SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
June 30, 1999 0-23038
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CORRECTIONAL SERVICES CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 11-3182580
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(State of Incorporation) (I.R.S. Employer Identification Number)
1819 Main Street, Suite 1000, Sarasota, Florida 34236
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(Address of principal executive offices)
Registrant's telephone number, including area code:
(941) 953-9199
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Not Applicable
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(Former name, former address and former fiscal year
if changed since last report)
Number of shares of common stock outstanding on August 13, 1999: 11,373,064.
Indicate by check mark whether the registrant (1)has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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<PAGE>
CORRECTIONAL SERVICES CORPORATION
INDEX
Page No.
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
(unaudited) - for the Three and Six Months Ended
June 30, 1999 and 1998 4 & 5
Condensed Consolidated Statements of Cash Flows
(unaudited) - for the Six Months Ended
June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
ASSETS June 30, December 31,
1999 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,728 $ 7,639
Restricted cash 286 157
Accounts receivable, net 41,138 37,924
Receivable from sale of equipment and
leasehold improvements 534 994
Deferred tax asset 2,716 2,071
Prepaid expenses and other current assets 3,954 5,421
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Total current assets 50,356 54,206
PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST, NET 50,263 53,120
OTHER ASSETS
Deferred tax asset 11,394 9,162
Other 6,987 9,847
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$119,000 $126,335
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 31,431 $ 27,823
Subordinated promissory notes 1,036 1,101
7% Convertible Subordinated Debentures 30,470 32,200
Current portion of long-term obligations 21 22
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Total current liabilities 62,958 61,146
LONG-TERM SENIOR DEBT 9,000 11,500
LONG-TERM OBLIGATIONS 364 364
LONG-TERM PORTION OF FACILITY LOSS RESERVES 308 1,299
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Total liabilities 72,630 74,309
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, 11,176,475 and 10,906,768
shares issued and outstanding 112 109
Additional paid-in capital 81,286 79,552
Accumulated deficit (35,028) (27,635)
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Total stockholders' equity 46,370 52,026
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$119,000 $126,335
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The accompanying notes are an integral part of these statements.
3
</TABLE>
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<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<CAPTION>
Six Months Ended June 30,
------------------------
1999 1998
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<S> <C> <C>
Revenues $119,813 $ 84,186
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Facility expenses:
Operating 106,058 71,585
Startup costs 757 6,154
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106,815 77,739
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Contribution from operations 12,998 6,447
Other operating expenses:
General and administrative 6,745 8,904
Merger costs and related restructuring charges 13,813 -
Costs Related to CCI transaction - 306
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Operating income (loss) (7,560) (2,763)
Interest and other expense, net (1,482) (987)
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Income (loss) before income taxes and cumulative
Effect of change in accounting principle (9,042) (3,750)
Income tax (expense) benefit 1,649 1,436
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Income (loss) before cumulative effect of change
in accounting principle (7,393) (2,314)
Cumulative effect of change in
accounting principle, net of tax of $3,180 - (4,863)
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Net loss $(7,393) $(7,177)
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---------- ----------
Basic earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting principle $(0.67) $(0.21)
Cumulative effect of change in
accounting principle - $(0.45)
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Net loss per share $(0.67) $(0.66)
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---------- ----------
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $(0.67) $(0.21)
Cumulative effect of change in
accounting principle - $(0.45)
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Net loss per share $(0.67) $(0.66)
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---------- ----------
Number of shares used to compute EPS:
Basic 11,098 10,816
Diluted 11,098 10,816
The accompanying notes are an integral part of these statements.
4
</TABLE>
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
(continued)
<CAPTION>
Three Months Ended June 30,
--------------------------
1999 1998
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<S> <C> <C>
Revenues $60,878 $42,048
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Facility expenses:
Operating 53,730 37,590
Startup costs 28 5,549
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53,758 43,139
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Contribution from operations 7,120 (1,091)
Other operating expenses:
General and administrative 3,037 4,886
Costs related to CCI transaction - 306
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Operating income (loss) 4,083 (6,283)
Interest and other expense, net (725) (487)
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Income (loss) before income taxes 3,358 (6,770)
Income tax (expense) benefit (1,326) 2,539
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Net income (loss) $2,032 $(4,231)
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(Loss) Earnings per share:
Basic $0.18 $(0.39)
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Diluted $0.18 $(0.39)
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Number of shares used to compute EPS:
Basic 11,176 10,865
Diluted 11,218 10,865
The accompanying notes are an integral part of these statements.
5
</TABLE>
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,393) $ (7,177)
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 2,977 2,635
Stock granted as compensation - 15
Merger related asset write down 4,895 -
Cumulative effect of a change in
accounting principle - 4,863
Deferred income tax expense (benefit) (2,878) 121
Loss on sale fixed assets - 13
Write off of other assets - 321
Tax benefit realized due to exercise of
nonqualified stock options - 208
Changes in operating assets and liabilities:
Restricted Cash (129) 188
Accounts receivable (3,214) (4,078)
Prepaid expenses and other current assets 1,468 (818)
Accounts payable and accrued liabilities 1,092 (2,817)
Reserve for facility carrying costs 1,527 (459)
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Net cash used in operating activities: (1,655) (6,985)
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Cash flows from investing activities:
Capital expenditures (2,273) (6,549)
Proceeds from the sale of property, equipment
and improvements - 22
Proceeds from the sale of behavioral
health business - 4,500
Collection of notes receivable - 36
Other assets 44 (448)
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Net cash used in investing activities: (2,229) (2,439)
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Cash flows from financing activities:
Repayments on senior debt, net (2,500) 4,500
Payment on short-term and long-term obligations (2) (1,181)
Payment of subordinated debt (1,796) -
Proceeds from sale of fixed assets 460 460
Net proceeds from exercise of stock options
and warrants 1,736 1,572
Debt issuance costs (125) (39)
Long-term portion of prepaid lease 200 175
Dividend Distribution - (60)
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Net cash provided by (used in)
financing activities: (2,027) 5,427
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NET DECREASE IN CASH AND CASH EQUIVALENTS (5,911) (3,997)
Cash and cash equivalents at beginning of period 7,639 13,231
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Cash and cash equivalents at end of period $ 1,728 $ 9,234
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Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $ 1,536 $ 1,444
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Income taxes $ 146 $ 333
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The accompanying notes are an integral part of these statements.
6
</TABLE>
<PAGE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Correctional Services Corporation and its wholly owned subsidiaries. Due to
the pooling of interests business combination consummated on March 31, 1999,
described in Note 2, the condensed consolidated financial statements also
include the accounts of Youth Services International, Inc. and its
subsidiaries ("YSI") for all periods presented.
In the opinion of management of Correctional Services Corporation and
subsidiaries (the "Company"), the accompanying unaudited condensed
consolidated financial statements as of June 30, 1999, and for the three and
six months ended June 30, 1999 and 1998, include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation. The
condensed consolidated balance sheet as of December 31, 1998 has been derived
from the audited financial statements of the Company and YSI as of December
31, 1998. The statements herein are presented in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements on Form 10-K for the Company and Form 8-K for YSI have been
omitted from these statements, as permitted under the applicable rules and
regulations. The statements should be read in conjunction with the
consolidated financial statements and the related notes included in the
Company's Annual Report on Form 10-K and Form 8-K for YSI for the year ended
December 31, 1998.
The results of operations for the three and six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 - POOLING OF INTERESTS BUSINESS COMBINATION
On March 31, 1999, the Company exchanged 3,114,614 shares of the Company's
common stock for all of the common stock of YSI. YSI operates juvenile
justice facilities and also provides aftercare services to adjudicated youth.
The above transaction has been accounted for as a pooling of interests and,
accordingly the condensed consolidated financial statements for the periods
presented have been restated to include the accounts of YSI.
Revenue and net income of the separate companies for the period preceding the
YSI merger were as follows (in thousands):
Three months ended Six months ended
June 30, 1998 June 30, 1998
-------------------- -------------------
Revenue Net Income Revenue Net Income
CSC, as previously reported,
before the effect of change in
accounting principle
(see Note 3) $20,156 $ 1,051 $39,267 $ 2,059
Effect of change in accounting
principle - (3,361) - (8,543)
YSI 21,892 (1,921) 44,919 (693)
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Combined $42,048 ($4,231) $84,186 ($7,177)
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------- ------ ------- ------
In connection with the merger, during the first quarter of 1999, the Company
recorded a charge to operating expenses of approximately $13,813,000
($10,279,000, after taxes) for direct costs related to the merger and certain
other costs resulting from the restructuring of the newly combined
operations.
7
<PAGE>
Direct Merger costs consisted primarily of fees to investment bankers,
attorneys, accountants, financial advisors and printing and other direct costs.
Restructuring charges included severance and change in control payments made to
certain former officers and employees of YSI and costs associated with the
consolidation of administrative functions and the expected closure of certain
facilities. Exit costs include charges resulting from the cancellation of lease
agreements and other long-term commitments, the write-down of underutilized
assets or assets to be disposed of and miscellaneous other cots.
Merger costs and related restructuring charges are comprised of the following
(in thousands):
Direct merger costs $ 6,111
Restructuring charges:
Employee severance and change in
control payments 2,339
Exit costs 4,410
Other 953
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Total $13,813
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In addition, in connection with the merger, the Company assumed $32,200,000
of 7% Convertible Subordinated Debentures originally issued by YSI during the
year ended June 30, 1996. Under the terms of the indenture pursuant to,
which YSI issued the Debentures, the acquisition of YSI by the Company
constituted a :change of control" thereby enabling the holder of the Debentures
to demand immediate redemption by the Company. The applicable portion of the
unamortized costs related to the issuance of these debentures have been
appropriately written off and are included in the direct merger costs.
Agreements were reached with certain holders representing $30,500,000 of the
total debt to defer payment until March 31, 2000. (See Liquidity and Capital
Resources Section in Management Discussion and Analysis.) In June 1999, a
total of $1,730,000 representing the balance was repaid from working capital.
NOTE 3 - DEFERRED DEVELOPMENT AND STARTUP COSTS
In the fourth quarter of 1998 the Company elected to adopt early the AICPA's
Statement of Position 98-5 (SOP 98-5), Accounting for Start-up Costs. The
accounting change requires the Company to expense start-up and deferred
development costs as incurred, rather than capitalizing and subsequently
amortizing such costs. SOP 98-5 required the Company to record a cumulative
effect of change in accounting of $4,863,380 (net of tax benefit of
$3,180,000) retroactively to January 1, 1998. Due to this implementation
methodology, the first quarter of 1998 was retroactively restated to reflect
the cumulative effect of change in accounting. In the second quarter ended
June 30, 1998 operating expenses were restated to reflect the reversal of
$415,669 of amortization expense. In addition, $5,972,305 of startup and
development cost previously capitalized was expensed as incurred.
