
facility.
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(vi) Contractor will be responsible for providing for optometry
service, eyeglasses and any related prosthetic, laboratory or
pharmaceutical services relating to vision care.
(vii) The Facility will require at least one Post of registered
nursing services.
(viii) The mental health program will be provided under the direction
of a mental health professional. A psychiatrist will be on-call 24
hours per day. Mental health interventions should be available from a
wide array of therapeutic techniques from proven successful
modalities.
(ix) The health program shall include a health education and
illness/injury prevention component for the Residents.
(q) Volunteer/Mentor Program: Contractor shall have a plan for recruiting
------------------------
and training volunteers and reasonable opportunities for their
participation in the program. Provide recruitment and training plan(s). The
volunteer program can be a very important part of that exposure by
providing the Residents contact with people who have widely varied
interests.
Section 5.10 WORK PROGRAMS. If Contractor provides Residents with community
-------------
work or vocational programs, they shall be in accordance with the Standards. If
work programs are used as part of the behavior management program, Residents
shall earn "points" that can be used at the commissary, if any.
Section 5.11 COMMISSARY. If Contractor provides a commissary to be used by
----------
Residents to obtain personal items beyond minimum Standards, all profits shall
be the property of the State and accounted for, remitted and reported to the
State on a quarterly basis.
Section 5.12 EMERGENCY. Contractor shall take reasonable steps to avoid any
---------
Emergency at the Facility. Contractor agrees to timely contact local government
law enforcement, the Nevada Division of Child and Family Services, the Nevada
Department of Prisons and the DOA in the event of a potential or existing
Emergency as defined in this Agreement. Contractor shall fully cooperate in and
yield to the authority of local law enforcement and the State in the event that
the State deems the circumstance an Emergency under this Agreement. The State
may look to its Nevada Department of Prisons' correctional officers and/or the
State Highway Patrol to intervene on its behalf in any potential or ongoing
Emergency. Contractor shall reimburse local law enforcement and the State for
the cost of any such intervention by either or both.
Section 5.13 ACCESS TO COURTS AND HEARINGS. Contractor will provide timely
-----------------------------
transportation and security to all necessary Resident court appearances and
hearings in full compliance with Standards.
Section 5.14 GRIEVANCE PROCEDURE. Contractor will provide a formal grievance
-------------------
procedure for Residents in compliance with the Standards.
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Section 5.15 DISCIPLINE. Contractor shall only impose discipline through rules,
-----------
policies and orders consistent with Standards with the Facility director or
assistant director acting as the appeal officer on Resident appeals from any
disciplinary actions. A record of all discipline proceedings from notice and
action through any appeal must be maintained in the Resident's file.
Section 5.16 RECREATION. Consistent with specifications, Builder (in equipping
----------
the Facility) and Contractor (in operating the Facility) shall provide adequate
physical facilities (in-door and out-door), equipment and supplies for a
recreation program that meets any applicable court order and Standards.
Recreation facilities and equipment shall not be less than Contractor's accepted
proposal, as amended.
Section 5.17 LAUNDRY. Contractor will provide timely laundry services for the
-------
Residents in compliance with the Standards and Residents shall not be relied
upon as labor.
Section 5.18 TRANSPORTATION. Contractor shall provide, at its own expense and
--------------
in accordance with Standards, full transportation services with respect to all
Residents assigned to the Facility. At a minimum, and unless otherwise provided,
such transportation to include health care, court, employment and all routine
Facility transportation within Clark County.
Section 5.19 MAIL. Contractor will provide mail services to Residents at no
----
cost to the State in compliance with the Standards.
Section 5.20 TELEPHONES. Contractor will provide Resident telephone services
----------
approved by the State with any profits or revenues derived for the use paid to
the State. All profit or revenues shall be accounted for, remitted and reported
on a quarterly basis.
Section 5.21 FOOD SERVICE. Builder shall equip to specifications and Contractor
------------
shall provide food services for all Residents in accordance with Standards. At a
minimum, the food service operation shall provide a meal schedule, special diet,
medical, religious requirements, menu review by a registered nutritionist or
dietitian, three (3) meals, of which two (2) are hot meals, at regular times
during each twenty-four (24) hour period, with no more than twelve (12) hours
between the evening meal and breakfast. No more than 14 hours may elapse between
two meals. A nutritious snack shall be provided in the evenings. The menu shall
be on a minimum 28-day rotation and shall be approved by a registered
nutritionist or dietitian for variety of foods, appropriateness and
attractiveness for the Residents, and their caloric level. Contractor shall keep
sufficient records, and provide information as requested, to enable it to
prepare information for the State to utilize in making claims for participation
in the Federal School Meal program
(a) Except in emergency situations or when a Resident is in close custody
housing, the Residents shall eat their meals in the dining or multi-purpose
area designated to accommodate meal consumption. Food must not be allowed
to be transported out of the dining area to the housing units.
Section 5.22 LIBRARY. Builder shall equip to specifications and Contractor will
-------
provide a Resident library in compliance with the Standards.
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Section 5.23 VOLUNTEER PROGRAM. Contractor will provide a volunteer program for
-----------------
Residents at the Facility in accordance with the Standards.
Section 5.24 VISITATION. Builder shall equip and Contractor will provide
----------
physical space, furniture, equipment and supervision for visitation in
accordance with their proposal, as amended. Conjugal visits will not be
permitted under any circumstances.
Section 5.25 REVENUE PROGRAMS. Contractor shall cooperate with the State on any
----------------
existing or proposed future revenue programs including without limitation,
telephones and commissary, if any. All such revenue shall be the property of the
State.
Section 5.26 RECORDS INSPECTION, AUDIT & OWNERSHIP. The Builder and Contractor
-------------------------------------
shall maintain documentation for all billings to the DOA a follows:
(a) Books and Records. Contractor agrees to keep and maintain under
-----------------
general accepted accounting principles individual records, contracts, books
and documents as are necessary to fully disclose to the State or United
States Government, or their authorized representatives, upon audits or
reviews.
(b) Inspection & Audit. Contractor agrees that the relevant books, records
------------------
(written, electronic, computer related or otherwise), including but not
limited to, relevant accounting procedures and practices of the Contractor
or its subcontractors, financial statements and supporting documentation,
and documentation related to the work product, at reasonable times, and at
a reasonable place provided by the Contractor, shall be subject to
inspection, examination, review, audit and copying at various but necessary
times with or without notice by the State Auditor, the relevant State
Agency or its contracted examiners, the Department of Administration,
Budget Division, the Department of Taxation, the Nevada State Attorney
General's Office or its Fraud Control Units, the State Legislative Auditor,
and with regard to any federal funding, the relevant Federal Agency, the
Comptroller General, the General Accounting Office, the Office of the
Inspector General or any of their authorized representatives. All
subcontracts shall reflect the requirements of this section.
(c) Period of Retention. All books, records, reports and statements
-------------------
relevant to this Agreement must be retained a minimum three (3) years and
for five (5) years if any Federal funds are used or until audited by the
State or Federal government from the date of payment for the relevant goods
or services by the State, whichever is later. Retention time shall be
extended when an audit is scheduled or in progress until the Contractor is
notified that such audit is completed.
(d) State Ownership of Property. Any reports, mental health histories,
---------------------------
studies, tests, manuals, instructions, Resident files, as-built blue
prints, plans, maps, Resident and Facility data, system designs or any
other documents or drawings, prepared or in the course of preparation by
Contractor (or its subcontractors) in the performance of its obligations
under this Agreement which are necessary to the State's operation upon
purchase or conclusion of the Management Agreement, shall be the exclusive
property of
46
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the State and all such materials shall be remitted to the State by
Contractor upon completion, termination or cancellation of this Contract.
Contractor shall not use, willingly allow or cause to have such materials
used for any purpose other than the performance of Contractor's obligations
under this agreement without the prior written consent of the State.
Section 5.27 ACA AND NCCHC ACCREDITATION. Contractor will make application for
---------------------------
and obtain accreditation for the Facility from both the American Correctional
Association and the National Commission on Correctional Health Care within
eighteen (18) months of the SCD, unless prevented from doing so by a material
act or omission of the State or Force Majeure.
Section 5.28 TELECOMMUNICATIONS. Contractor shall provide, at its expense, all
------------------
of its own telecommunication equipment, radio, fax machine and basic telephone
service for the operation of the Facility. Such telecommunication equipment
shall be capable of interfacing with the State's existing communication systems
and with any future State communication systems.
Section 5.29 DATA PROCESSING SERVICES. Contractor shall provide at its expense,
------------------------
facilities and compatible equipment and software necessary to interface with the
State's computer systems where necessary. Contractor shall maintain and report
to the State all Resident data as required by Standards. All systems shall be
year 2000 compliant.
Section 5.30 ADMISSION, ORIENTATION, PERSONAL PROPERTY AND RELEASE. The
-----------------------------------------------------
Contractor shall provide in accordance with Standards, ACA Standards, and
Contractor's Operational Plan, physical space and resources for the admission,
release, orientation and personal property of Residents at the Facility.
