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
March 31, 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 March 31, 1999: 11,176,475
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)
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operation (unaudited)
- for the Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows (unaudited)
- for the Three Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 9
Item 3. Quantative and Qualitative Disclosures About Market Risk 14
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands, except share data)
<CAPTION>
ASSETS March 31, December 31,
1999 1998
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,727 $ 7,639
Restricted cash 167 157
Accounts receivable, net 35,999 37,924
Receivable from sale of equipment and
leasehold improvements 879 994
Deferred tax asset 2,716 2,071
Prepaid expenses and other current assets 4,470 5,421
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Total current assets 50,958 54,206
PROPERTY, EQUIPMENT AND IMPROVEMENTS,
AT COST, NET 50,198 53,120
OTHER ASSETS
Deferred tax asset 11,394 9,162
Other 7,241 9,847
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$119,791 $126,335
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 31,801 $ 27,823
Subordinated promissory notes 1,036 1,101
Current portion of long-term obligations 20 22
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Total current liabilities 32,857 28,946
LONG-TERM SENIOR DEBT 9,000 11,500
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 32,200
LONG-TERM OBLIGATIONS 363 364
LONG-TERM PORTION OF FACILITY LOSS RESERVES 1,033 1,299
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Total liabilities 75,453 74,309
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 1,000,000
shares authorized, none issued an 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 (37,060) (27,635)
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Total stockholders' equity 44,338 52,026
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$119,791 $126,335
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The accompanying notes are an integral part of these statements.
3
</TABLE>
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended March 31,
---------------------------
<S> <C> <C>
1999 1998
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Revenues $58,934 $42,221
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Facility expenses
Operating 52,329 33,961
Startup costs 729 327
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53,058 34,288
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Contribution from operations 5,876 7,933
Other operating expenses:
General and administrative 3,708 4,328
Merger costs and related restructuring charges 13,813 -
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Operating income (loss) (11,645) 3,605
Interest and other expense, net (756) (585)
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Income (loss) before income taxes and cumulative
effect of change in accounting principle (12,401) 3,020
Income tax (expense) benefit 2,976 (1,104)
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Income (loss) before cumulative effect of change
in accounting principle (9,425) 1,916
Cumulative effect of change in accounting
principle, net of tax of $3,180 - (4,863)
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Net loss $(9,425) $(2,947)
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Basic earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $(0.86) $0.18
Cumulative effect of change in accounting
principle - (0.45)
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Net loss per share $(0.86) $(0.27)
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Diluted earnings (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $(0.86) $0.17
Cumulative effect of change in accounting
principle - (0.43)
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Net loss per share $(0.86) $(0.26)
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Number of shares used to compute EPS:
Basic 11,018 10,766
Diluted 11,018 11,303
The accompanying notes are an integral part of these statements.
4
</TABLE>
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(9,425) $(2,947)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 1,526 1,331
Stock granted as compensation - 14
Merger-related asset write-downs 5,245 -
Cumulative effect of a change in
accounting principle - 4,863
Deferred income tax benefit (2,877) (208)
Loss on sale of fixed assets - 15
Changes in operating assets and liabilities:
Accounts receivable 1,925 (2,006)
Prepaid expenses and other current assets 951 (491)
Accounts payable and accrued liabilities 3,891 (435)
Reserve for Fort Worth and NYCC facilities
loss reserves (179) (230)
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Net cash provided by (used in) operating
activities: 1,057 (94)
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Cash flows from investing activities:
Capital expenditures (1,289) (4,138)
Proceeds from sale of fixed assets - 17
Proceeds from sale of Behavioral Health business - 4,500
(Increase) decrease in restricted cash - maintenance
fund (10) 17
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Net cash (used in) provided by investing
activities: (1,299) 396
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Cash flows from financing activities:
Repayments on senior debt, net (2,500) -
Repayment on short-term and long-term obligations (68) (1,029)
Proceeds from sale of equipment and leasehold
improvements 115 115
Net proceeds from exercise of stock options
and warrants 1,737 564
Long-term portion of prepaid lease 100 -
Other assets (54) (114)
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Net cash used in financing activities: (670) (464)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (912) (162)
Cash and cash equivalents at beginning of period 7,639 13,231
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Cash and cash equivalents at end of period $ 6,727 $13,069
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Supplemental disclosures of cash flows information:
Cash paid (refunded) during the period for:
Interest $1,243 $1,366
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Income taxes, net $145 $7
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The accompanying notes are an integral part of these statements.
5
</TABLE>
<PAGE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1999, and for the three months ended March
31, 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 months ended March 31, 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 March 31, 1998 Revenue Net Income
- --------------------------------- ------- ----------
CSC, as previously reported, before the effect
of change in accounting principle (see Note 3) $19,110 $1,008
Effect of change in accounting principle - (5,182)
YSI 23,111 1,227
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Combined $42,221 $(2,947)
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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.
6
<PAGE>
Merger costs consisted primarily of fees for investment bankers, attorneys,
accountants, financial advisors and printing and other direct costs.
Restructuring charges include severance, change in control payments made to
certain former officers of YSI and costs associated with exiting certain
operating and administrative activities. 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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Restructuring activities primarily relate to 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 costs.
In addition, in connection with the merger, the Company assumed $32,200,000 of
7% Convertible Subordinated Debentures originally issued during the year ended
June 30, 1996 by YSI. Due to certain provisions in the indenture, the change of
control as a result of the merger enables the holder 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.) A total of $1,700,000
representing the balance will be repaid from working capital during the second
quarter of 1999.