NOTE 4 - INCOME TAXES
Deferred tax assets consisting of a current portion of $2,716,000 and a long-
term portion of $11,394,000 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 Company, after considering its pattern of profitability and its
anticipated future taxable income, believes it is more likely than not that
the deferred tax assets will be realized.
8
<PAGE>
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share in accordance with SFAS No. 128:
Six Months Ended June 30, 1999
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Six Months Ended June 30, 1998
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Three Months Ended June 30, 1999
Numerator:
Net Income $2,032
------
------
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,176
Effect of dilutive securities - stock
options and warrants 42
------
Denominator for diluted earnings per share 11,218
------
------
Three Months Ended June 30, 1998
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company is one of the largest and most comprehensive providers of
juvenile rehabilitative services with 42 facilities and approximately 5,400
juveniles in its care. In addition, the Company is a leading developer and
operator of adult correctional facilities operating 20 facilities
representing approximately 7,300 beds. On a combined basis, as of June 30,
1999, the Company provided services in 22 states and Puerto Rico,
representing approximately 12,600 beds including aftercare services.
The Company's primary source of revenue is generated from the operation of
its facilities pursuant to contracts with federal, state and local governmental
agencies, and management agreements with third parties that contract
directly with governmental agencies. Generally, the Company's contracts are
based on a daily rate per resident, some of which have guaranteed minimum
payments; others provide for fixed monthly payments irrespective of the
number of residents housed. In addition, the Company receives revenue for
educational and aftercare services. The Company recognizes revenue when the
Company performs the services pursuant to its contracts.
The Company typically pays all facility operating expenses, except for
rent or lease payments in the case of certain government-provided facilities
or for facilities for which the Company has only a management contract.
Operating expenses are principally comprised of costs directly attributable
to the management of the facility and care of the residents which include
salaries and benefits of administrative and direct supervision personnel,
food, clothing, medical services and personal hygiene supplies. Other
operating expenses are comprised of fixed costs which consists of rent and
lease payments, utilities, insurance, depreciation and professional fees.
The Company also incurs start-up costs as it relates to the opening of new
facilities. Such costs are principally comprised of expenses associated with
the recruitment, hiring and training of staff, travel of personnel and
certain legal costs.
Contribution from operations consists of revenues minus operating expenses
and start-up costs. Contribution from operations, in general, is lower in the
initial stages of a facilities' operations. This is due to the need to incur a
significant portion of the facilities' operating expenses while the facility
is in the process of attaining full occupancy.
General and administrative costs primarily consist of salaries and
benefits of non-facility based personnel, insurance, professional fees, rent
and utilities associated with the operation of the Company's corporate
offices. In addition, general and administrative costs consist of
development costs principally comprised of travel, proposal development,
legal fees, and various consulting and agency fees.
Recent Developments
On February 23, 1999, the Company announced that it had mutually agreed
with the Administration of Juvenile Institutions not to renew the contract for
the 120-bed Bayamon Detention Center in Bayamon, Puerto Rico. In May 1999, the
Company discontinued operating this facility.
On March 26, 1999, the Company through its YSI subsidiary was re-awarded
the contract to operate the 350 bed Charles Hl Hickey, Jr. School located in
Baltimore, Maryland.
On March 31, 1999, the Company completed the acquisition of YSI, which was
accounted for using the pooling of interests method. The Company issued
3,114,614 shares of the its common stock for all YSI capital stock.
Accordingly, the Company's consolidated financial statements have been
restated to reflect the combination with YSI.
On June 11, 1999, the Company discontinued operating the Clarinda Academy
in Clarinda, Iowa.
On June 25, 1999, the Company closed the Stuart E. Nunn Juvenile Center in
Texarcana, Texas.
10
<PAGE>
Results of Operations
The following tables sets forth-certain operating data as a
percentage of total revenues:
Percentage of Total Revenue
Six Months Ended
June 30,
---------------------------
1999 1998
Revenues 100.0% 100.0%
Expenses:
Operating 88.5% 85.0%
Startup costs 0.7% 7.3%
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89.2% 92.3%
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Contribution from operations 10.8% 7.7%
Other operating expenses:
General and administrative 5.6% 10.6%
Merger costs and related restructuring
Charges 11.5% 0.0%
Costs related to CCI transaction 0.0% 0.4%
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17.1% 11.0%
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Operating income -6.3% -3.3%
Interest income (expense), net -1.2% -1.2%
Income (loss) before income taxes and
Cumulative effect of change in accounting -7.5% -4.5%
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Income tax (provision) benefit 1.4% 1.7%
Income (loss) before cumulative effect of
Change in accounting -6.1% -2.8%
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Cumulative effect of change in
accounting, net of tax of $3,180,000 0.0% 5.8%
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Net income (loss) -6.1% -8.5%
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11
<PAGE>
The following tables sets forth-certain operating data as a
percentage of total revenues: (continued)
Percentage of Total Revenue
Three Months Ended
June 30,
---------------------------
1999 1998
Revenues 100.0% 100.0%
Expenses:
Operating 88.3% 89.4%
Startup costs 0.0% 13.2%
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88.3% 102.6%
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Contribution from operations 11.7% -2.6%
Other operating expenses:
General and administrative 5.0% 11.6%
Merger costs and related restructuring
Charges 0.0% 0.0%
Costs related to CCI transaction 0.0% 0.7%
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5.0% 12.3%
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Operating income 6.7% -14.9%
Interest income (expense), net -1.2% -1.2%
Income (loss) before income taxes 5.5% -16.1%
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Income tax (provision) benefit -2.2% 6.0%
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Net income (loss) 3.3% -10.1%
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Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue increased by $35.6 million or 42% for the six months ended June 30,
1999 to $119.8 million compared to the same period in 1998 due primarily to an
increase in the number of residents housed by the Company. The net change was
primarily due to:
- An increase of $34.6 million generated from the opening of 12 juvenile
and 6 adult facilities.
- A net increase of $2.9 million generated from per diem rate and occupancy
level increases in existing facilities.
- A decrease of $2.7 million from the sale of the behavioral health
business and the discontinuance of the Timberline Academy and the College
Station programs.
Operating expenses increased $34.4 million or 48% for the six months ended
June 30, 1999 to $106.0 million compared to the same period in 1998 due
primarily to the opening of the 18 new facilities mentioned above.
As a percentage of revenues, operating expenses increased to 88.5% for the
six months ended June 30, 1999 from 85.0% for the six months ended June 30,
1998. The increase was primarily due to the number of facilities that were in
their early stages of operations. These facilities incurred operating expenses
as a percentage of revenue which were greater than those experienced by the
Company in 1998.
12
<PAGE>
Startup costs were $757,000 costs for the six months ended June 30, 1999
compared to $6,154,000 for the six months ended June 30, 1998. Startup for the
six months ended June 30, 1999, related to the startup of the South Fulton,
Georgia facility and 300-bed expansion of the Crowley, Colorado facility.
General and administrative expenses decreased from $8.9 million for the
period ended June 30, 1998 to $6.7 million for the six months ended June 30,
1999. The decrease of $2.4 million in general and administrative expenses was
primarily attributable to:
- The reduction of the administrative staff of the YSI subsidiary.
- The reduction of YSI corporate overhead expenses.
- The synergies realized from the merger resulting in the reduction of
insurance, office expenses and travel.
As a percentage of revenues, general and administrative expenses decreased
to 5.6% for the six months ended June 30, 1999 from 10.6% for the six months
ended June 30, 1998. The decrease in general and administrative expenses as a
percentage of revenue is a result of the achievement of synergies noted above
and leveraging of these remaining costs over a larger revenue base.
Interest expense, net of interest income, was $1,482,000 for the six months
ended June 30, 1999 compared to interest expense, net of interest income of
$987,000 for the six months ended June 30, 1998, a net increase in interest
expense of $495,000. This increase resulted from borrowings on the Company's
credit facility to finance the growth of the Company.
For the six months ended June 30, 1999 the Company recognized an income tax
benefit of $1,649,000 representing an effective tax rate of 18.2%. For the six
months ended June 30, 1998 the Company recognized a benefit for income taxes of
$1,436,000 and an income tax benefit of $3,180,000 related to the cumulative
effect of change in accounting principle representing an effective tax rate of
39.1%. The reduction in the effective tax rate was a result of expensing
certain merger costs that are non-deductible for tax purposes.
As a result of the foregoing factors, for the six months ended June 30,
1999 the Company had a net loss of ($7,393,000) or ($0.67) per share. For the
six months ended June 30, 1998 the Company had a net loss of ($2,314,000) and a
net loss of ($7,177,000) or ($0.21) and ($0.66) per share before and after the
cumulative effect of change in accounting principle, respectively.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenue increased by $18.8 million or 45% for the three months ended June
30, 1999 to $60.9 million compared to the same period in 1998 due primarily to
an increase in the number of residents housed by the Company. The net change
was primarily due to:
- An increase of $18.1 million generated from the opening of 12 juvenile
and 6 adult facilities.
- A net increase of $1.2 million generated from per diem rate and occupancy
level increases in existing facilities.
- A decrease of $.9 million from the sale of the behavioral health business
and the discontinuance of the Timberline Academy and the College Station
programs.
Operating expenses increased $16.1 million or 43% for the three months
ended June 30, 1999 to $53.7 million compared to the same period in 1998 due
primarily to the opening of the 18 new facilities mentioned above.
As a percentage of revenues, operating expenses decreased to 88.3% for the
three months ended June 30, 1999 from 89.4% for the three months ended June
30, 1998. The decrease was primarily due to the Company's increased
purchasing power, which resulted in lower costs in food, various operating
supplies and training.
Startup costs were $28,000 costs for the three months ended June 30, 1999
compared to $5,549,000 for the three months ended June 30, 1998. During the
three months ended June 30, 1998, there were nine (9) facilities in the startup
phase of operations. During the three months ended June 30, 1999, there were no
material startup expenses incurred.
13
<PAGE>
General and administrative expenses decreased to $3.0 million for the
period ended June 30, 1999 from $4.9 million for the three months ended June
30, 1998. The decrease in general and administrative expenses was primarily
attributable to the reduction of the administrative staff and corporate
overhead of the YSI subsidiary and synergies achieved from the merger.
As a percentage of revenues, general and administrative expenses decreased
to 5.0% for the three months ended June 30, 1999 from 11.6% for the three
months ended June 30, 1998. The decrease in general and administrative
expenses as a percentage of revenue is a result of leveraging these reduced
costs over a larger revenue base.
Interest expense, net of interest income, was $725,000 for the three months
ended June 30, 1999 compared to interest expense, net of interest income of
$487,000 for the three months ended June 30, 1998, a net increase in interest
expense of $238,000. This increase resulted from prior borrowings on the
Company's credit facility to finance the substantial growth of the Company
during late 1998 and early 1999.
For the three months ended June 30, 1999 the Company recognized an income
tax provision of $1,326,000 representing an effective tax rate of 39.5%. For
the three months ended June 30, 1998 the Company recognized a benefit for
income taxes of $2,539,000 representing an effective tax rate of 37.5%. The
reduction in the effective tax rate was a result of expensing certain merger
costs that are non-deductible for tax purposes.