ARTICLE 6
EMPLOYEES OF INDEPENDENT CONTRACTORS
------------------------------------
Section 6.1 INDEPENDENT CONTRACTORS. Builder and Contractor are associated with
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the State only for the purposes and to the extent set forth in this Agreement,
and in respect to the performance of the contracted services pursuant to this
Agreement, both are independent contractors and, subject only to the terms of
this Agreement, shall have the sole right to supervise, manage, operate, control
and direct the performance of the details incident to its duties under this
Agreement. Nothing contained in this Agreement shall be deemed or construed to
create a partnership or joint venture, to create the relationships of an
employer-employee or principal-agent or to otherwise create any liability for
State whatsoever with respect to the indebtedness, liabilities and obligations
of Builder or Contractor or any other party. Builder and Contractor shall be
solely responsible for all employment or benefits package. The State shall have
no obligation with respect to: (1) withholding of income taxes, FICA or any
other taxes or fees, (2) industrial insurance coverage, (3) participation in any
group insurance plans available to employees of the State, (4) participation or
contributions by either the Builder, Contractor or the State to the public
employees retirement system, (5) accumulation of vacation leave or sick leave,
or (6) unemployment compensation coverage provided by the State. Builder and
Contractor shall indemnify and hold State harmless from, and defend State
against, any and all losses, damages, claims, costs, penalties, liabilities and
expenses howsoever arising or incurred because of,
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incident to, or otherwise with respect to any such taxes or fees. Neither the
Builder, Contractor nor its employees, agents or representatives shall be
considered employees, agents or representatives of the State, except as provided
for in this Agreement.
Section 6.2 PERSONNEL. Contractor will provide personnel to deliver twenty-four
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(24) hour care and supervision to Residents, as well as administrative and
support service personnel for the overall operation of the Facility as more
fully described in Article 5 or this Agreement, and in the attached EXHIBIT 5,
STAFFING PATTERN. Prior to employment with Contractor, applicants will be
subjected to a thorough background check including criminal, medical, and
employment history.
(a) The use of part-time supervisor(s) of Direct Care Workers is
prohibited.
(b) Contractor will maintain a file containing job descriptions and
standards of performance for each position contained within the Staffing
Pattern.
(c) Facility staffing pattern will, at a minimum include the position types
and numbers found in Article 5 generally, and specifically the Operational
Plan and the Minimum Staffing Ratios as set forth in this Agreement, and
shall be listed in EXHIBIT 5, "STAFFING PATTERN," attached hereto and
incorporated by reference.
(d) Contractor will maintain employee personnel files on site which shall
contain, without limitation, the following: service records, any
correctional officer certifications, official transcripts showing degree
conferred or other qualifying data, employee evaluations and background
checks. Employee personnel files shall be provided for audit or
investigative purposes.
(e) Contractor shall not hire any individual who intends to maintain
concurrent employment with the Nevada Department of Prisons, the Department
of Human Resources or the Southern Nevada Women's Correctional Facility
operated by Corrections Corporation of America either as an employee or
under contract service.
(f) Contractor shall not hire any individual with any record of a felony
conviction.
(g) The selection or change of the top managers (director of assistant
director(s)) of the Facility must be prior approved by the State.
(h) All employees must have annual physical examinations, and TB and
Hepatitis B tests are mandatory.
(i) Contractor shall maintain policies and procedures for maintaining a
drug fee workplace.
Section 6.3 TRAINING. Contractor will provide for employees training programs
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as follows:
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(a) Contractor will provide a minimum of one hundred sixty (160) hours of
pre-service training to all Critical Post security positions and
supervisors of Direct Care Workers, and a system of continuing training
consistent with the Contractor's proposal, as amended.
(b) Contractor will provide a minimum of forty (40) hours of pre-service
training for medical/professional, administration, management, and other
supervisors, and a system of continuing training consistent with the
Contractor's proposal, as amended.
(c) Contractor will provide a minimum of twenty-four (24) hours of in-
service training to all support staff for each calendar year they are
employed beyond the initial year of employment.
(d) Training Curriculum: All positions must be able to understand the
mission and goals of the Facility, the operational regulations governing
the Facility and the specific responsibilities of the job being performed.
Direct case workers must receive instruction in, at a minimum: Use of force
and self defense tactics; Key control; Suicide prevention; Counseling
techniques; Use of positive reinforcement in behavior management;
Disciplinary and grievance procedures; CPR and First Aid; Effects of
medications or drug withdrawal; Effective techniques for staff-Resident
interaction; All policies and procedures for the Facility; and, Crisis
intervention and de-escalation techniques.
Section 6.4 VACANCIES. It is understood by the parties that vacancies will
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occur from time to time in staff positions required by the Staffing Pattern. For
purposes of this Agreement, a vacancy is defined to occur when the employee
assigned to that position has been terminated, resigned or is reassigned to
another position, and no other qualified person is available to perform the
duties of that position. Contractor will notify the State Monitor in writing
within three (3) days of the date any position becomes vacant, and will fill any
vacant position with a qualified individual within thirty (30) days after the
vacancy occurs.
(a) If a Critical Post position is vacant for any whole or part of a shift,
the Contractor shall pay or the Minimum Contractor Payment may, at the sole
discretion of the State, be reduced by an amount equal to three (3) times
the monthly base wage for that position for each shift, or part of a shift,
the position is vacant.
(b) In addition to the above, in the event that the minimum staffing ratio
is not met on any shift, the Contractor may be required to pay or the
Minimum Contractor Payment may, at the sole discretion of the State, be
reduced by Five Hundred Dollars ($500.00) per day. The penalty may be
increased by the same amount for each consecutive day in which the same
ratio continues to not be met. The State reserves the right to impose or
waive any such penalty payment. Waiver must be in writing. The failure to
impose shall not be construed as a waiver.
(c) Staffing Ratio Report: With each billing, a staffing report of the
prior billing period shall be submitted showing the required identification
of Residents, staff positions, contracted ratios, the actual staffing and
any resulting Contractor Minimum Payment reductions that the State may
exercise (see also Section 8.3).
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Section 6.5 SUBCONTRACTS AND ASSIGNMENT. Contractor may subcontract for the
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provision of specific services set out herein such as maintenance, grounds care,
medical services, etc., but will not subcontract for the overall management of
the Facility. Builder may subcontract construction work in a manner reasonable
and customary to the industry. Contractor and Builder may not assign this
Contract without the prior written consent of the Director of the DOA.
Contractor and Builder shall remain responsible for their subcontractors
including payment to same.
Section 6.6 USE OF FORCE. Deadly force is not anticipated to be necessary for
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the Resident population. The use of force shall be permitted only to the extent
it is addressed in the approved policies and procedures of the Facility as set
forth in the Operational Plan.
Section 6.7 LIMITED RIGHT TO EMPLOY. In anticipation of completion or
-----------------------
termination of the Management Agreement, the State or its subsequent Facility
management contractor is authorized to seek to employ, recruit or employ any
Contractor employee, agent or subcontractor in any way connected with the
operation or management of the Facility and Contractor hereby waives any claims
to consideration or damages. However, during the term of this Agreement, both
parties agree that they will not actively recruit or seek to employ each other's
employees, agents or subcontractors without consent. In the event that the
Contractor does so employ without consent, it shall pay the DOA Two Thousand
Five Hundred Dollars ($2,500.00) per employment. The payment may be waived by
the DOA in writing.
ARTICLE 7
CONTRACT MONITORS
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Section 7.1 CONTRACT MONITOR. The State will provide a Contract Monitor, paid
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for by Contractor, who will enjoy the following rights and duties:
(a) Monitor Contractor's compliance with this Contract by observation,
interviewing, reviewing Facility records, Resident files, budget documents
and attending selected meetings, staffing or hearings. The Monitor will act
as the State's liaison with the Contractor, and will report to the DOA
Director or his designee. The Contractor will permit the Contract Monitor
to interview Residents and staff, and inspect the Facility and all records
at any time;
(b) Review and make recommendations to the State regarding classification
decisions (including transfers to or from the Facility);
(c) Review decisions by the Facility Administrator regarding Resident
disciplinary appeals and grievances to make recommendations to the State
whether the Contractor's procedures and decisions are in compliance with
the Standards and terms of this Contract;
(d) Contractor will provide all RFP requirements and will pay to DOA FOUR
THOUSAND EIGHT HUNDRED DOLLARS ($4,800.00) PER MONTH for payment by the
State to the Contract Monitor as consideration for the services. This
amount may be increased at the discretion of the DOA at any inflation
adjustment period consistent with Section 8.4 timing and
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percentage amount if the Monitor is an independent contractor, or if
Monitor is a State employee, any increases otherwise approved for State
employees. Nonpayment will be subject to set-off from payments made under
the Management Agreement; and
(e) Contractor agrees that the Contract Monitor has no authority, actual or
apparent, to approve, advise or direct the conduct, policies or procedures
of the Contractor or the performance of its employees or agents. The
Contract Monitor shall have no duty under this Agreement to the Contractor,
its employees or agents, or Residents, to personally intervene in any
circumstance that may be observed in the course and scope of audit duties.