As a result of the foregoing factors, for the three months ended June 30,
1999 the Company had net income of $2,032,000 or $0.18 per share. For the
three months ended June 30, 1998 the Company had a net loss of ($4,231,000) or
($0.39) per share.
Liquidity and Capital Resources
At June 30, 1999 the Company had $1,728,000 of cash and a working capital
deficit of ($12,602,000) as compared to December 31, 1998 when the Company had
$7,639,000 in cash and a working capital deficit of ($6,940,000). The decrease
in the Company's cash is attributable primarily to (i) decreases in net income
during the first half of 1999 caused by the recognition of cash expenses related
to the Company's acquisition of YSI, (ii) net repayments of $2,500,000 on the
Company's revolving credit facility, and (iii) the redemption by the Company of
$1,796,000 in subordinated debt issued by YSI prior to the acquisition of YSI by
the Company. The increase in the Company's working capital deficit was
attributable primarily to the decrease in the Company's cash and the
reclassification in the fourth quarter of 1998 of the YSI's subordinated
debenture obligations from long-term to short-term obligations to reflect the
accelerated redemption dates caused by the "change in control" resulting from
the acquisition of YSI. These changes are further explained as follows:
Net cash used in operating activities was $1,655,000 for the six months
ended June 30, 1999, compared to net cash used in operating activities of
$6,282,000 for the six months ended June 30, 1998. The change is attributed
primarily to:
- A decrease in net income due to the recognition of cash expenses related
to the merger.
- An increase in accounts receivable offset by an increase in accounts
payable, both related to the opening of new facilities.
Net cash of $2,229,000 was used in investing activities during the six
months ended June 30, 1999 as compared to $2,439,000 used in investing
activities in the six months ended June 30, 1998. In the 1999 period such cash
was used principally for:
- Capital expenditures related to the opening of new facilities.
- Leasehold improvements on existing facilities.
- Merger related computer technology and upgrades
- Land Improvement for future development.
In the comparable period for 1998, the principal investing activities of
the Company were:
- Capital expenditures related to the opening of new facilities;
- Offset by the receipt of $4,500,000 from the sale of the Behavioral
Health business owned by YSI.
Net cash of $2,027,000 was used in financing activities for the six months
ended June 30, 1999 as compared to $5,427,000 provided by financing activities
for the six months ended June 30, 1998. During the 1999 period the Company's
primary uses of funds were:
14
<PAGE>
- Net repayments of $2,500,000 on the Company's revolving credit agreement
from working capital funds.
- Repayment of subordinated debt of $1,796,000;
- Offset by the receipt of $1,736,000 from the exercise of stock options
and warrants.
In the comparable period for 1998, the primary source of cash provided by
financing activities was proceeds from the Company's revolving credit agreement
of $4,500,000 and proceeds of $1,572,000 received from the exercise of stock
options and warrants, offset by repayments of short-term borrowings and
long-term debt of $1,181,000.
In order to provide for its anticipated cash needs, the Company previously
established a credit facility with a syndicate of banks led by NationsBank, N.A.
under which the bank syndicate agreed to provide the Company with $20 million in
financing under a "tax retention operating lease" facility (to be used primarily
for the acquisition, development and construction of new facilities) and $10
million in financing under a revolving line of credit facility to be used for
working capital purposes. In August of 1998, the Company initiated an amendment
to its current credit agreement, which was finalized on October 16, 1998, under
which the revolving line of credit portion of the credit facility was increased
on an interim basis by $17,500,000 to $27,500,000 in available credit. On March
31, 1999, the Company finalized a second amendment to its credit agreement with
the NationsBank syndicate pursuant to which the syndicate banks consented to the
merger with YSI, agreed to modify certain financial covenants to give effect to
the merger, the merger-related costs and the adoption of SOP 98-5, and waived
any default arising from the merger. In addition, the termination date of the
$17.5 million temporary increase in the Company's line of credit facility was
extended to June 15, 1999. The $17.5 million temporary increase in the line of
credit facility provided to the Company by the NationsBank syndicate expired on
June 15, 1999.
As of June 30, 1999, the total amount outstanding under the revolving line of
credit facility was $9,000,000 and the total amount outstanding under the tax
retention operating lease facility was $17,111,021.
In anticipation of the expiration of the temporary increase in the NationsBank
facility, and to address the Company's anticipated need for additional credit,
the Company solicited and received a commitment from another financial
institution to provide a credit facility to the Company which would replace the
NationsBank facility and increase the amount of credit available to the Company.
This commitment is subject to, among other things, the satisfactory completion
by the financial institution of its due diligence review of the business of the
Company and the execution of definitive credit agreements. The Company
currently is in the process of negotiating the terms of those credit agreements
and expects to close on this transaction during the third quarter; however, no
assurance can be (or is) given as to when or if this credit facility will be
finalized and made available to the Company. If the Company is unable to
finalize this credit facility or find a suitable replacement facility, then the
liquidity of the Company may be affected adversely.
In the meantime, in order to provide the Company with increased liquidity
pending the replacement of the NationsBank syndicate facility, the Company has
obtained a temporary $2 million working capital line of credit which may be used
by that subsidiary to make intercompany loans to the Company and its other
subsidiaries. This temporary facility expires on September 20, 1999, or such
earlier date on which the NationsBank facility shall be replaced. Management
believes that this facility, coupled with the remaining availability under the
NationsBank facility, likely will be sufficient to meet the Company's short-term
cash needs; however, as noted above, if the Company is unable to finalize a
suitable replacement credit facility for the NationsBank facility, then the
liquidity of the Company may be affected adversely.
In addition, the Company will need to obtain additional debt or equity
financing to fund the redemption of approximately $30.5 million of YSI's 7%
Convertible Subordinated Debentures on March 31, 2000. As noted above, the
holders of the remaining $30,470,000 in principal amount of the debentures have
agreed to extend the redemption date until March 31, 2000, one year after the
merger. (The Company redeemed $1,796,000 of the debentures in June 1999). The
credit facility currently being negotiated by the Company is not expected to
provide the Company with sufficient credit to enable the Company to fund this
redemption obligation. 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, the financial condition and results of operations of the Company may
be materially adversely effected.
The Company continues to make cash investments in the acquisition and
construction of new facilities and the expansion of existing facilities. In
addition, the Company expects to continue to have cash needs as it relates to
financing start-up costs in connection with new contracts. In addition the
Company is continuing to evaluate opportunities, which could require
significant outlays of cash. If such opportunities are pursued the Company
would require additional financing resources. Management believes these
additional resources may be available through alternative financing methods.
15
<PAGE>
Year 2000
The Year 2000 problem is the result of two potential malfunctions that
could have an impact on the Company's operations. First, many computer
systems and software currently in use have been programmed to use two digits
rather than four to identify the year. Consequently, the year 2000 could be
incorrectly interpreted as the year 1900. The second potential problem is
the use of embedded chips in various equipment may also have been designed
using the two digits rather than four to define the applicable year. These
chips are sometimes used in the security and communication equipment used at
certain of the Company's facilities.
The Company has established a Corporate-level Year 2000 Program Management
Plan (PMP), chartered to assure that all of its strategic business units are
Year 2000 compliant by the target date of the third quarter 1999. The
Company's corporate MIS department has conducted an in-depth assessment of
its Year 2000 health. The assessment process has been completed and has
resulted in an inventory of business critical software, hardware, and network
elements that may be affected by the Year 2000 problem.
Analysis of the assessment findings revealed that the Company is
positioned to deal with these Year 2000 issues. Approximately 90% of all
computer systems and software will be in compliance without modification. The
Company's Corporate MIS staff is currently in the process of modifying or
replacing the remaining 10% of its computer systems and software. The
corporate accounting system has been tested and upgraded to be compliant.
The Company has undertaken a program to inventory, assess and correct or
replace equipment that contains embedded chips that will have a direct impact
on inmate security or employee safety.
Under the guidelines of the PMP, the Company will be drawing upon the
expertise, both internally and externally, of technical experts who
specialize in Year 2000 issues. The Company is relying on information that is
being provided by vendors and manufacturers regarding the Y2K compliance
status of their products. There can be no assurances that in all instances
accurate information is being provided and the Company cannot guarantee
the repair, replacement or upgrade of all items of equipment on a timely
basis. Contingency planning will be established and implemented in an effort
to minimize any impact from Y2K related failures of such equipment. Because
some of the Company's physical sites are connected to other entities whose
Y2K readiness efforts it does not control, there will be issues that arise
which are dependent on these entities' efforts. By vigorously pursuing vendor
certifications and warranties, and through comprehensive testing, the Company
will ensure that its network, systems and services continue to be reliable
through the millennium date change and beyond.
The Company estimates to invest approximately $150,000 in connection with
it's PMP and expects to fund such expenses through cash flows from
operations. However there can be no assurances that these estimates will be
achieved and actual results could differ materially from those anticipated.
This entire section "Year 2000 Issue" is hereby designated a "Year 2000
Readiness Disclosure" under and subject to the United States Year 2000
Information and Readiness Disclosure Act (1998).
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's current financing is subject to variable rates of interest
and is therefore exposed to fluctuations in interest rates. The Company's
subordinated debt and mortgage on property accrues interest at fixed rates of
interest.
The table below presents the principal amounts, weighted average interest
rates, fair value and other terms, by year of expected maturity, required to
evaluate the expected cash flows and sensitivity to interest rate changes.
Actual maturities may differ because of prepayment rights.
<TABLE>
<CAPTION>
Expected Maturity Dates
-----------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt 31,523,103 17,404 17,651 17,923 3,022 307,013 31,886,316 31,886,316
---------- ------ ------ ------ ----- ------- ---------- ----------
---------- ------ ------ ------ ----- ------- ---------- ----------
Weighted average interest
rate at June 30, 1999 7.10%
----
----
Variable rate LIBOR debt - - 9,000,000 - - - 9,000,000 9,000,000
---------- ------ --------- ------ ----- ------- ---------- ----------
---------- ------ --------- ------ ----- ------- ---------- ----------
Weighted average interest
rate at June 30, 1999 7.68%
----
----
</TABLE>
17
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings, other than
ordinary routine litigation incidental to its business, which, in
the opinion of the Company are material to the Company, either individually
or in the aggregate.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Stockholders of Correctional Services
Corporation was held on June 28, 1999.
At the meeting, eight (8) proposals were considered and voted
upon with the following results:
(1) To elect seven directors to serve until the next annual
meeting of stockholders;
Results: VOTES CAST VOTES CAST BROKERS
NAME IN FAVOR AGAINST ABSTAIN NON VOTES
------- ---------- ---------- ------- ---------
Stuart M. Gerson 9,166,977 561,963 0 0
Shimmie Horn 9,167,014 561,926 0 0
Bobbie L. Huskey 9,226,605 502,335 0 0
James F. Slattery 9,166,977 561,963 0 0
Aaron Speisman 9,166,014 561,926 0 0
Richard P. Staley 9,167,014 561,926 0 0
Melvin T. Stith 9,226,605 502,335 0 0
(2) To approve the amendments to the Stock Option Plan;
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,291,656 1,208,874 92,987 0
(3) To grant discretionary authority to the Board of Directors to
amend outstanding stock options granted to Ira Cotler, Michael Garretson and
Stuart Gerson, which amendments extend the expiration date of those options
from five to up to ten years from the date of grant and extend
transferability of the options to family members;
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,839,621 655,768 98,128 0
18
<PAGE>
(4) To approve amendments to the 1994 Non-Employee Director Stock
Option Plan;
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,863,885 636,323 93,309 0
(5) To adopt the 1999 Non-Employee Director Stock Option Plan;
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,580,786 920,104 92,627 0
(6) To ratify the 1998 grant of a stock option to James F. Slattery,
the Company's Chairman, Chief Executive Officer and President;
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,978,810 519,241 95,466 0
(7) If proposal 6 is adopted, to grant discretionary authority to the
Board of Directors to amend Mr. Slattery's stock option to extend the
expiration date of such option from five to up to ten years from the date of
grant and extend transferability of the options to family members; and
Results: VOTES CAST VOTES CAST BROKERS
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
4,842,400 653,536 97,581 0
(8) To ratify the reappointment of Grant Thornton, LLP as independent
auditors of the Company for the year ending December 31, 1999.
Results: VOTES CAST VOTES CAST BROKER
IN FAVOR AGAINST ABSTAIN NON VOTES
---------- ---------- ------- ---------
9,511,284 135,732 81,924 0
Item 5. Other Information
Effective as of March 31, 1999, the date on which the Company acquired
Youth Services International, Inc. pursuant to an Agreement and Plan of
Merger dated September 23, 1998, as amended, Bobbie L. Huskey, formerly a
member of the Board of Directors of Youth Services International, Inc., was
appointed a Director of the Company. Ms. Huskey was elected to the Board of
Directors by the shareholders of the Company at its Annual Meeting. (See
Item 4 (1) above.)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
- - ------------------------------------------------------------------------------
Certain statements contained in this conference call are not historical
but are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These include statements regarding the expectations, beliefs,
intentions or strategies regarding the future. The Company intends that all
forward-looking statements be subject to the safe-harbor provisions of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements reflect the Company's views as of the date they are made with
respect to future events and financial performance, but are subject to many
uncertainties and risks which could cause the actual results of the Company
to differ materially from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties and risks
include, but are not limited to: the integration of Youth Services
International; occupancy levels; the renewal of contracts, the ability to
19
<PAGE>
secure new contracts; availability and cost of financing to redeem YSI's
debentures and to expand our business; and public resistance to
privatization. Additional risk factors include those discussed in the Form
10-K as well as those set forth in the Company's joint proxy
statement/prospectus, dated March 4, 1999 and those set forth in reports
filed by the Company from time to time on Forms 10-Q and 8-K. The Company
does not undertake any obligation to update any forward-looking statements.
The preceding discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto included
elsewhere in this quarterly report and with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 and with the Company's
Joint Proxy Statement/ Prospectus dated March 4, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
10.71 Loan Agreement by and between Youth Services International of
Maryland, Inc. and Summit Bank, dated July 28, 1999.
11. Computation of Per Share Earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
The Company filed a current report on Form 8-K on April 15, 1999 and
amended that filing on April 22, 1999. These reports reported under items 2 and
7 the consummation of the merger of Youth Services International, Inc. with a
wholly-owned subsidiary of the Company on March 31, 1999. The report
incorporated by reference the Company's financial statements included in its
March 4, 1999 proxy statement and the amended report includes proforma financial
statements giving effect to the consummation of the merger.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORRECTIONAL SERVICES CORPORATION
Registrant
By: /s/ Ira M. Cotler
--------------------------------------
Ira M. Cotler, Chief Financial Officer
Dated: August 16, 1999
21
LOAN AGREEMENT
by and between
YOUTH SERVICES INTERNATIONAL OF MARYLAND, INC.
and
SUMMIT BANK
July 28, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
I. DEFINITIONS 1
1.1 Defined Terms 1
II. REVOLVING LINE OF CREDIT 6
2.1 Advances 6
2.2 Procedure for Advances 6
2.3 Revolving Credit Note 6
2.4 Interest Rate Under Revolving Credit Note 6
2.5 Payments Under Revolving Credit Note 6
2.6 Use of Proceeds of Advances 7
2.7 Optional Prepayments of Revolving Credit Note 7
2.8 Mandatory Prepayment of Revolving Credit Note 7
2.9 Method of Payment 7
2.10 Business Day 7
2.11 Charge 7
2.12 Commitment Fee 7
2.13 Bank's Counsel Fees 8
III. REPRESENTATIONS AND WARRANTIES 8
3.1 Controlling Shareholders; Subsidiaries 8
3.2 Organization; Power; Qualification 8
3.3 Authorization of Agreement 8
3.4 No Legal Bar 8
3.5 Consent 9
3.6 Compliance With Law 9
3.7 Title to Properties and Assets; Liens 9
3.8 No Default 9
3.9 No Litigation or Judgments 9
3.10 Tax Returns and Payments 10
3.11 No Adverse Changes 10
3.12 ERISA 10
3.13 Federal Reserve Regulations 10
3.14 Solvency 11
3.15 Year 2000 11
3.16 Accuracy and Completeness of Information 11
3.17 No Liability 11
-i-
<PAGE>
IV. COVENANTS 11
4.1 Preservation of Existence 11
4.2 Nature of Business 12
4.3 Compliance with Laws 12
4.4 Maintenance of Properties 12
4.5 Accounting Methods 12
4.6 Payment of Taxes and Claims 12
4.7 Visits and Inspections; Field Examinations 13
4.8 Information Covenants 13
4.9 Accuracy and Completeness of Information 14
4.10 Insurance 14
4.11 Indebtedness 14
4.12 Liens 15
4.13 Sale of Assets; Merger 15
4.14 Guarantees 15
4.15 Issuance of Stock 15
4.16 Further Documentation 15
4.17 Bank's Appointment as Attorney-in-Fact 15
4.18 Performance by Bank of Borrower's Obligations 15
V. CONDITIONS PRECEDENT 16
5.1 Conditions Precedent 16
5.2 Conditions Precedent to Additional Advances 17
VI. EVENTS OF DEFAULT 17
VII. REMEDIES 19
VIII. INDEMNIFICATION 20
8.1 Indemnification 20
IX. MISCELLANEOUS 21
9.1 Notice 21
9.2 No Waiver; Cumulative Remedies 22
9.3 Survival of Agreements 22
9.4 Amendment 22
9.5 Successors and Assigns 22
9.6 Severability 22
9.7 Counterparts 22
9.8 Governing Law; No Third Party Rights 23
9.9 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION 23
-ii-
<PAGE>
THIS LOAN AGREEMENT is dated July 28, 1999 and is by and between
YOUTH SERVICES INTERNATIONAL OF MARYLAND, INC., a Maryland corporation having
its principal executive offices located at 1819 Main Street, Sarasota, Florida
34236 and having its principal place of business at 4000 Cullen Drive,
Sabillasville, Maryland (the "Borrower"), and SUMMIT BANK, a banking
institution of the State of New Jersey having an office located at 250 Moore
Street, Hackensack, New Jersey 07601 (the "Bank").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the Bank to extend certain
credit and make certain loans to the Borrower in an aggregate principal amount
not to exceed $2,000,000, and the Bank is willing to do so, all in accordance
with the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
I. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following words and
terms shall have the following meanings:
"Advances" shall have the meaning ascribed to such term in Section
2.1 hereof.
"Affiliate" shall mean as to any specified Person:
(a) any Person that directly or indirectly through one or
more intermediaries controls or is controlled by or is under common control
with the specified Person;
(b) any Person that is an officer of, partner in, or
trustee of, or serves in a similar capacity with respect to, the specified
Person, or of or in which the specified Person is an officer, partner or
trustee, or with respect to which the specified Person serves in a similar
capacity;
(c) any Person that, directly or indirectly, is the
beneficial owner of any amount of any class of equity securities of the
specified Person or is the beneficial owner of any interest in the capital
profit of the specified Person;
(d) any Person of which the specified Person is directly or
indirectly the beneficial owner of any amount of any class of equity securities
or any Person of which the specified Person is the beneficial owner of any
interest in the capital and profits; or
(e) any member of the immediate family of the specified Person.
-2-
<PAGE>
"Agreement" shall mean this Loan Agreement, together with any and
all exhibits, schedules, amendments or supplements hereto.
"Bank" shall mean Summit Bank, a banking institution of the State
of New Jersey, and its successors and assigns.
"Bank Costs" shall mean all taxes and insurance premiums of every
kind and nature of the Borrower paid by the Bank; all filing, recording,
publication, and search fees incurred in connection with and relating to the
Borrower paid by the Bank; all out-of-pocket costs incurred and sums expended
by the Bank, with or without suit, to correct any default, to make advances of
principal and interest or payments to prior secured parties, to enforce any
right or remedy of the Bank, or in connection with any other provision of any
Loan Document, including without limitation, any out-of-pocket costs incurred
by the Bank with respect to any other lender in connection with the Loan
Documents and the transactions contemplated thereby; out-of-pocket costs of
suit incurred by the Bank in enforcing or defending this Agreement or any other
Loan Document or any portion thereof; all out-of-pocket costs and expenses
including attorneys' fees and expenses incurred by the Bank in preparing,
reviewing, enforcing, amending, modifying, extending administering, defending
or otherwise concerning this Agreement or any other Loan Document or any
portion hereof or thereof; and whether or not suit is brought, all out-of-
pocket costs of arbitration and insolvency proceedings.
"Base Rate" shall mean the rate of interest announced from time to
time by the Bank as its "base rate" or "base lending rate". This rate of
interest is determined from time to time by the Bank as a means of pricing some
loans to its customers and is neither tied to any external rate of interest or
index nor does it necessarily reflect the lowest rate of interest actually
charged by the Bank to any particular class or category of customers of the
Bank.
"Borrower" shall mean Youth Services International of Maryland,
Inc., a Maryland corporation, and its successors and assigns.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which state or federally chartered banks in the State of New
Jersey are authorized to close.
"Code" shall mean the Uniform Commercial Code as in effect in any
applicable jurisdiction.
"CSC" shall mean Correctional Services Corporation, a Delaware
corporation, and its successors and assigns.
"Default" shall mean any of the events specified in Article VI
hereof which, with the passage of time or giving of notice or both, would
constitute an Event of Default.
-2-
<PAGE>
"Event of Default" shall mean any of the events specified in
Article VI hereof, provided that any requirement for notice or lapse of time or
any other condition has been satisfied.