(f) On the first day of each month Contractor shall provide a personnel
roster of all full- and part-time employees and subcontractor employees
which include at a minimum:
(1) name
(2) position number
(3) position title
(4) hire date
(5) assignment
(6) percent of full-time equivalents (FTE)
(g) Further, once per month the roster shall include a master staffing
report indicating the Facility's staffing pattern as well as actual
assignment of Posts and duties.
Section 7.2 CONSTRUCTION MONITOR ROLE. The State will provide a Construction
Contract Monitor, paid for by the Builder as part of the cost of construction,
who will be contracted, employed or appointed during the design and construction
period prior to the Facility opening. The Section 7.1 Contract Monitor will not
be charged to the Contractor until 60 days prior to the anticipated SCD under
this Agreement. The Construction Monitor will enjoy the following rights and
duties:
(a) Perform a quality assurance function to ensure that the construction is
being done in accordance with the provided plans and specifications. The
Construction Monitor will have the authority to stop any further draws
against construction funds until, in the judgment of the State, the reason
for stopping draws has been resolved.
(b) To act as liaison between the Builder, Contractor and the State and
State Public Works Board.
(c) Upon the effective date of this Agreement, Builder shall pay to DOA
FOUR THOUSAND EIGHT HUNDRED DOLLARS ($4,800.00) PER MONTH for the duration
of construction, which shall be deemed to end upon the Services
Commencement Date, for payment of such services. Nonpayment will be subject
to set-off against any construction draw payments.
(d) The Construction Monitor shall review and approve all plans prior to
construction.
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(e) The Construction Monitor must review and approve all as-built plans to
be provided to the State on electronic media and one (1) copy of sepia.
(f) The State Public Works Board acts as the building official for the
State and in addition to any necessary local government approvals will
certify by Certificate of Occupancy upon satisfactory completion and prior
to every occupancy.
ARTICLE 8
COMPENSATION AND ADJUSTMENTS
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Section 8.0 START-UP PERIOD. Except as otherwise provided in Section 3.3 there
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will be no other payment obligation or the duty to pay the Per Diem Rate during
the Start-Up Period.
Section 8.1 PER DIEM RATE. The payment for services under the Management
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Agreement in the first period following the SCD under this Agreement shall be
ONE HUNDRED TWENTY AND 49/100 ($120.49) PER RESIDENT DAY. (See Section 5.2 for
an alternative per diem per Resident formula regarding limited circumstances of
Contractor initiated agreements for Residents from other jurisdictions.)
The original Per Diem Rate is a negotiated number that is based upon a first
contract year baseline operating budget as presented by the Contractor. That
base budget shall be incorporated into this Agreement as EXHIBIT 6, BASELINE
OPERATING BUDGET.
Section 8.2 PAYMENT. The State will pay by wire transfer from any immediately
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available funds to a depository to be designated by Contractor a rate per
Resident for each Resident Day a Resident is assigned to the Facility operated
by Contractor as follows in Sections 8.2 through 8.6.
Section 8.3 BILLING. Contractor will bill the State for each calendar month,
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one (1) calendar month in arrears, for the Minimum Contractor Payment, including
on the invoice the names, identification numbers of Residents assigned and
calendar days in which the Resident was assigned to the Facility and the prior
months staffing ratio report (Section 6.4). The State will pay such invoice
within thirty (30) days after receipt of invoice by wire transfer to a
depository to be designated by Contractor.
If the amount to be paid to Contractor is disputed by the State, then the State,
on or before the date the invoice is payable, will advise Contractor of the
basis for the dispute and, in the manner provided above, pay the amount of such
invoice which is not in dispute. If the parties cannot resolve the dispute
within thirty (30) days of such advice, either party may initiate dispute
resolution as provided herein.
Section 8.4 PER DIEM INFLATION ADJUSTMENTS. All subsequent inflation
------------------------------
adjustments to the Per Diem Rate shall be based upon the first Contract year Per
Diem Rate as defined in this Agreement generally and specifically in this
Article.
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Beginning with the second Fiscal Year following SCD, and each subsequent Fiscal
Year thereafter, an inflation adjustment will be automatically budgeted by the
DOA to the previous year's Per Diem Rate as follows:
(a) Adjustment by the product of the current PER DIEM RATE TIMES (X) ONE
AND ONE HALF PERCENT (1.5%).
(b) This adjustment figure shall appear in the DOA's proposed budget for
each Biennium during the Agreement's Term. The budget process shall be for
the entire Biennium, with the intention of obtaining two (2) separate
legislatively approved fiscal year adjustments.
(c) All automatic adjustments to the Per Diem Rate shall be conditioned
upon the timing and sufficiency of appropriation by the State Legislature
for this purpose.
Section 8.5 COMPENSATION FOR ADDITIONAL SERVICES. DOA recognizes that
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Contractor has entered into the Management Agreement and has offered to furnish
the Operation and Management Services hereunder based upon the Standards in
effect as of the effective date of the Management Agreement. If there are
material or extraordinary changes not otherwise due to practices by Contractor
at less than Standards or duties, which changes are as a result of changes in
Standards, generally applicable to the State and which necessitate a change in
the scope of services furnished by the Contractor so as to demonstrably increase
the annualized cost of operating and managing the Facility, then the Contractor
shall be entitled to solicit negotiations, at the same time for determining a
Per Diem Rate inflation adjustment, for extra compensation for the Additional
Services required, which compensation may be provided pursuant to an amendment
to this Agreement so long as the Additional Services are within the scope of the
request for proposal and the increased compensation is within appropriated
funding limits.
The Contractor shall request in writing, together with such supporting
documentation or information as the State may reasonably request, the additional
compensation Contractor desires to offset Contractor's increase in costs for
furnishing the Additional Services because of any such change. The State shall
review the request and the DOA will decide if additional payment is justified.
If the DOA agrees then a Contract Amendment will be made for Board of Examiner's
required approval.
Section 8.6 FAILURE TO AGREE ON COMPENSATION FOR ADDITIONAL SERVICES. If the
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parties cannot agree on compensation for Additional Services within sixty (60)
days of the date Contractor requests such services, the State and Contractor may
initiate resolution through dispute resolution procedures provided in this
Agreement.
Section 8.7 UTILITIES. Contractor will pay all utility charges (i.e. electric,
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water, natural gas, sewer, phone, garbage, etc.).
Section 8.8 PERFORMANCE BOND. In addition to Builder's Construction Performance
----------------
Bond, as set forth in the Insurance Schedule in Section 9.2, Contractor will
provide a Management Agreement Performance Bond throughout the term of this
Contract. Builder will deliver the Construction Performance Bond to the Director
of DOA in a reasonable time following the
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approval of this Contract by the Board of Examiners, but no later than ten (10)
days prior to the scheduled sale of Section 3.4 Securities. The Management
Agreement Performance bond shall be delivered within ten (10) days of the
Services Commencement Date. The terms and conditions of the bond must be
approved by the Risk Management Division of the Department of Administration,
and such approval will be a condition precedent to this Contract taking effect.
The Bond shall be subject to demand by the DOA with a written notice of default
or breach under the terms set forth in Article 10 of this Agreement.
Section 8.9 FISCAL MANAGEMENT. Builder and Contractor will provide accounting
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procedures which conform to Generally Accepted Accounting Procedures ("GAAP").
DOA may audit the Facility's fiscal accounts at any time.
ARTICLE 9
INDEMNIFICATION AND INSURANCE
-----------------------------
Section 9.1 INDEMNIFICATION. Except only in the case of the sole negligence of
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the State, severally Builder and Contractor will indemnify, defend, not
excluding the State's right to participate, and hold the State, the Corporation
and their respective officers, employees, agents, representatives (including
attorneys, state officials and immune contractors under NRS 41.0307(3)) and
volunteers, in their official and individual capacity, harmless from and against
any and all claims (including, without limitation, all civil rights claims),
demands, causes of action at law or equity, losses, costs and expenses
(including attorney's fees and court costs) incurred as a result of this
Agreement.
The Builder or Contractor and DOA will agree to cooperate in defending claims
filed against both parties or their employees.
The right to indemnification provided by this subsection will be in addition to,
and not in lieu of, any other remedy otherwise available to the State. The
provisions of this indemnification section shall not be construed to deny the
State of the benefits of any NRS Chapter 41 limitations to its exposure to
liability or damages.
In the event that the State or the DOA is not fully indemnified as required by
this Agreement, in addition to any other remedies set forth in this Agreement,
the DOA may set-off against any moneys owed to Builder or Contractor, as
appropriate, including without limitation any Minimum Contractor Payment or
otherwise claim the same as damages including statutory interest.
Section 9.2 INSURANCE. Unless expressly waived in writing by the State,
---------
Builder and Contractor, as independent contractors and not employees of the
State, must provide policies of insurance in amounts set forth in this Insurance
Schedule and pay all taxes and fees incident hereunto. The State and the
Corporation shall have no liability except as specifically provided in the
Contract.
Builder or Contractor shall not commence work before:
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1. Builder or Contractor have provided the required evidence of insurance
to the Risk Management Division, and
2. The State has approved the insurance policies provided by the Builder or
Contractor.
Prior approval of the insurance policies by the State's Risk Management Division
shall be a condition precedent to the effective date of this contract and the
State's approval of any changes to insurance coverage during the course of
performance shall constitute an ongoing condition subsequent this contract.