"Facility Contract" shall mean Contract No. C015157/V00P8000046
dated July 3, 1997 between the Borrower and The Maryland Department of Juvenile
Justice pursuant to which the Borrower manages the Victor Cullen Academy,
together with all amendments or supplements thereto or replacements therefor.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time.
"Indebtedness" shall mean (i) all items (other than capital stock,
capital surplus and retained earnings) which in accordance with GAAP would be
included in determining total liabilities as shown on the liability side of a
balance sheet as at the date on which Indebtedness is to be determined and (ii)
whether or not so reflected, all indebtedness, contingent or otherwise and
whether unsecured or secured by any Lien, and all capitalized lease
obligations.
"Lien" shall mean (a) any lien, judicial lien, assignment, charge,
conditional sale or other title retention agreement, lease constituting a
capital lease, hypothecation, mortgage, pledge, or other security interest,
encumbrance or title retention agreement of any kind, whether legal or
equitable, in respect of any property of a Person, or upon the income, rents or
profits therefrom; (b) any arrangement, express or implied, under which any
property of a Person is transferred, sequestered or otherwise identified for
the purpose of subjecting the same to the payment of Indebtedness or
performance of any other obligation in priority to the payment of the general
unsecured creditors of such Person; (c) any Indebtedness for wages or
Indebtedness arising for any other reason which is unpaid more than 30 days
after the same shall have become due and payable and which, if unpaid, might by
Section 507 of the Bankruptcy Code or any other law (whether or not the events
or conditions (other than the existence of such Indebtedness or the initiation
of legal proceedings available generally to unsecured creditors) set forth in
such law have occurred or been satisfied) be given any priority whatsoever over
general unsecured creditors of such Person; and (d) the filing of, or any
agreement to give, any financing statement under the Code or its equivalent in
any jurisdiction.
"Loan Documents" shall collectively mean this Agreement, the
Revolving Credit Note, and all other agreements, documents, instruments and
certificates executed and delivered to the Bank in connection herewith or
therewith, together with all modifications to, extensions of and substitutions
for the foregoing.
"Maximum Amount" shall mean $2,000,000.
"Obligations" shall mean all loans, advances, extensions of credit,
debts, liabilities, obligations, payments, guarantees, covenants and duties
owing by the Borrower to the Bank, of any kind and description, direct or
indirect (including any participation or interest of the Bank in any obligation
-3-
<PAGE>
of the Borrower to any other Person), voluntary or involuntary, absolute or
contingent, due or to become due, now existing or hereafter incurred or
created, whether or not related to or of the same class as the loans described
herein, and further including all Bank Costs, audit fees, commitment fees and
balance deficiency fees.
"Permitted Indebtedness" shall mean:
(i) Indebtedness owing to the Bank;
(ii) Indebtedness incurred in favor of trade creditors and
in the ordinary course of business and not more than 90 days overdue (unless a
longer period is consistent with accepted trade practice, provided that such
longer period shall not exceed 120 days or unless being contested in good faith
and by appropriate proceedings promptly initiated and diligently conducted, but
only as long as foreclosure, distraint, sale or other similar proceedings shall
not have been commenced and such reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been provided therefor);
(iii) Indebtedness in respect of taxes, assessments,
governmental charges, worker's compensation, levies and claims for labor,
materials, supplies and rentals to the extent otherwise permitted under this
Agreement to remain unpaid and undischarged;
(iv) Indebtedness existing on the date hereof and fully
described on Schedule I attached hereto; and
(v) Indebtedness incurred in the ordinary course of
business with respect to the purchase by the Borrower of trucks, cars,
machinery or equipment (including capitalized lease obligations associated with
the acquisition of any such assets), provided that the amount of any such
Indebtedness does not exceed the purchase price of the asset acquired.
"Permitted Liens" shall mean:
(i) any Lien in favor of the Bank;
(ii) Liens that exist on the date hereof and are set forth
on Schedule II attached hereto;
(iii) Liens for taxes, assessments or governmental charges or
levies not yet due or which are delinquent and which are being contested in
good faith and by appropriate proceedings promptly initiated and diligently
conducted for which reserves have been established in accordance with GAAP with
respect thereto and as to which foreclosure, distraint, sale or other similar
proceedings shall not have been commenced;
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(iv) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
which are not overdue or which are being contested in good faith and by
appropriate proceedings promptly initiated and diligently conducted for which
reserves have been established in accordance with GAAP with respect thereto and
as to which foreclosure, distraint, sale or other similar proceedings shall not
have been commenced;
(v) pledges or deposits in connection with workers'
compensation, workers' compensation insurance, unemployment insurance and other
social security legislation;
(vi) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature incurred
in the ordinary course of business;
(vii) Liens created by or existing from any litigation or
legal proceeding; provided that the execution or other enforcement of such
Liens is effectively stayed, the claims secured thereby are being actively
contested in good faith by appropriate proceedings, adequate book reserves have
been established in accordance with GAAP with respect thereto and no Default or
Event of Default arises or is created as a result thereof; and
(viii) Liens arising in connection with the Indebtedness
described in paragraph (v) of the definition of Permitted Indebtedness.
"Person" shall mean any individual, corporation, partnership,
association, limited liability company, joint stock company, trust,
unincorporated organization, joint venture, court or government or political
subdivision or agency thereof.
"Revolving Credit Note" shall have the meaning ascribed to such
term in Section 2.3 hereof.
"Termination Date" shall mean the earlier of (i) September 20, 1999
or (ii) the date of the initial funding under a proposed credit agreement among
CSC, the Borrower and certain other subsidiaries of CSC as guarantors and the
Bank as syndication agent.
1.2 The words "hereof", "herein", and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and section,
subsection, schedule and exhibit references are to this Agreement unless
otherwise specified.
1.3 As used in this Agreement, or any certificate, report or
other document made or delivered pursuant to this Agreement, accounting terms
which are not otherwise defined shall have the meanings given to them under
GAAP.
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II. REVOLVING LINE OF CREDIT
2.1 Advances. From time to time,
during the period from the date hereof until the Termination Date, in the
manner hereinafter set forth, the Borrower may borrow from the Bank and, upon
request of the Borrower and upon the terms and conditions contained herein, the
Bank shall lend to the Borrower a sum or sums (the "Advances") which, when
added to the outstanding principal amount of the Advances theretofore made
pursuant to this Agreement will not exceed in the aggregate at any time the
Maximum Amount.
2.2 Procedure for Advances. Subject to the terms and conditions
set forth herein, the Borrower may borrow, pay or prepay and reborrow from the
Bank under this Agreement. Each Advance shall be made upon prior written (or
telephonic, promptly followed by written) notice from the Borrower to the Bank
specifying the proposed date of such borrowing and the principal amount thereof
(which notice shall be received by the Bank prior to 12:00 p.m. with respect to
any Advance to be made on the same date). On the date of each such Advance,
pon fulfillment of the conditions precedent set forth herein, the Bank shall
make available to the Borrower the amount of such Advance by transferring such
funds (i) to the account maintained at _______________, account number
_________or (ii) in accordance with written instructions provided by the
Borrower and reasonably acceptable to the Bank.
2.3 Revolving Credit Note.
The indebtedness of the Borrower to the Bank with respect to the Advances made
from time to time hereunder shall be evidenced by a revolving credit note made
payable to the order of the Bank, dated the date hereof, signed by the Borrower
and delivered to the Bank (such revolving credit note, together with all
modifications thereto, extensions thereof and substitutions therefor, is herein
referred to as the "Revolving Credit Note").
2.4 Interest Rate Under Revolving Credit Note. The Revolving Credit
Note shall bear interest from the date thereof on the outstanding daily
principal amount thereof, at a fluctuating rate per annum equal to the Base Rate
or, upon the occurrence of an Event of Default, such higher rate as provided in
the Revolving Credit Note. Interest shall be calculated on the basis of a
360-day year for the actual number of days elapsed. The rate of interest on the
Revolving Credit Note shall be adjusted automatically as of the opening of
business on each day on which any change in the Base Rate is announced by the
Bank at its principal office.
2.5 Payments Under Revolving Credit Note. Installments of accrued
interest only under the Revolving Credit Note shall be due and payable monthly,
commencing on August 1, 1999 and continuing on the first Business Day of each
and every month thereafter, with a final installment of accrued interest being
due and payable on the Termination Date. Subject to the Bank's right of
acceleration upon the occurrence of an Event of Default, all principal,
interest and other amounts outstanding under the Revolving Credit Note shall be
immediately due and payable on the Termination Date, without any requirement of
notice or otherwise.
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2.6 Use of Proceeds of Advances. Proceeds of the Advances shall be
utilized by the Borrower for general working capital purposes and to make loans
or distributions, or pay dividends, to CSC for its working capital purposes.
2.7 Optional Prepayments of Revolving Credit Note. The Borrower
shall have the right to prepay, in whole or in part and without premium or
penalty, the Revolving Credit Note at any time and from time to time.
2.8 Mandatory Prepayment of Revolving Credit Note. If at any time
and for whatever reason the aggregate outstanding principal amount of Advances
hereunder exceeds the Maximum Amount, such excess, together with accrued
interest thereon, shall be due and payable by the Borrower immediately upon
demand by the Bank.
2.9 Method of Payment. The Borrower shall make each payment to be
made by it hereunder and under the Revolving Credit Note (including, without
limitation, all principal, interest and optional and mandatory prepayments),
without set-off or counterclaim, not later than 2:00 p.m. (New York City time)
on the day when due in lawful money of the United States of America and in
immediately available funds to the Bank at its principal office set forth on
the first page of this Agreement.
2.10 Business Day. Whenever any payment hereunder or under the
Revolving Credit Note shall be stated as due on
any day other than a Business Day, the maturity of such payment shall be
extended to the next succeeding Business Day and interest and all other fees
shall accrue during such extension.
2.11 Charge. Without in any way limiting any right of offset,
counterclaim or banker's lien which the Bank may
otherwise have at law, the Borrower hereby irrevocably authorizes and directs
the Bank, if any, to charge against the Borrower's account or accounts at the
Bank an amount or amounts as are due and payable to the Bank hereunder or under
the Notes from time to time.
2.12 Commitment Fee. Concurrently herewith, the Borrower is paying
the Bank a commitment fee in the amount of $20,000.
2.13 Bank's Counsel Fees. The Borrower shall on demand reimburse the
Bank for all reasonable legal fees and expenses incurred by the Bank in this
transaction, including but not limited to, drafting and negotiation of the Loan
Documents, review of pre-closing documents and materials required by the Bank,
and performance of customary closing and post-closing tasks.
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III. REPRESENTATIONS AND WARRANTIES.
3. In order to induce the Bank to enter into this Agreement and,
among other things, make the Advances as provided herein, the Borrower hereby
represents, warrants and agrees that:
3.1 Sole Shareholder; Subsidiaries. CSC owns and controls 100% of
each class or series of the Borrower's voting stock. The Borrower has no
subsidiaries and does not conduct business, and has not conducted business
within the five years prior to the date hereof, under any trade name or
alternate or fictitious name.