Insurance Coverages: The Builder and Contractor shall, at their sole expense,
procure, maintain and keep in force for the duration of the contract the
following insurance conforming to the minimum requirements set forth below.
Unless specifically specified herein or otherwise agreed to by the State, the
required insurance shall be in effect prior to the commencement of work by the
Builder or Contractor and shall continue in force until the latter of:
1. Final acceptance by the State of the completion of this Contract; or
2. Such time as the insurance is no longer required by the State under the
terms of this Agreement.
Any insurance or self-insurance available to the State shall be excess of and
non-contributing with any insurance required from Builder or Contractor. All
insurance policies shall apply on a primary basis.
Until such time as the insurance is no longer required by the State, Builder and
Contractor shall provide the State with renewal or replacement evidence of
insurance no less than thirty (30) days before the expiration or replacement of
the required insurance. If at any time during the period when insurance is
required by the Contract, an insurer or surety shall fail to comply with the
requirements of this Contract, as soon as Builder or Contractor has knowledge of
any such failure, Builder and Contractor shall immediately notify the State and
immediately replace such insurance or bond with an insurer meeting the
requirements.
BUILDER
Builder shall cause each subcontractor to purchase and maintain insurance of the
type specified below. When requested by the State, Builder shall furnish copies
of certificates of insurance evidencing coverage for each subcontractor.
WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY INSURANCE
- --------------------------------------------------------
1) Proof of compliance with the provisions of Nevada Revised Statutes,
Chapter 616 and all other related chapters or as required by laws of the
state of domicile of the contractor.
2) Non-Nevada contractors must include evidence of Employer's Liability
Insurance with their Workers' Compensation insurance.
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3) Nevada contractors and certified self-insured contractors must evidence
Employers' Liability coverage as part of their General Liability insurance.
COMMERCIAL GENERAL LIABILITY INSURANCE
- --------------------------------------
1) Minimum Limits required:
$30,000,000 General Aggregate
$30,000,000 Products & Completed Operations Aggregate
$1,000,000 Personal and Advertising Injury
$15,000,000 Each Occurrence
$1,000,000 Employer's Liability (for Nevada & self-insured
employers only)
2) Separate General Aggregate limit shall apply to this project
3) Coverage for Builder, and the State and the Corporation, as additional
insureds, shall be on an occurrence basis and shall be at least as broad as
ISO 1996 form CG 00 01 (or a substitute form providing equivalent
coverage); and shall cover liability arising from premises, operations,
independent contractors, products-completed operations, personal injury,
and liability assumed under an insured contract (including the tort
liability of another assumed in a business contract).
4) There shall be no endorsement or modification limiting the scope of
coverage for liability arising from explosion, collapse, underground
property damage, or employment-related practices.
5) Builder shall maintain Commercial General Liability and, if necessary,
Umbrella Liability insurance with a limit of not less than $10,000,000 each
occurrence for at lease three (3) years following substantial completion of
the work.
BUSINESS AUTOMOBILE LIABILITY INSURANCE
- ---------------------------------------
1) Minimum Limit required: $ 1,000,000 Each Occurrence with a $10,000,000
umbrella for bodily injury and property damage.
2) Coverage shall be for "any auto" (including owned, non-owned and hired
vehicles). The policy shall be written on ISO form CA 00 01 or a substitute
providing equivalent liability coverage. If necessary, the policy shall be
endorsed to provide contractual liability coverage.
UMBRELLA OR EXCESS LIABILITY INSURANCE
- --------------------------------------
1) May be used to achieve the above minimum liability limits.
2) If the policy contains an aggregate limit, a separate General Aggregate
limit shall apply to this.
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PERFORMANCE & PAYMENT BOND
- --------------------------
Bond penalty required: 100% of the amount of the construction contract or
purchase price of the Facility less the cost of developed land, whichever is the
greater amount.
The Builder shall submit a post maintenance warranty bond or a letter from
surety that guarantees the work for the warranty period but for not less than
one year.
BUILDERS RISK INSURANCE
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Minimum amount: $ 100% of the Total Amount of the Contract, less land value.
Prior to the start of the work, Builder shall purchase and maintain Builders
Risk insurance on the entire work at its replacement cost. Such insurance shall
be written on a completed value form and in an amount equal to the Total Amount
of the Contract, less the land value, subject to subsequent modifications of the
Contract sum, if any. The "work" shall mean the construction and services
required by the Contract Documents, whether completed or partially completed,
and includes all other labor, materials, equipment and services provided or to
be provided by the Builder to fulfill the Builder's obligations.
(1) The insurance shall cover the entire work specified in this Contract,
plus reasonable compensation for architect's services and expenses made
necessary by an insured loss. Insured property shall include portions of
the work located away from the site but intended for use at the site and
shall also cover portions of the work in transit. The policy shall include
as insured property scaffolding, falsework, and temporary buildings located
at the site. The policy shall cover the cost of removing debris, including
demolition which may be legally necessary by the operation of any law,
ordinance or regulation.
(2) The insurance shall be written to cover all risks of physical loss
including collapse, testing, flood and earthquake.
(3) The insurance shall name as insureds the State of Nevada, the
Corporation, the Builder and all subcontractors and sub-subcontractors in
the work.
(4) Payment of an applicable deductible shall be the responsibility of the
insured making the claim. However, if the insured making the claim is the
State or the Corporation, payment of the deductible shall be the Builder's
responsibility.
(5) Builders Risk insurance shall be maintained in effect, unless otherwise
provided for in the contract documents, until The Service Commencement Date
or the Occupancy Date on the Building Permit, whichever is later.
If the State or the Corporation is damaged by the failure of the Builder to
maintain required Builders Risk insurance, then the Builder shall bear all
reasonable costs properly attributable to that failure.
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(6) Waiver of Subrogation. The State, the Corporation, and the Builder
waive all rights against each other and each of their subcontractors, sub-
subcontractors, officers, agents, employees and immune contractors for
recovery for damages caused by perils to the extent covered by the Builders
Risk insurance or any other property insurance applicable to the work.
(7) Partial Occupancy Partial occupancy or use of the work shall not
commence until the insurance company or companies providing Builders Risk
insurance have consented to such partial occupancy or use. The State, the
Corporation, and the Builder shall take reasonable steps to obtain consent
of the insurance company (ies) and agree to take no action, other than upon
mutual written consent, with respect to occupancy or use of the work that
could lead to cancellation, lapse, or reduction of insurance.
(8) Builder's and subcontractors' tools, equipment and machinery not
destined to become part of the structure, if excluded from coverage in the
Builders Risk insurance policy, is Builder's responsibility to insure. It
is expressly understood and agreed that the State shall have no
responsibility therefore.
BOILER & MACHINERY INSURANCE
- ----------------------------
Builder shall purchase and maintain Boiler & Machinery insurance, on a
replacement cost basis, in a minimum amount equal to the Builder's Risk
insurance, covering objects during installation and until final acceptance by
the State.
(1) If the Boiler & Machinery insurer is other than the Builders Risk
insurance company, a joint loss agreement between the insurers is required.
(2) The insurance shall name as insureds the State of Nevada, the
Corporation, the Builder and all subcontractors and sub-subcontractors in
the work.
(3) Waiver of Subrogation. The State, the Corporation, and the Builder
waive all rights against each other and each of their subcontractors, sub-
subcontractors, officers, agents, employees and immune contractors for
recovery for damages caused by perils to the extent covered by the Boiler &
Machinery insurance or any other property insurance applicable to the work.
MANAGEMENT CONTRACTOR
WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY INSURANCE
- --------------------------------------------------------
1) Proof of compliance with the provisions of Nevada Revised Statutes,
Chapter 616 and all other related chapters or as required by laws of the
state of domicile of the contractor.
2) Non-Nevada contractors must include evidence of Employer's Liability
Insurance with their Workers' Compensation insurance.
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3) Nevada contractors and certified self-insured contractors must evidence
Employers' Liability coverage as part of their General Liability insurance.
COMMERCIAL GENERAL LIABILITY INSURANCE
- --------------------------------------
1) Minimum Limits required:
$25,000,000 General Aggregate
$10,000,000 Products & Completed Operations Aggregate
$10,000,000 Personal and Advertising Injury
$10,000,000 Each Occurrence
$1,000,000 Employer's Liability (for Nevada & self-insured
employers only)
2) A separate General Aggregate limit shall apply to this project
3) Coverage shall be on an occurrence basis and shall be at least as broad
as ISO 1996 form CG 00 01 (or a substitute form providing equivalent
coverage); and shall cover liability arising from premises, operations,
independent contractors, products-completed operations, personal injury,
and liability assumed under an insured contract (including the tort
liability of another assumed in a business contract). It shall include
also, without limitation, civil lawsuits and claims by Residents, Title VII
Federal actions, lawful intentional acts (deliberate indifference),
unintentional or negligent violations of law, and intentional acts
constituting violations of civil rights and any other liability resulting
from all facility operations under this Management Agreement.
4) The policy shall not exclude coverage for AIDS/HIV or coverage for
physicians and psychiatrists employee of the Contractor.
5) The War Exclusion does not include riots at a prison setting.