3.2 Organization; Power; Qualification. The Borrower (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Maryland, (ii) has the full power and authority to own and
operate its properties and assets and to carry on the business now conducted by
it (iii) is qualified or authorized to do business and in good standing in all
jurisdictions wherein the character of the property owned or the nature of the
business conducted by the Borrower makes such qualification or authorization
necessary, except such jurisdictions in which the lack of qualification or
authorization does not materially adversely affect the business, results of
operations or financial condition of the Borrower.
3.3 Authorization of Agreement. The Borrower has full power and
authority to execute, deliver and perform any action which may be necessary or
advisable to carry out the terms of the Loan Documents; and each Loan Document
to which the Borrower is a party has been duly executed and delivered by the
Borrower and is the legal, valid and binding obligation of the Borrower
enforceable in accordance with its terms.
3.4 No Legal Bar. The execution, delivery and performance of the
Loan Documents will not (i) violate any provision of any existing law, statute,
rule, regulation or ordinance (ii) conflict with, result in a breach of or
constitute a default under (a) the certificate of incorporation or by-laws of
the Borrower or (b) any order, judgment, award or decree of any court,
governmental authority, bureau or agency, or (c) any mortgage, lease, material
contract or other material agreement or undertaking to which the Borrower is a
party, and (iii) result in the creation or imposition of any Lien upon or with '
respect to any property or asset now or hereafter acquired by the Borrower.
3.5 Consent. No consent, license,
permit, approval or authorization of, exemption by, notice to, report to, or
registration, filing or declaration with any Person is required in connection
with the execution, delivery, performance or validity of the Loan Documents or
the transactions contemplated thereby.
3.6 Compliance With Law.
The Borrower is not in violation of any applicable law, rule, regulation,
statute, ordinance, or any order, judgment, award or decree of any court,
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governmental authority, bureau or agency, the violation of which might have a
materially adverse effect on the business, assets, liabilities, financial
condition, results of operation or business prospects of the Borrower.
3.7 Title to Properties and Assets; Liens. Except for Permitted
Liens, the Borrower has good, marketable and legal title to, or a valid
leasehold interest in, all of its properties and assets. All of said properties
and assets are in good working order. The Borrower does not own, or have any
interest in, any real property other than the Borrower's leasehold interest in
the Victor Cullen Academy located at 4000 Cullen Drive, Sabillasville, Maryland.
Except as otherwise set forth on Schedule II attached hereto, no financing
statement under the Code which names the Borrower as debtor has been filed in
any jurisdiction, and the Borrower has not signed any such financing statement
or any security agreement authorizing any secured party thereunder to file any
such financing statement in any such jurisdiction.
3.8 No Default. The Borrower is not
in default in any material respect in the payment or performance of the
Facility Contract, or any of its obligations under any mortgage, indenture,
lease, contract or other agreement or undertaking to which it is a party or by
which it or any of its properties or assets may be bound, and no Default or
Event of Default has occurred and is continuing. The Borrower is not in
default under any material order, award or decree of any court, arbitrator, or
governmental authority binding upon or affecting it or by which any of its
properties or assets may be bound or affected, and no such order, award or
decree, if any, materially adversely affects the ability of the Borrower to
carry on its business as presently conducted or to perform its obligations
under the Loan Documents. The Facility Contract, a true, correct and complete
copy of which has been provided to the Bank, is in full force and effect, and
to the knowledge of the Borrower, there is no basis for either party thereto to
terminate the Facility Contract.
3.9 No Litigation or Judgments. Except as set forth on Schedule III
attached hereto, no litigation, investigation or proceeding of or before any
court, arbitrator or governmental authority is currently pending, nor, to the
knowledge of the Borrower, threatened, against the Borrower or any of its
properties and revenues, which, if adversely determined, would materially
adversely affect the business, operations, financial condition or results of
operations of the Borrower. There are no outstanding judgments, orders, awards
or decrees binding upon the Borrower or to which the Borrower or its assets are
subject.
3.10 Tax Returns and Payments. All federal, state and other tax
returns of the Borrower required by law to be filed have been duly filed or
extensions obtained, and all federal, state and other taxes, assessments and
governmental charges or levies upon the Borrower or any of its properties,
income, profits or assets which are due and payable have been paid or provided
for, except such tax returns the non-filing of which, and such taxes the
nonpayment of which, would not have a material adverse effect upon the business,
assets, liabilities, financial condition, results of operation or business
prospects of the Borrower and except for such taxes and assessments which the
Borrower is disputing in good faith and for which the Borrower has established
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adequate reserves on its books for the payment of such disputed taxes or
assessments in accordance with GAAP.
3.11 No Adverse Changes.
Since March 31, 1999, no material adverse change has occurred in the business,
assets, liabilities, financial condition, results of operations or business
prospects of the Borrower, and no event has occurred or failed to occur which
has had or is likely to have a material adverse effect on the business, assets,
liabilities, financial condition, results of operations or business prospects
of the Borrower.
3.12 ERISA.
(a) The Borrower is in compliance in all material respects with
the applicable provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and all regulations issued thereunder; and
(b) No "employee benefit plan", as defined in Section 3 of ERISA,
maintained and administered by the Borrower (but excluding any multi-employer
plan in which either Borrower participates but does not administer), as from
time to time in effect (the "Plans"), nor any trusts created thereunder, nor
any trustee or administrator thereof, has engaged in a "prohibited
transaction," as defined in Section 4975 of the Internal Revenue Code of 1986,
which could subject the Borrower, any Plan or any such trust, or any trustee or
administrator thereof, or any party dealing with any Plan or any such trust to
the tax or penalty on prohibited transactions imposed by said Section 4975.
Neither any of the Plans nor any such trusts have been terminated, nor has
there been any "reportable event," as defined in Section 4043 of ERISA, or
"accumulated funding deficiency." The Borrower has not incurred any liability
to the Pension Benefit Guaranty Corporation.
3.13 Federal Reserve Regulations. The Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any margin stock (within the
meaning of Regulations U and X of the Board of Governors of the Federal Reserve
System). No part of any of the Advances hereunder shall be used to purchase or
carry any such margin stock or to extend credit to others for the purpose of
purchasing or carrying any such margin stock.
3.14 Solvency. The Borrower (i) is solvent and will not be rendered
insolvent by the incurrence of the Obligations, by the execution of this
Agreement, the Revolving Credit Note or
any other Loan Document to which it is a party or signatory, or by any
transactions contemplated hereunder or thereunder, (ii) is able to pay its
debts as they come due and does not intend to incur, or believe that it will
incur, debts beyond its ability to pay such debts as they mature or come due,
(iii) has capital sufficient to carry on its business and any business in which
it intends or is about to engage, and (iv) owns property and assets having a
value in excess of its liabilities and debts.
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3.15 Year 2000. To the best knowledge of the Borrower, the advent of
the year 2000 likely will not have a material adverse effect upon the Borrower's
operations or the performance of its information technology.
3.16 Accuracy and Completeness of Information. All information,
reports and other papers and data furnished to the Bank were, at the time the
same were so furnished, complete and correct in all material respects. No
document furnished or statement made to the Bank in connection with the
negotiation, preparation or execution of the Loan Documents contains or will
contain any untrue statement of fact or omits or will omit to state a material
fact necessary in order to make the statements contained therein not misleading.
No fact is known to the Borrower which has had or may in the future have (so far
as the Borrower can reasonably foresee) a materially adverse effect upon the
Borrower's business, assets, liabilities, condition, financial or otherwise, or
results of operations that has not been set forth in the financial statements
furnished to the Bank or other reports or other papers or data otherwise
disclosed in writing to the Bank.
3.17 No Liability. Neither CSC nor
any of its subsidiaries (other than the Borrower) is liable, by contract,
operation of law or otherwise, for the debts, liabilities or obligations of the
Borrower, except that Youth Services International, Inc. is the guarantor of
all obligations of the Borrower under the Facility Contract.
IV. COVENANTS
4. The Borrower covenants and agrees that until all the
Obligations have been satisfied and paid in full, the Borrower will comply with
the following covenants:
4.1 Preservation of Existence. The Borrower will do or cause to be
done all things necessary to preserve and maintain in full force and effect its
corporate existence and all contracts, rights, licenses, permits, franchises and
trade names which in its judgment are necessary or useful to the proper conduct
of its business and shall qualify and remain qualified as a foreign corporation
and authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification or
authorization, except such jurisdictions in which the lack of qualification or
authorization does not materially adversely affect the business, results of
operations or financial condition of the Borrower.
4.2 Nature of Business.
The Borrower will continue to be engaged in the business of operating, managing
or otherwise rendering services to juvenile facilities for at-risk or troubled
youths.
4.3 Compliance with Laws.
The Borrower will comply with all laws, ordinances, governmental rules and
regulations to which it or its properties or assets are, or might become,
subject (unless the same shall be contested by the Borrower in good faith and
by appropriate proceedings and such contest shall operate to stay any such non-
compliance), the noncompliance with which might materially interfere with the
performance of its obligations under the Loan Documents or with the proper
conduct of its business.
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4.4 Maintenance of Properties. The Borrower will maintain or cause
to be maintained in working order and condition, ordinary wear and tear
excepted, all of its assets and properties which are material to the conduct of
its business, and from time to time, make or cause to be made all necessary
repairs, replacements, additions, betterments and improvements thereto, so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times.
4.5 Accounting Methods.
The Borrower will maintain a system of accounting established and administered
in accordance with GAAP, keep adequate records and books of account in which
complete entries will be made in accordance with GAAP, make provision in its
accounts in accordance with GAAP for reserves for depreciation, obsolescence
and amortization and all other proper reserves and accruals which in accordance
with GAAP should be established.
4.6 Payment of Taxes and Claims. The Borrower will pay and discharge
promptly (i) all taxes, assessments and governmental charges or levies imposed
upon it or upon its income or profits or upon any of its properties or assets
before the same shall become delinquent, (ii) all lawful claims of materialmen,
mechanics, carriers, warehousemen, landlords, and other similar persons for
labor, materials, supplies and rentals which, if unpaid, might by law become a
Lien or charge upon its property and (iii) all of its Indebtedness and other
obligations of whatever nature when due (subject, where applicable, to grace
periods, normal credit terms and to other forbearance in the ordinary course of
business); provided, however, that none of the foregoing need be paid while
being contested in good faith and by appropriate proceedings, so long as
adequate book reserves have been established in accordance with GAAP with
respect thereto and the Borrower's title to, and its right to use, its
properties are not materially adversely affected thereby.