Contractor shall require any independent contractor physicians and psychiatrists
to provide for their own professional liability coverage that also provides for
the same coverage with minimum limits of not less than $ 1,000,000 per person
and annual aggregate.
BUSINESS AUTOMOBILE LIABILITY INSURANCE
- ---------------------------------------
1) Minimum Limit required: $10,000,000 Each Occurrence for bodily injury
and property damage.
2) Coverage shall be for "any auto" (including owned, non-owned and hired
vehicles).
3) The policy shall be written on ISO form CA 00 01 or a substitute
providing equivalent liability coverage. If necessary, the policy shall be
endorsed to provide contractual liability coverage.
PROFESSIONAL LIABILITY INSURANCE
- --------------------------------
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1) Minimum Limit required: $ 10,000,000 Each Incident/Claim.
2) Retroactive date: Prior to commencement of the performance of the
contract.
3) Discovery period: Three (3) years after termination date of contract.
4) The coverage afforded by this policy shall apply to acts or omissions of
all personnel providing residents with services, including without
limitation, malpractice for medical, dental, optometry, ophthalmology,
psychology and psychiatry.
5) The policy shall not exclude coverage for AIDS/HIV.
6) A certified copy of this policy is required.
UMBRELLA OR EXCESS LIABILITY INSURANCE
- --------------------------------------
1) May be used to achieve the above minimum liability limits.
2) Non-Nevada contractors must include evidence of Employer's Liability
Insurance with their Workers' Compensation insurance.
3) Nevada contractors and certified self-insured contractors must evidence
Employers' Liability coverage as part of their General Liability insurance.
PERFORMANCE BOND
- ----------------
Bond penalty required: $5,000,000.00
COMMERCIAL PROPERTY & BUSINESS INTERRUPTION INSURANCE
- -----------------------------------------------------
While the State reserves the right to insure for this exposure, if specified as
required in the Insurance Schedule, Contractor shall maintain for the duration
of the lease Commercial Property & Business Interruption insurance-
Minimum amount: 100% of the replacement cost of the Facility, including
equipment, fixtures, furnishings, improvements and betterments.
(1) Prior to the Services Commencement Date, Management Contractor shall
procure Commercial Property Insurance on a form providing coverage for all
risk perils including flood and earthquake and contain an agreed amount
endorsement.
(2) The policy, on ISO form CP10 30 or equivalent, shall include Business
Interruption, Extra Expense and Expediting Expense coverages and be on an
actual loss sustained basis, including payroll coverage.
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(3) All sublimits, if any, shall be shown on the certificate of insurance.
(4) The War Exclusion does not include riots at a prison setting.
(5) During the term of the lease agreement, the Facility's insured value
shall be adjusted at each contract anniversary, using an insurance industry
indices acceptable to the Lessor, to reflect its adjusted 100% replacement
cost.
(6) In no event shall landlord be liable for any damage to or loss of
personal property sustained by tenant, whether or not it is insured, even
if such loss is caused by the negligence of landlord.
BOILER & MACHINERY INSURANCE
- ----------------------------
Contractor shall purchase and maintain Boiler & Machinery insurance, on a
replacement cost basis, in an amount equal to the 100% replacement cost of the
Facility insurance covering all direct and indirect losses and including Extra
Expense and Expediting Expense coverage.
(1) If the Boiler & Machinery insurer is other than the Commercial Property
insurance company, a written, joint loss agreement between the insurers is
required.
(2) All sublimits, if any, shall be shown on the certificate of insurance.
Waiver of Subrogation. Landlord and tenant hereby waive any recovery of damages
against each other (including their employees, officers, directors, agents or
representatives) for loss or damage to the building, tenant improvements and
betterments, fixtures, equipment, and any other personal property to the extent
covered by the commercial property insurance or boiler and Machinery insurance
required above.
Any deductible applicable to the commercial property, business interruption or
boiler and machinery insurance purchased in compliance with this paragraph shall
be approved by landlord, and tenant shall pay to landlord any amount in excess
of not insured because of the deductible.
Property Deductibles: Any deductible applicable to the commercial property,
business interruption or boiler and machinery insurance purchased in compliance
with the requirements above shall be approved by landlord, and tenant shall pay
to landlord any amount in excess of not insured because of the deductible.
GENERAL REQUIREMENTS (Builder and Management Contractor):
- ---------------------------------------------------------
A. Additional Insured: The State of Nevada, Department of Administration, the
Corporation (a non-profit corporation), their officers, employees and immune
contractors as defined in NRS 41.0307 and the Trust Indenture and its Trustee
shall be named as additional insureds by endorsement to all liability policies
except Employers Liability and Professional Liability, evidenced by Contractor.
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The State of Nevada, Department of Administration, the Corporation (a non-profit
corporation), and the Trust Indenture and its Trustee shall be named as
additional insureds and loss payees on by endorsement to all property insurance
policies.
B. Waiver of Subrogation: Each liability insurance policy and workers'
compensation policy shall provide for a waiver of subrogation as to all
additional insureds.
C. Cross-Liability: If liability policies do not contain the standard ISO
separation of insureds provision, or a substantially similar clause, they shall
endorsed to provide cross-liability coverage.
D. Deductibles and Self-Insured Retentions: Insurance maintained by Builder or
Contractor shall apply on a first dollar basis without application of a
deductible or self-insured retention unless otherwise specifically agreed to by
the State. Such approval shall not relieve Builder or Contractor from the
obligation to pay any deductible or self-insured retention. Any deductible or
self-insured retention shall not exceed $5,000 per occurrence for Builder and
$50,000 per occurrence for Contractor, unless otherwise approved by the Risk
Management Division.
E. Policy Cancellation: Except for ten days notice for non-payment of premium,
each insurance policy shall be endorsed to state that;
1) Without sixty (60) days prior written notice to the State of Nevada, the
policy shall not be canceled, non-renewed or coverage and /or limits
reduced or materially altered, and
2) Further provide that notices required by this paragraph shall be sent by
certified mailed to the address shown below.
F. Approved Insurer: Each insurance policy shall be:
----------------
1) Issued by insurance companies authorized to do business in the State of
Nevada or approved surplus lines insurers acceptable to the Agency and
having agents in Nevada upon whom service of process may be made, and
2) Are currently rated by A.M. Best as "A-VII" or better.
EVIDENCE OF INSURANCE (BUILDER AND MANAGEMENT CONTRACTOR):
- ----------------------------------------------------------
A. Prior to the start of any Work, Builder and Contractor must provide the
following documents to the State:
1) Certificate of Insurance: The Acord 25 Certificate of Insurance form or
------------------------
a form substantially similar must be submitted to the State to evidence the
insurance policies and coverages required of Builder or Contractor. The
wording, ". . . endeavor to . . ." ". . . but failure to mail such notice
shall impose no obligation or liability of any kind upon the company, its
agents or representatives," or any similar language with respect to
cancellation shall be deleted.
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Qualified self-insurers of statutory Workers' Compensation insurance shall
provide a copy of their certification.
2) Additional Insured Endorsement: An original Additional Insured
------------------------------
Endorsement (ISO be submitted to the State form CG20 10 11 85), signed by
an authorized insurance company representative, must to evidence the
endorsement of the State and the Corporation as additional insureds per
General Requirements, A. above.
3) Best Rating: A copy of the most current A. M. Best rating for each
-----------
company affording coverage must accompany the insurance documents.
4) Schedule of Underlying Insurance Policies: If Umbrella or Excess policy
-----------------------------------------
is evidenced to comply with minimum limits, provide a copy of the Underlyer
Schedule from the insurance policy.
B. Review and Approval Documents in "A" above must be submitted for review and
-------------------
approval by the State prior to any Work being performed by the Builder or
Contractor. Neither approval by the State nor failure to disapprove the
insurance furnished by the Builder or Contractor shall relieve the Builder or
Contractor of their full responsibility to provide the insurance required by
this Contract. Compliance with the insurance requirements of this Contract shall
not limit the liability of the Builder or Contractor or its sub-contractors,
employees or agents to the State or others, and shall be in addition to and not
in lieu of any other remedy available to the State under this Contract or
otherwise. The State reserves the right to request and review a copy of any
required insurance policy or endorsement to assure compliance with these
requirements.
Mail all required insurance documents to the Certificate Holder:
State of Nevada
c/o Risk Management Division
Attention: K. Mariner
400 West King Street, Suite 300
Carson City, NV 89703
Subcontractor Coverage. Builder and Contractor shall include all subcontractors
- -----------------------
as insured under its policies or shall furnish separate certificates and
endorsements for each subcontractor. All coverages for subcontractors shall be
subject to all the requirements previously stipulated
Section 9.3 SUBCONTRACTOR INSURANCE. Builder and Contractor will require all
-----------------------
subcontractors to obtain, maintain and keep in force insurance coverage in
accordance with accepted industry standards during the time they are engaged
thereunder.
Section 9.4 DEFENSE/IMMUNITY. By entering into this Contract, State does not
----------------
waive its governmental immunity nor does Builder or Contractor or the State
waive any immunity which may be extended to either by operation of law including
limitation of damages. The liability of the State shall not be subject to
punitive damages. Damages for any State Event of Default shall never exceed the
amount of funds which have been appropriated, but not paid, for the fiscal year
in
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existence at the time of the breach. Under NRS Chapter 41 generally, the State
may be subject to limited liability. Under NRS 41.0321 specifically, the State
and its agencies, officers, employees and immune contractors are immune from
liability for Year 2000 computer system non-compliance.
Section 9.5 NOTICE OF CLAIMS. Within ten (10) working days after receipt of a
----------------
summons in any action by DOA or Builder or Contractor, or of any agent, employee
or officer thereof, or within thirty (30) days of receipt by DOA or Builder or
Contractor, or of any agent, employee or officer thereof, of notice of claim,
DOA or Builder or Contractor, or any agent, employee or officer, will notify the
other party in writing of the commencement thereof. The notice requirement is
intended to ensure that defense of the claim is not harmed by failure to comply
with the notice requirements. DOA's failure to comply with the notice
requirements that is the proximate cause of a default judgment that cannot be
set aside can result in Builder's or Contractor's refusal to indemnify DOA or
any agent, employee or officer.
ARTICLE 10
DEFAULT AND TERMINATION
-----------------------
Section 10.1 DEFAULT OR TERMINATION. Except as otherwise provided for in this
----------------------
Section, an Event of Default on the part of either party means the occurrence of
any event described in Section 10.1(d) or (e) below. An Event of Default may be
declared with or without a termination. Regardless of any default or termination
of the Builder or Contractor, the obligations of the State and Corporation to
Section 3.4 Certificate holders shall remain unchanged.
(a) NOTICE. Unless otherwise provided in this section, any Event of
------
Default or termination must be declared upon One Hundred Eighty (180) or
more calendar days prior written notice by the Builder or Contractor or
Sixty (60) or more calendar days prior written notice by the State and
delivered by certified mail or by facsimile and regular mail or in person
to the other party's designated representative.
(b) STATE TERMINATION WITHOUT CAUSE. The Construction Agreement or the
-------------------------------
Management Agreement may be terminated by mutual consent or unilaterally by
any respective party without cause upon prior written notice as set forth
in this Section.
(c) STATE NON-APPROPRIATION WITHOUT CAUSE. At the sole discretion of the
-------------------------------------
State, for cause or without cause, the Contractor's Management Agreement
may be actively lobbied by the State for non-appropriation by the
Legislature, or the State may lobby for appropriation to operate the
Facility itself in lieu of independent contractor(s). In the event of an
appropriation to operate the Facility with State employees, the DOA may
terminate the Management Agreement at its sole discretion after written
notice as set forth in this Section.
(d) STATE IMMEDIATE TERMINATION FOR CAUSE. The State may terminate at its
-------------------------------------
sole option any or all component parts of this Contract, and Builder or
Contractor waives any and all claim(s) for damages, effective immediately
without prior notice upon receipt of written notice by certified mail or in
person, under the following conditions:
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(i) If for any reason the State's funding is not appropriated by the
Nevada State Legislature and continued or budgeted at levels
sufficient to allow for the purchase of the indicated quantity of
services; or
(ii) If any State or Federal statute is passed, modified, amended,
repealed or interpreted by a State or Federal judicial or legislative
authority in such a way that the work or services are no longer
authorized or lawful for purchase.
(e) CAUSE TERMINATION FOR AN EVENT OF DEFAULT. The relevant party's
-----------------------------------------
respective component part(s) of this Contract may be terminated by either
party upon written notice of an Event of Default to the other relevant
party as follows:
(i) If the Builder's or Contractor's Event of Default is or results in
a failure to provide or perform any of the conditions, work,
deliverables, goods or services called for by this Contract within
the time requirements specified herein or within any granted
extension of those time requirements; or
(ii) If the State's Event of Default constitutes a material breach of
material duty under this Contract and any such breach substantially
impairs the Builder's or Contractor's ability to perform; or
(iii) If any State, County, City or Federal license, authorization,
waiver, permit, qualification, certification or accreditation
required by this Contract, statute, ordinance, law or regulation
governing this Contract, or as covenanted herein, to be held by the
Builder or Contractor to provide the services required by this
Contract is for any reason denied, revoked, debarred, excluded,
terminated, suspended, lapsed or not renewed; or
(iv) If Builder or Contractor becomes insolvent, subject to
receivership, or becomes voluntarily or involuntarily subject to
the jurisdiction of the Bankruptcy Court; or
(v) If it is found by the State that any bid collusion or quid pro quo
or gratuities in the FORM OF MONEY, SERVICES, ENTERTAINMENT, GIFTS
OR OTHER-WISE WERE OFFERED OR GIVEN by Builder or Contractor, or
any agent or representative of Builder or Contractor, to any
officer or employee of the State of Nevada with a view toward
securing a contract or securing favorable treatment with respect to
the awarding, extending or amending, or the making of any
determination with respect to the performing of such contract;
and
(vi) Disputes between the builder and contractor regarding any
collateral agreement(s) or contract(s) between the builder and
contractor or any third party shall not constitute grounds for
termination of this contract.
SECTION 10.2 TIME TO CURE. If any Event of Default of this Contract by either
------------
party remains uncured more than thirty (30) days (or a longer period if mutually
agreed) after written notice
65
<PAGE>
thereof by the party asserting the breach to the party against which the breach
is asserted, such condition may be a basis for termination; provided, however,
if, within thirty (30) days (or a longer period if mutually agreed) after such
notice, a substantial good faith effort to cure said breach has been undertaken
by the party against which the breach has been asserted, said breach, at the
sole discretion of the non-breaching party, may or may not be declared an Event
of Default subject to termination. Any such discretion shall not be construed as
a waiver of any eventual uncured breach.
Section 10.3 FORCE MAJEURE. Neither party shall be deemed to be in violation
-------------
of this Contract if it is prevented from performing any of its obligations
hereunder for any defined reason (as Force Majeure is defined in Article 1, and
separately defined in Section 3.4). In such an event the intervening cause must
not be through the fault of the party asserting such an excuse, and the excused
party is obligated to promptly perform in accordance with the terms of the
Contract after the intervening causes ceases.
Section 10.4 REMEDY FOR DEFAULT OR TERMINATION. Upon an Event of Default or
---------------------------------
Termination by State of any respective party, Builder's or Contractor's sole
remedy shall be to terminate their component part(s) of this Contract. Upon any
such termination, Builder or Contractor will only be entitled to receive from
State payment for all services satisfactorily furnished under this Contract up
to and including the date of termination and no other damages may be claimed.
The State's remedies as to Builder's or Contractor's respective Event of Default
or Termination may without limitation also include at the sole discretion of the
State an administration liquidated damage adjustment to compensation which shall
be no greater than an amount equal to One Thousand Dollars ($1,000.00) per day
for each day beyond the cure period in which Builder or Contractor is in breach
or default. In the event of termination due to an Event of Default by Builder or
Contractor, the State may assert a respective claim against the defaulting party
for actual damages including, without limitation, attorney's fees and costs at a
rate of One Hundred Twenty-Five Dollars ($125.00) per hour for State employed
attorneys. Except as expressly limited in this Agreement the remedies are not
exclusive, and are cumulative with all other remedies at law or equity as the
law shall provide.
Section 10.5 WAIVER. No waiver or failure to assert any breach, default,
------
liquidated damages or any of the terms or conditions of this Contract shall be
construed or held to be a waiver of that or of any other or subsequent event;
nor will any waiver be valid or binding unless the same will be in writing and
signed by the party alleged to have granted the waiver.
ARTICLE 11
DISPUTES
--------
Section 11.1 DISPUTE RESOLUTION. Any issue of dispute between the parties
------------------
concerning any and all matters related to this Agreement will be resolved as
follows:
(a) Step 1: Negotiation in good faith by the parties with said negotiation
------
period not to exceed thirty (30) days from the date notice is given by the
party desiring negotiation unless a longer period is mutually agreed to by
the parties. If negotiation does not result in a resolution, the parties
may proceed to Step 2 set out herein.
66
<PAGE>
(b) Step 2: Decision by the Director of DOA. The Director of DOA will have
------
the final State decision in any dispuite arising out of this
Agreement.
(c) Step 3: Either party may bring action for declaratory or breach in
------
Nevada State District Court.
ARTICLE 12
MISCELLANEOUS
-------------
Section 12.1 NON-DISCRIMINATION. No person on the grounds of disability, age,
------------------
race, color, creed, religion, gender or national origin will be excluded from
participation in, or denied benefits of, or be otherwise subjected to
discrimination in the performance of this Contract, or in the employment
practices of the Builder or Contractor, respectively. Builder and Contractor,
individually, and their subcontractors, shall comply with the terms, conditions
and requirements of the Civil Rights Act of 1964, as amended, the Rehabilitation
Act of 1990 and the Americans with Disabilities Act. The Builder or Contractor
shall, upon request, show proof of such non-discrimination, and shall post in
conspicuous places, available to all employees and applications, notices of such
non-discrimination.
Section 12.2 BINDING NATURE. This Contract will not be binding upon the parties
--------------
until and unless all conditions are satisfied and this Contract is approved and
executed by the parties and the State Board of Examiners.