4.7 Visits and Inspections; Field Examinations. The Borrower will
permit the Bank and its agents and representatives, at any time during normal
business hours, to (i) visit and inspect the properties of the Borrower, (ii)
inspect and make extracts from the books and records of the Borrower, and (iii)
discuss with the Borrower's principal officers, employees and independent public
accountants any and all matters with respect to the business, assets,
liabilities, financial condition, results of operations and business prospects
of the Borrower. Without limiting the generality of the foregoing, the Bank
shall be permitted to conduct periodic field examinations of the Borrower and
its business and operations in accordance with the Bank's normal and customary
practices.
4.8 Information Covenants.
The Borrower will furnish the following information to the Bank:
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(i) Copies of Financial Statements and Reports.
(a) From time to time and promptly upon each request
of the Bank, such reports, financial statements and other information regarding
the business, assets, liabilities, financial condition, results of operations
or business prospects of each Borrower as the Bank may request; and
(b) Within 15 days after the Borrower has filed its
federal tax return (or the consolidated return for the Borrower, CSC and some
or all of its other subsidiaries) each year, a copy of such tax return.
(ii) Notice of Litigation and Other Matters. Prompt notice
of:
(1) the commencement of any proceeding or
investigation by or before any governmental body and any action or proceeding
in any court or before any arbitrator against or in any other way relating
adversely to the Borrower or any of its properties, assets or business, which,
if adversely determined, would singly or when aggregated with all other
proceedings, investigations or actions, materially and adversely affect the
business, results of operations or financial condition of the Borrower;
(2) any notice received from any administrative
official or agency relating to any order, ruling, statute or other law or
information which would materially and adversely affect the operations of the
Borrower;
(3) any amendment of the certificate of
incorporation or by-laws of the Borrower;
(4) any material adverse change with respect to the
business, assets, liabilities, financial condition or results of operations of
the Borrower;
(5) any Default or Event of Default or any default
under any other material agreement to which the Borrower is a party or by which
any of its properties may be bound; and
(6) any event which would result in a representation
or warranty of the Borrower contained herein being false or incorrect in any
material respect if made on and as of the date of occurrence of such event.
(iii) ERISA
(a) As soon as possible, and in any event within 30
days after any executive officer of the Borrower knows or has reason to know
that any reportable event (as defined in Section 4043 of ERISA) with respect to
any Plan has occurred, a statement of the chief financial officer setting forth
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details as to such reportable event and the action that the Borrower proposes
to take with respect thereto, together with a copy of the notice of such
reportable event given to the Pension Benefit Guaranty Corporation.
(b) Promptly after receipt thereof, a copy of any
notice the Borrower may receive from the Pension Benefit Guaranty Corporation
relating to the intention of said Corporation to terminate any Plan or to
appoint a trustee to administer any Plan.
4.9 Accuracy and Completeness of Information. The Borrower covenants
that all information, reports, statements, and other papers and data furnished
to the Bank pursuant to any provision or term of any of the Loan Documents shall
be, at the time the same is so furnished, complete and correct in all material
respects.
4.10 Insurance. The Borrower
will maintain with financially sound and reputable insurance companies
insurance policies (i) insuring the Borrower's assets, on a full replacement
cost basis, against loss by fire, explosion, theft and such other casualties as
are usually insured against by companies engaged in the same or similar
businesses and (ii) insuring the Borrower against liability for personal injury
and property damage, such policies to be in such form and in such amounts and
coverage as may be satisfactory to the Bank.
4.11 Indebtedness. The Borrower
will not create, assume, incur, guarantee or in any manner become liable, con-
tingently or otherwise, in respect of any Indebtedness except for Permitted
Indebtedness; provided, however, that the foregoing provision shall not apply
if, concurrently with the incurrence of such Indebtedness, the proceeds thereof
are applied to the complete satisfaction and payment in full of all
Obligations.
4.12 Liens. The Borrower will not
create, assume or incur or cause to be created, assumed or incurred, or permit
to exist, any Liens on its properties or assets except for Permitted Liens.
4.13 Sale of Assets; Merger. The Borrower shall not (a) sell,
transfer, assign, lease or otherwise dispose of (whether in one transaction or a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) or (b) consolidate with or merge into any other
corporation or permit any corporation to merge into it.
4.14 Guarantees. The Borrower shall
not guarantee, endorse, become surety for, or otherwise in any way become or be
responsible for, the obligations of any other Person whether by agreement to
purchase the indebtedness of any other Person, or agreement for the furnishing
of funds, directly or indirectly, for the purpose of payment of indebtedness of
any other Person, other than in connection with Permitted Indebtedness and
endorsements of negotiable instruments for deposit or collection in the
ordinary course of its business.
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4.15 Issuance of Stock.
The Borrower shall not issue to any Person any shares of its capital stock
(whether common or preferred) nor any options, subscriptions, warrants, rights,
contracts, commitments, understandings or agreements to purchase or otherwise
acquire any such shares (including any rights of conversion or exchange)
without the prior written consent of the Bank.
4.16 Further Documentation. At any time and from time to time upon
the Bank's written request and at the Borrower's sole expense, the Borrower will
promptly and duly execute and deliver such further documents and instruments and
do such further acts and things as the Bank may reasonably request in order to
obtain the full benefits of this Agreement and the Loan Documents and the rights
and powers herein and therein granted.
4.17 Bank's Appointment as Attorney-in-Fact. The Borrower hereby
irrevocably constitutes and appoints the Bank, and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Borrower and
in the name of the Borrower or in its own name, from time to time in the Bank's
discretion following the occurrence and continuance of an Event of Default, for
the purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of this Agreement
4.18 Performance by Bank of Borrower's Obligations. If the Borrower
fails to perform or comply with any of its agreements contained herein, and the
Bank, as provided for by the terms of this Agreement, shall perform or comply,
or otherwise cause performance or compliance, with such agreement, the
reasonable expenses of the Bank incurred in connection with such performance or
compliance (together with interest thereon at the rate of 3% in excess of the
Base Rate) shall be payable by the Borrower to the Bank on demand and shall
constitute Obligations secured hereby.
V. CONDITIONS PRECEDENT
5.1 Conditions Precedent.
The obligation of the Bank to make the initial Advance under the Revolving
Credit Note as of the date hereof is subject to the condition precedent that
the Bank shall have received each and every one of the following on or before
the date hereof in form and substance satisfactory to the Bank:
(a) An originally executed copy of this Agreement and each
of the other Loan Documents and all other documents, instruments and
certificates required hereunder and thereunder;
(b) A copy of the certificate of incorporation and bylaws
of the Borrower, certified as a true copy by the Secretary or an Assistant
Secretary of the Borrower;
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(c) A good standing certificate with respect to the
Borrower issued as of a recent date by the Secretary of State of Maryland;
(d) A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying the names and true signatures of the
officers of the Borrower authorized to sign each of the Loan Documents to which
the Borrower is a party;
(e) A copy of the resolutions approved by the Board of
Directors of the Borrower authorizing the execution, delivery and performance
by the Borrower of each of the Loan Documents to which it is a party, certified
as a true copy by the Secretary or an Assistant Secretary of the Borrower;
(f) A written opinion of counsel to the Borrower;
(g) A copy of the Facility Contract certified by the
Borrower; and
(h) Such other documents and information as the Bank shall
reasonably request, in form and substance satisfactory to the Bank, and all
legal matters and documents with respect to the transactions contemplated by
this Agreement shall be satisfactory to counsel for the Bank.
5.2 Conditions Precedent to Additional Advances. The Bank shall have
no obligation to make any additional Advance subsequent to the date hereof
unless each of the following conditions precedent has been either satisfied or
waived prior to or concurrently with the making of such Advance:
(a) Each of the conditions of Section 5.1 has been
satisfied or waived;
(b) Each of the Loan Documents shall be in full force and
effect;
(c) The representations and warranties of the Borrower set
forth herein shall be true and correct as of the date of each Advance as if
made on and as of such date;
(d) No Default or Event of Default has occurred and is
continuing as of the date of each Advance; and
(e) There is and has been no material adverse change in the
Borrower's financial condition, results of operations or otherwise which would,
in the judgment of the Bank, impair the Borrower's ability to repay all or any
portion of the Revolving Credit Note.
Each request for an Advance by the Borrower shall be deemed a
representation and warranty by the Borrower that each of the conditions
precedent set forth in Sections 5.2(a), (b), (c), (d) and (e) hereof has been
-16-
<PAGE>
satisfied, unless the Bank has waived satisfaction of any such condition in
writing prior to or concurrently with the making of such Advances, in which
case the representation and warranty of the Borrower will not be deemed to
extend to that particular condition.
VI. EVENTS OF DEFAULT
6. Each of the following shall constitute an Event of Default,
whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any governmental body:
6.1 The Borrower shall fail to make any payment of principal or
interest under the Revolving Credit Note or hereunder on any date when due.
6.2 If any warranty or representation made by or on behalf of the
Borrower contained herein or in any of the Loan Documents or in any document
furnished in compliance or connection with the Loan Documents is false or
incorrect in any material respect when made.
6.3 (i) The Borrower shall default in the performance or
observance of any covenant or agreement set forth in Sections 4.5 through and
including 4.9 and 4.11 through and including 4.16, or (ii) the Borrower shall
default in the performance or observance of any other covenant or agreement
contained in this Agreement (which is not the subject of Section 6.1 or 6.2
hereof or clause (i) of this Section 6.3) and such default shall continue
unremedied for 30 days after any officer of the Borrower shall have become
aware of such default.
6.4 If any Event of Default (as defined therein) shall occur
under any of the other Loan Documents.
6.5 The Borrower shall (i) default in any payment of the
principal of or interest on any Indebtedness (other than the Indebtedness
evidenced by the Revolving Credit Note) owing to the Bank, (ii) default in any
payment of the principal of or interest on any Indebtedness, which, whether
individually or together with all such other Indebtedness as to which a default
has occurred, equals or exceeds $25,000 (other than the Indebtedness evidenced
by the Revolving Credit Note), beyond the period of grace, if any, provided in
the instrument or agreement under which such Indebtedness was created; or (iii)
default in the observance or performance of any other agreement or condition
relating to any such Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur, the
effect of which default or other event is to cause, or to permit the holder or
holders of such Indebtedness (or a trustee or agent on behalf of such holder or
holders) to cause, with the giving of notice if required, such Indebtedness to
become due prior to its stated maturity and as the result of such default or
event such Indebtedness has been accelerated and become due and payable prior
to its stated maturity.
-17-
<PAGE>
6.6 (i) The Borrower shall commence any case, proceeding or
other action (A) under any existing or future law of any jurisdiction, domestic
or foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, or (B) seeking appointment of a
receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or the Borrower shall make a general assignment
for the benefit of its creditors; or (ii) there shall be commenced against the
Borrower any case, proceeding or other action of a nature referred to in clause
(i) above which (A) results in the entry of an order for relief or any such
adjudication or appointment or (B) remains undismissed, undischarged or
unbonded for a period of 60 days; or (iii) there shall be commenced against the
Borrower any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of its assets, which results in the entry of an order for any
such relief which shall not have been vacated, discharged, or stayed or bonded
pending appeal within 60 days from the entry thereof; or (iv) the Borrower
shall take any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the acts set forth in clauses (i), (ii) or (iii)
above.