(a) The parties hereto represent and warrant that the person executing
this Agreement on behalf of each party has full power and authority to
enter into this Agreement. Builder and Contractor acknowledge that as
required by statute or State policy this Contract is effective only
after approval by the State Board of Examiners and only for the period
of time set forth in the Contract. Any services provided by Builder or
Contractor before this Contract is effective or after it ceases to be
effective are provided at the sole risk of the Builder or Contractor.
(b) Contractor warrants that neither it nor its principals are presently
debarred, suspended, proposed for debarment, declared ineligible, or
voluntarily excluded from participation in this transaction by any
federal department or agency.
Section 12.3 INVALIDITY AND SEVERABILITY. In the event that any provision of
---------------------------
this Contract will be held to be invalid, such provision will be null and void,
the validity of the remaining provisions of this Contract will not in any way be
affected thereby.
Section 12.4 PROHIBITION AGAINST ASSIGNMENT. It is hereby agreed by the parties
------------------------------
that Contractor may not assign or transfer this Contract or any interest in this
Contract without the written agreement of the DOA.
Section 12.5 COUNTERPARTS. This Contract may be executed in multiple
------------
counterparts, each of which will be deemed to be an original and all of which
will constitute one (1) Contract,
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<PAGE>
notwithstanding that all parties are not signatories to the original or the same
counterpart, or that signature pages from different counterparts are combined,
and the signature of any party to any counterpart will be deemed to be a
signature too and may be appended to any other counterpart.
Section 12.6 INTERPRETATION. The headings contained in this Contract are for
--------------
reference purposes only and will not affect the meaning or interpretation of
this Contract.
Section 12.7 TERMINOLOGY AND DEFINITIONS. All personal pronouns used in this
---------------------------
Contract, whether used in the masculine, feminine, or neuter gender, will
include all other genders; the singular will include the plural and the plural
will include the singular. In construing the intent of a section, a section
heading shall not be considered inconsistent with the actual text of the section
being construed.
Section 12.8 VENUE. This Contract will be interpreted by the laws of the State
-----
of Nevada, and Clark County will be the venue in the event any action is filed
against the Builder or Contractor or the State by any third party.
Section 12.9 RELEASE. Builder and Contractor, upon final payment of the amount
-------
due under this Contract, releases the State, its agencies, officers and
employees from all liabilities, claims and obligations whatsoever arising from
or under this Contract. Builder and Contractor agrees not to purport to bind
State to any obligation not assumed herein by State unless Builder or Contractor
has express written authority to do so, and then only within the strict limits
of this authority.
Section 12.10 AMENDMENT. This Contract will not be altered, changed or amended
---------
except by instrument in writing executed by the parties hereto and approved by
the State Board of Examiners.
Section 12.11 SCOPE OF CONTRACT. This Contract incorporates all the contracts,
-----------------
covenants and understandings between the parties hereto concerning the subject
matter hereof and all such covenants, contracts and understandings have been
merged into this written Contract. No prior contract or understandings, verbal
or otherwise, of the parties or their agents will be valid or enforceable unless
embodied in this Contract.
Section 12.12 JURISDICTION. Any and all suits as between the parties to this
------------
Agreement for any and every breach of this Agreement shall be instituted and
maintained in any court of competent jurisdiction in the State of Nevada.
Section 12.13 LAWS OF NEVADA. This Contract shall be governed and construed in
---------------
accordance with the laws of the State of Nevada.
Section 12.14 LIQUIDATED ADMINISTRATIVE ADJUSTMENTS. In addition to other non-
-------------------------------------
exclusive administrative liquidated damages set forth elsewhere in this
Agreement, for each incident of escape from custody or supervision, the
Contractor agrees to pay an administrative cost adjustment to the DOA the sum of
One Thousand Dollars ($1,000.00) per incident as a credit adjustment to the
monthly operator payment. This and other liquidated damages set forth elsewhere
in this Agreement shall not be construed as a waiver or satisfaction of any
68
<PAGE>
indemnification or liability otherwise required by this Agreement. For purposes
of this section, an escape is defined as any unauthorized absence from the
secure Facility, as well as from the supervision required by the Contractor or
their representative. It does not include the "walk-away" status of Residents
who escape from their employment, if any, in the public environment while
assigned as community trustee Residents. However, to the extent that the
services of local law enforcement or the State are utilized in re-capturing any
escapee, Contractor shall reimburse the same for their costs.
Section 12.15 GOVERNMENT OBLIGATIONS. Builder and Contractor will be
----------------------
responsible to pay their respective taxes, assessments, fees, premiums, permits,
licenses and any other government obligations required by law. Real property and
personal property taxes are the responsibility of Contractor in accordance with
NRS 361.157 and NRS 361.159. Builder and Contractor warrant that it has a valid
business license. Builder and Contractor agree to be responsible for payment of
any such government obligations not paid by itself for any reason, and for its
subcontractors in relation to this Agreement. The State may set-off against
consideration due for payment of any government obligation owed.
Section 12.16 NOTICES. All notices will be sent certified mail, return receipt
-------
requested, to:
DOA: Director
Nevada Department of Administration
209 East Musser Street
Blasdel Building, room 200
Carson City, Nevada 89701
Phone: 702-687-4065
Facsimile: 702-687-3983
Builder:
Clark & Sullivan Constructors
905 Industrial Way
Sparks, Nevada 89431
Phone: 702-355-8500
Facsimile: 702-355-8063
Contractor:
Correctional Services Corporation
1819 Main Street, Suite 1000
Sarasota, Florida 34236
Phone: 914-953-9199
Facsimile: 914-953-9198
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<PAGE>
IN WITNESS WHEREOF, intending to be legally bound, the parties have
caused their authorized representative to execute this Contract.
NEVADA DEPARTMENT OF ADMINISTRATION:
BY: /s/ John P. Comeaux DATE: 2/1/99
_________________________________ ___________________
John P. Comeaux, Director
*****************************************
NEVADA DEPARTMENT OF HUMAN RESOURCES:
BY: /s/ Charlotte Crawford DATE: 1/28/99
_________________________________ ___________________
Charlotte Crawford, Director
*****************************************
CORRECTIONAL SERVICES CORPORATION,
MANAGEMENT CONTRACTOR:
BY: /s/ James F. Slattery DATE: 1/29/99
_________________________________ ___________________
James F. Slattery, President
*****************************************
IN WITNESS WHEREOF, the Corporation has executed the IP Agreement in its
corporate name with its corporate seal hereunto affixed and attested by its duly
authorized officers; and the State has caused the IP Agreement to be executed in
its corporate name and the seal of the State affixed and attested by duly
authorized officers thereof. All of the above are effective as of the date of
approval of the State Board of Examiners.
CORPORATION, NEVADA REAL PROPERTY CORPORATION
A NEVADA NON-PROFIT CORPORATION:
BY: /s/ Brian K. Krolicki DATE: 2/1/99
_________________________________ ___________________
Its: President
__________________________________
*****************************************
70
<PAGE>
BUILDER, LICENSED CONTRACTOR DESIGN/BUILD TEAM:
By: /s/ B. J. Sullivan By: /s/ James Broman
_________________________________ _____________________
B.J. Sullivan, President of S. James Broman, President
Clark & Sullivan Constructors Rite of Passage, Inc.
DATE: 1-28-99 DATE: 1.28/99
_________________________________ _____________________
*****************************************
APPROVED AS TO FORM:
FRANKIE SUE DEL PAPA
Attorney General
BY: /s/ Randall R. Munn DATE: 1/28/99
_________________________________ ___________________
Deputy Attorney General
***************************************
STATE BOARD OF EXAMINERS:
BY: /s/ John P. Comeaux DATE: 2/2/99
_________________________________ ___________________
John P. Comeaux, Clerk
***************************************
71
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EXHIBITS AND ATTACHMENTS
CONTRACT EXHIBITS
Exhibit 1 - Updated Plans and Specifications
Exhibit 2 - Legal Description and Title Insurance Policy
Exhibit 3 - SCD Inventory
Exhibit 4 - Operational Plan
Exhibit 5 - Staffing Pattern
Exhibit 6 - Baseline Operation Budget
Exhibit 7 - Base Rentals and Purchase Option Price Schedule
Exhibit 8 - Builder's Construction Draw Schedule
CONTRACT ATTACHMENTS
Attachment A - Contractor's RFP Design/Build and Operations Proposal
(Amendments and Best and Final Offer)
Attachment B - Builder's Best and Final Offer
Attachment C - RFP No. 1018 Amendments
Attachment D - RFP No. 1018
Attachment E - Indenture of Trust
72
<PAGE>
EXHIBIT 1
UPDATED PLANS AND SPECIFICATIONS
73
<PAGE>
EXHIBIT 2
LEGAL DESCRIPTION AND TITLE INSURANCE POLICY
74
<PAGE>
EXHIBIT 3
SCD INVENTORY
75
<PAGE>
EXHIBIT 4
OPERATIONAL PLAN
76
<PAGE>
EXHIBIT 5
STAFFING PATTERN
77
<PAGE>
EXHIBIT 6
BASELINE OPERATING BUDGET
78
<PAGE>
EXHIBIT 7
BASE RENTALS AND PURCHASE OPTION PRICE SCHEDULE
The Purchase Option Price is payable on July 1 or January 1 of the year
indicated in an amount sufficient to discharge the State's obligation under the
IP Agreement in accordance with the Indenture by payment of an amount sufficient
to pay the principal of and interest on the Certificates to their maturity
dates.
Base Payment Due / Base Principal / Component / Base Internet Component / Total
Base Payments
--------
79
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EXHIBIT 8
BUILDER'S CONSTRUCTION DRAW SCHEDULE
80
<PAGE>
Attachment A
CONTRACTOR'S RFP DESIGN/BUILD AND OPERATIONS PROPOSAL
-----------------------------------------------------
(AMENDMENTS AND BEST AND FINAL OFFER)
-----------------------------------
81
<PAGE>
Attachment B
BUILDER'S BEST AND FINAL OFFER
------------------------------
82
<PAGE>
Attachment C
RFP NO. 1018 AMENDMENTS
-----------------------
83
<PAGE>
Attachment D
RFP NO. 1018
------------
84
<PAGE>
Attachment E
INDENTURE OF TRUST
------------------
85
<PAGE>
Exhibit 10.115
Form of Proxy Solicitor Agreement
February 16, 1999
Correctional Services Corp.
1819 Main Street, Suite 1000
Sarasota, Florida 34236
Attn.: Mr. Ira Cotler
Chief Financial Officer
Re: Retainer Agreement
Dear Ira:
In accordance with the terms of this Agreement, The Client indicated below ("The
Client") hereby retains Corporate Investor Communications, Inc. ("CIC") to
perform the following services ("Services"):
In connection with the 1999 Special Meeting of Shareholders, CIC will
develop an effective communications strategy, perform the broker search,
distribute proxy materials and solicit voted proxies from all banks,
brokers, nominees and intermediaries in accordance with applicable
governmental regulations.
1. Fee. In consideration of the Services to be provided, The Client shall
pay a Retainer Fee of Two Thousand Dollars ($2,000) ("Retainer Fee")
which shall be payable by The Client simultaneously with execution of
this Agreement. This Retainer Fee shall be credited against the
following fee to be charged to The Client for the Services hereunder:
The fee for Proxy Solicitation is $4,000, based on the following
proposal: Merger with Youth Services International and the distribution
of proxy material. Our fees for contacting non-objecting beneficial
owners ("NOBOs") and registered holders, if requested, will include a
unit fee of $4.00 per holder contacted, a $300 set-up fee and out-of-
pocket expenses related to telephone number lookups. CIC reserves the
right to adjust its fee for reasons including a change to the proposals,
vote requirement, significant increase in beneficial owners or contested
solicitation. The Client will reimburse CIC for all reasonable
disbursements which may include printing search cards, postage, outbound
freight and courier charges, filing and research reports, bank listings,
data transmissions and other expenses approved by The Client.
<PAGE>
February 16, 1999
Correctional Services Corp.
Mr. Ira Cotler
Retainer Agreement (page 2)
2. Term/Termination. This Agreement shall commence on the date indicated
below and shall continue until CIC has completed the Services required
of it hereunder. CIC may terminate this Agreement in the event of
default by The Client. Default is defined to include: The Client's
failure to pay any amount within thirty (30) days after invoice for said
amount is delivered to The Client; if The Client defaults in the
performance of any representation, warranty or obligation of The Client
set forth herein and such default continues, uncured, for a period of
twenty (20) days after delivery of written notice of such default by CIC
to The Client.
3. Additional Terms and Conditions. This Agreement is subject to the
General Terms and Conditions set forth on the reverse side hereof.
<TABLE>
<CAPTION>
<S> <C>
Corporate Investor Correctional Services Corp.
Communications, Inc.
-------------------------------------------------------
[CLIENT]
- ---------------------------------------------------- ------------------------------------------------------
Authorized Signature Authorized Signature
- ---------------------------------------------------- ------------------------------------------------------
Virginia Porcaro Name
- ---------------------------------------------------- ------------------------------------------------------
Vice President, Corporate Services Group Title
- ---------------------------------------------------- ------------------------------------------------------
February 16, 1999 Date
</TABLE>
<PAGE>
GENERAL TERMS AND CONDITIONS
Representations and Warranties. CIC hereby represents and warrants that this
Agreement is valid and binding upon CIC. The Client hereby represents and
warrants that this Agreement is valid and binding upon The Client, that the
execution hereof and the performance by The Client of its obligations hereunder
will not cause or otherwise result in a default by The Client of any contract,
agreement, commitment or obligations to which The Client is a party or by which
it is otherwise bound. The foregoing representations are in lieu of all other
representations and/or warranties express or implied. CIC's liability for
damages, regardless of the form of action, will not exceed the actual fees paid
by The Client for the Services hereunder during the twelve (12) months
immediately preceding the date on which such damages were incurred. No action
arising out of this Agreement may be brought by either party more than one year
after such cause of action has accrued.
Confidential Information.
(a) All Confidential Information shall be and shall remain the sole and
exclusive property of CIC. The Client agrees to hold the Confidential
Information in the strictest confidence and to employ all reasonable measures to
prevent the unauthorized use thereof which shall not be less than those measures
employed by The Client in protecting its own trade secrets and Confidential
Information. Such measures shall include procedures for controlling the
dissemination of such Confidential Information only to authorized agents and
employees of The Client who need to know the Confidential Information and who
shall be informed by The Client of its confidential nature and who shall agree,
in advance, to treat the Confidential Information in strict confidence, in
accordance with these requirements, and The Client shall be liable for any
breach by such employees or agents of the terms hereof.
(b) For the purpose of this Agreement, the term "Confidential Information"
shall mean all information, materials, documents, data or advice in whatever
form and however complied by or on behalf of CIC concerning The Client, its
parent subsidiaries or affiliates including, without limitation, market
surveillance information, shareholder profile information, investor targeting
information and vote projection information, and any and all documents or
materials developed by CIC from information provided by The Client.
(c) The term "Confidential Information" shall not include information that (i)
is generally known by or available to the public or which becomes known or
available by means other than a breach by The Client; (ii) is legally known to
The Client at the time The Client receives such information from CIC; and (iii)
is legally disclosed to The Client by an independent third party without
restriction on disclosure.
(d) Immediately upon termination of this Agreement, The Client shall return
or, alternatively, destroy any and all documents, materials and information in
any form and all copies thereof consisting of or relating to the Confidential
Information and shall confirm, in writing, to CIC that all of the foregoing has
been destroyed. This obligation shall survive termination of this Agreement.
Indemnification. The Client hereby agrees to hold harmless and indemnify CIC and
its officers, directors and employees against any and all losses, claims, causes
of action, damages, liabilities, costs and expenses, including reasonable
attorneys fees ("Indemnified Loss") incurred by any or all of the foregoing
parties arising from or relating, directly or indirectly, to: (i) a breach by
The Client of the terms of this Agreement, or (ii) the Services provided by CIC
to The Client under this Agreement, except to the extent that any such
Indemnified Loss is the result of the gross negligence or willful misconduct of
any CIC officer or employee. Without in any way limiting the foregoing, The
Client hereby agrees to pay any and all costs and expenses including, but not
limited to: attorneys' fees for court appearance necessary or appropriate for
CIC to enforce, interpret or defend this Agreement, defend or respond to any
proceeding investigation or governmental inquiry or action at law or in equity
arising out of, relating to, or in connection with the Services provided by CIC
to The Client under this Agreement; or respond to any subpoena of CIC's records
as they relate to The Client and/or the Services provided by CIC hereunder.
Reimbursement will be made to the indemnified persons at the time as such loss,
cost or expense is incurred. CIC hereby agrees to notify The Client of any claim
or cause of action against CIC arising out, relating to, or in connection with
the Services provided by CIC under this Agreement. The obligations set forth in
this paragraph shall survive termination of this Agreement.
Late Payment. All invoices shall be due and paid by The Client within thirty
(30) days after the date of invoice. Any payments which are not received by CIC
within that time will incur interest at the rate of one and one-half percent (1
1/2%) per month or at the legally permissible interest rate, whichever is lower.
Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the subject matter contained herein and may not be
modified except in writing signed by both parties. This Agreement shall be
binding upon the parties and their respective successors and permitted assigns.
This Agreement may not be assigned by The Client without the express written
consent of CIC.
Severability. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provision hereof, all of which shall
remain enforceable in accordance with their terms.
Notices. Any notice or other communication to be given by either party hereto to
the other party hereto shall be in writing and mailed by certified mail with
return receipt requested to the party to be notified at its address set forth at
the beginning of this Agreement (or at such different address as the party to
receive the notice so designates by advance written notice to the other party).
Governing Law and Venue. This Agreement shall be governed and interpreted by the
laws of the State of New Jersey and the parties expressly agree that any dispute
arising out of or relating to this Agreement or its performance shall be in
resolved in the Supreme Court, Bergen County, New Jersey and each party consents
to the in personam jurisdiction of such court for the purpose of resolving any
such dispute. This paragraph shall survive termination of this Agreement.
<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 Amendment No. 1 to 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 16, 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 16, 1999