6.7 A final judgment shall be entered against the Borrower by any
court for the payment of money which, together with all other outstanding
judgments against the Borrower, exceeds $75,000 in the aggregate, which
judgment is not fully covered by insurance, or a warrant of attachment or
execution or similar process shall be issued or levied against property of the
Borrower, which together with other such property subject to other such
process, exceeds in value $75,000 in the aggregate and, if within 60 days (10
days if such aggregate amount exceeds $150,000) after the entry, issue or levy
thereof, such judgment, warrant or process shall not have been discharged or
stayed pending appeal, or, if within 60 days (10 days if such aggregate amount
exceeds $150,000) after the expiration of any such stay, such judgment, warrant
or process shall not have been discharged.
6.8 (i) A reportable event (as defined in Section 4043 (b) of
Title IV of ERISA) shall have occurred with respect to any "employee benefit
plan" (as defined in Section 3 of ERISA) maintained by the Borrower or to any
multi-employer plan in which the Borrower participates (collectively, the
"Benefit Plans") or any Benefit Plan of the Borrower shall have been
voluntarily terminated as provided in Section 4041(a) of ERISA and the
guaranteed, nonfunded, nonforfeitable benefits (as such terms are defined in
Section 4022 of ERISA) of any such Benefit Plan that has been voluntarily
terminated or with respect to which a reportable event has occurred, when
included in the financial statements of the Borrower on a pro forma basis as a
current liability and as a deduction from net worth, would cause the Borrower
to have a negative net worth; (ii) A trustee shall be appointed by a United
States District Court to administer any Benefit Plan; or (iii) the Pension
Benefit Guaranty Corporation shall institute proceedings to terminate any
Benefit Plan.
-18-
<PAGE>
6.9 If CSC shall cease to own and control 100% of each class of
voting stock of the Borrower, or if the Borrower shall commence any action or
step with respect to, or shall approve any plan of, any liquidation or
dissolution of the Borrower, unless provision is otherwise made for the payment
in full of the Obligations.
6.10 If the Facility Contract is terminated or not renewed for
any reason whatsoever.
VII. REMEDIES
7.1 Upon the occurrence of an Event of Default set forth in
Section 6.6, the Bank shall have no obligation to make any further Advance, and
all amounts outstanding (with accrued interest thereon) and all other amounts
owing under the Revolving Credit Note and the other Loan Documents shall
immediately become due and payable without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived by the Borrower.
7.2 Upon the occurrence of any other Event of Default, the Bank
shall have no obligation to make any further Advance and the Bank may declare
all amounts outstanding (with accrued interest thereon) and all other amounts
owing to it under the Revolving Credit Note and the other Loan Documents to be
due and payable forthwith, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived by the Borrower.
7.3 The Borrower also agrees to pay all Bank Costs incurred with
respect to the collection of any of the Obligations and the enforcement of any
of the Bank's rights hereunder.
7.4 The Borrower hereby waives (i) presentment, demand, protest
or any notice (to the extent permitted by applicable law) of any kind in
connection with this Agreement, except as otherwise provided herein, and (ii)
all rights to seek from any court any bond or security prior to the exercise by
the Bank of any remedy described herein,
VIII. INDEMNIFICATION
8.1 Indemnification. The
Borrower agrees to pay, reimburse, indemnify and hold harmless, the Bank, its
directors, officers, employees, agents and representatives from and against any
and all actions, costs, damages, disbursements, expenses (including attorneys'
fees), judgments, liabilities, losses, obligations, penalties and suits of any
kind or nature whatsoever with respect to:
-19-
<PAGE>
(i) the exercise of any right or remedy granted in any of
the Loan Documents, the collection or enforcement of any of the Obligations and
the proof or allowability of any claim arising under any of the Loan Documents,
whether in any bankruptcy or receivership proceeding or otherwise;
(ii) any claim of third parties, and the prosecution or
defense thereof, arising out of or in any way connected with the development,
preparation, execution or delivery of the Loan Documents or the making of
Advances hereunder;
(iiii) any and all search, recording and filing fees and
taxes, and any and all liabilities with respect thereto, or resulting from any
delay in paying stamp and other taxes, if any, which may be payable or
determined to be payable in connection with the Loan Documents; and
(iv) hazardous discharges, environmental complaints,
environmental problems or conditions, cleanup costs, consultants' fees or the
violation of any federal, state or local environmental law, rule or regulation
at, involving or with respect to any property owned, leased or operated by the
Borrower.
Notwithstanding the foregoing, the Bank shall not be entitled to
any indemnification with respect to its own gross negligence or willful
misconduct.
IX. MISCELLANEOUS
9.1 Notice. All notices and other
communications given to or made upon any party hereto in connection with this
Agreement shall, except as otherwise expressly herein provided, be in writing
and hand delivered, sent by certified mail, return receipt requested or
reputable overnight courier providing a receipt against delivery or faxed (so
long as, concurrently with sending a notice by fax, a party also sends the
notice by any other means permitted hereunder) to the respective parties, as
follows:
Bank: Summit Bank
250 Moore Street, 2nd Floor
Hackensack, New Jersey 07601
Att: Ms. Lisa Cohen
- with a copy to -
Wolff & Samson
5 Becker Farm Road
Roseland, New Jersey 07068
Att: Laurence M. Smith, Esq.
-20-
<PAGE>
Borrower: Youth Services International of
Maryland, Inc.
c/o Correctional Services Corporation
1819 Main Street
Sarasota, Florida 34236
Att: Mr. Ira Cotler
- with a copy to -
Foley & Lardner
100 North Tampa Street
Suite 2700
Tampa, Florida 33602
Att: Mark Wolfson, Esq.
or to such changed address as may be fixed by notice. All such notices and
other communications shall, except as otherwise expressly herein provided, be
effective when received by the party to whom properly addressed, the written
receipt by any employee of any such party constituting sufficient evidence of
such receipt, and in the case of telegraph, when delivered to the telegraph
company with charges prepaid.
9.2 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Bank, any right, power or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and not exclusive of any
rights or remedies provided by law.
9.3 Survival of Agreements. All agreements, representations and
warranties made herein, and in any certificates delivered pursuant hereto, shall
survive the execution and delivery of this Agreement and the Revolving Credit
Note and the making of any Advances.
9.4 Amendment. No modification,
amendment or waiver of any provision of this Agreement or the Revolving Credit
Note, nor consent to any departure therefrom by the Borrower, shall in any
event be effective unless the same shall be in writing and signed by the party
granting such modification, amendment or waiver, and then such waiver or
consent shall be effective only in the specific instance and for the purpose
for which given.
9.5 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Borrower, the Bank, all future holders of the
Revolving Credit Note and their respective successors and assigns, except that
the Borrower may not assign or transfer any of its rights under this Agreement,
the Revolving Credit Note or the other Loan Documents without the prior written
-21-
<PAGE>
consent of the Bank, which may be granted or withheld by the Bank in its sole
and absolute discretion. This Agreement, the Revolving Credit Note and the
other Loan Documents may be endorsed, assigned or transferred in whole or in
part by the Bank, and any such holder or assignee of the same shall succeed to
and be possessed of the rights and powers of the Bank under all of the same to
the extent transferred and assigned. The Bank may grant participations in all
or any portion of its interest in the indebtedness evidenced by the Revolving
Credit Note, and in such event the Borrower shall continue to make payments due
under the Revolving Credit Note to the Bank and the Bank shall have the sole
responsibility of allocating and forwarding such payments in the appropriate
manner and amounts.
9.6 Severability. In case any one
or more of the provisions contained in this Agreement or the Revolving Credit
Note should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein and
therein shall not in any way be affected or impaired thereby.
9.7 Counterparts. This Agreement
may be executed by the parties hereto in any number of separate counterparts
and all such counterparts taken together shall constitute one and the same
original instrument.
9.8 Governing Law; No Third Party Rights. This Agreement and the
Revolving Credit Note and
the rights and obligations of the parties hereunder and thereunder shall be
governed by and construed and interpreted in accordance with the laws of the
State of New Jersey, without regard to conflict of laws principles thereof.
This Agreement is solely for the benefit of the parties hereto and their
respective successors and assigns, and no other person shall have any right,
benefit, priority or interest in, under or because of the existence of, this
Agreement.
9.9 WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION. AFTER CONSULTATION
WITH COUNSEL, THE BORROWER AND THE BANK HEREBY WAIVE THEIR RIGHT TO A TRIAL BY
JURY IN CONNECTION WITH ANY AND ALL LITIGATION INVOLVING THE SUBJECT MATTER OF
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THE BORROWER AND THE BANK
HEREBY CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE NEW JERSEY SUPERIOR
COURT AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY IN ANY
MATTER ARISING HEREUNDER.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
-22-
<PAGE>
YOUTH SERVICES INTERNATIONAL
OF MARYLAND, INC.
By: /s/ James F. Slattery
James Slattery
President and CEO
SUMMIT BANK
By: /s/ Lisa Cohen
Lisa Cohen
Vice President
-23-
<PAGE>
STATE OF :
ss.
COUNTY OF :
BE IT REMEMBERED, that on this day of July, 1999, before me, the
subscriber, personally appeared James Slattery who I am satisfied is the
President and CEO of YOUTH SERVICES INTERNATIONAL OF MARYLAND, INC., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
-----------------------------------
STATE OF :
ss.
COUNTY OF :
BE IT REMEMBERED, that on this day of July, 1999, before me, the
subscriber, personally appeared Lisa Cohen, who I am satisfied is the Vice
President of SUMMIT BANK, the corporation named in and subscribing to the fore-
going instrument; and she, being by me duly sworn, acknowledged, deposed and
said that such instrument was made by such corporation, and that she signed and
delivered the same as such officer of such corporation as its voluntary act and
deed for the uses and purposes therein expressed.
------------------------------
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS No. 128:
Six Months Ended June 30, 1999
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Six Months Ended June 30, 1998
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Three Months Ended June 30, 1999
Numerator:
Net Income $2,032
------
------
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,176
Effect of dilutive securities - stock options
and warrants 42
------
Denominator for diluted earnings per share 11,218
------
------
Three Months Ended June 30, 1998
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914670
<NAME> Correctional Services Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,728
<SECURITIES> 0
<RECEIVABLES> 41,138
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,356
<PP&E> 63,443
<DEPRECIATION> 13,180
<TOTAL-ASSETS> 119,000
<CURRENT-LIABILITIES> 62,958
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 81,286
<TOTAL-LIABILITY-AND-EQUITY> 119,000
<SALES> 119,813
<TOTAL-REVENUES> 119,813
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 106,815
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9042)
<INCOME-TAX> 1,649
<INCOME-CONTINUING> (7,393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,393)
<EPS-BASIC> ($0.67)
<EPS-DILUTED> ($0.67)
</TABLE>