NOTE 3 - DEFERRED DEVELOPMENT AND STARTUP COSTS
In the fourth quarter of 1998 the Company elected to early adopt 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 first quarter ended March 31, 1998
operating expenses were restated to reflect the reversal of $385,319 of
amortization expense. In addition, $910,982 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. The reduction in the effective tax rate for the three
months ended March 31, 1999 was a result of expensing certain merger costs that
are non-deductible for tax purposes.
7
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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:
Three Months Ended March 31, 1999
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Three Months Ended March 31, 1998
Numerator:
Net Income $(2,947)
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-------
Denominator:
Basic earnings per share:
Weighted average shares outstanding 10,766
Effect of dilutive securities - stock
options and warrants 537
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Denominator for diluted earnings per share 11,303
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<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 43 facilities and approximately 5,800 juveniles in
its care. In addition, the Company is a leading developer and operator of adult
correctional facilities operating 20 facilities representing 7,241 beds. On a
combined basis, as of March 31, 1999, the Company provided services in 22 states
and Puerto Rico, representing approximately 13,000 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 government agency
contracts, 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 a 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 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 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 March 26, 1999, the Company through its YSI subsidiary was re-awarded the
contract to operate the 350 bed Charles H. Hickey Jr. School located in
Baltimore, Maryland.
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 effective May 1, 1999.
9
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Results of Operations
<TABLE>
The following table sets forth-certain operating data as a percentage of total
revenues:
<CAPTION>
Percentage of Total Revenues
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
Revenues 100.0% 100.0%
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Expenses:
Operating 88.8% 80.4%
Startup costs 1.2% 0.8%
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90.0% 81.2%
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Contribution from operations 10.0% 18.8%
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Other operating expenses:
General and administrative 6.3% 10.3%
Merger costs and related restructuring
charges 23.4% 0.0%
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29.7% 10.3%
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Operating income -19.7% 8.5%
Interest income (expense), net -1.3% -1.4%
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Income (loss) before income taxes and
cumulative effect of change in accounting -21.0% 7.1%
Income tax (provision) benefit 5.0% -2.6%
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Income (loss) before cumulative effect of
change in accounting -16.0% 4.5%
Cumulative effect of change in accounting,
net of tax - 11.5%
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Net income (loss) -16.0% -7.0%
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Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenue increased by $16.7 million or 40% for the three months ended March 31,
1999 to $58.9 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 $17.7 million generated from the opening of 12 juvenile and
5 adult facilities.
- A net increase of $.8 million generated from per diem rate and occupancy
level increases in existing facilities.
- A decrease of $1.8 million from the sale of the behavioral health business
and the discontinuance of the Timberline Academy and the College Station
programs.
Operating expenses increased $18.8 million or 55% for the three months ended
March 31, 1999 to $53.1 million compared to the same period in 1998 due to the
opening of the 17 new facilities mentioned above.
As a percentage of revenues, operating expenses increased to 88.8% for the three
months ended March 31, 1999 from 80.4% for the three months ended March 31,
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.
10
<PAGE>
Startup costs were $729,542 for the three months ended March 31, 1999 compared
to $327,349 for the three months ended March 31, 1998. Startup costs for the
three months ended March 31, 1999 related to the startup of the following
facilities:
- South Fulton, Georgia facility
- Crowley, Colorado (300 bed addition)
General and administrative expenses decreased to $3.7 million for the period
ended March 31, 1999 from $4.3 million for the three months ended March 31,
1998. The decrease in general and administrative expenses was primarily
attributable to the reduction of the administrative staff of the YSI subsidiary.
As a percentage of revenues, general and administrative expenses decreased to
6.3% for the three months ended March 31, 1999 from 10.25% for the three months
ended March 31, 1998. The decrease in general and administrative expenses as a
percentage of revenue is a result of leveraging these costs over a larger
revenue base.
Interest expense, net of interest income, was $756,277 for the three months
ended March 31, 1999 compared to interest expense, net of interest income of
$584,522 for the three months ended March 31, 1998, a net increase in interest
expense of $171,755. This increase resulted from borrowings on the Company's
credit facility to finance the growth of the Company.
For the three months ended March 31, 1999 the Company recognized an income tax
benefit of $2,976,331 representing an effective tax rate of 24%. For the three
months ended March 31, 1998 the Company recognized a provision for income taxes
of $1,103,529 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
39.5%. 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 March 31, 1999
the Company had a net loss of ($9,425,051) or ($0.86). For the three months
ended March 31, 1998 the Company had net income of $1,916,618 and a net loss of
($2,946,762) or $0.18 and ($0.45) per share before and after the cumulative
effect of change in accounting principle, respectively.
Liquidity and Capital Resources
At March 31, 1999 the Company had $6,727,000 of cash and working capital of
$18,101,000. Net cash provided by operating activities was $1,057,000 for the
three months ended March 31, 1999 compared to net cash used in operating
activities of $94,000 for the three months ended March 31, 1998. The change was
attributed primarily to:
- A decrease in net income due to the recognition of cash expenses related to
the merger.
- An increase in accounts receivable, prepaid expenses and offset by an
increase in accounts payable related to the opening of new facilities.
Net cash of $1,299,000 was used in investing activities during the three months
ended March 31, 1999 as compared to $396,000 being provided in the three months
ended March 31, 1998. In the 1999 period such cash was used principally for:
- Capital expenditures related to the opening of new facilities.
- The purchase of land and land improvements 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;
11
<PAGE>
- Offset by the receipt of $4,500,000 from the sale of the Behavioral Health
business owned by YSI.
Net cash of $672,000 was used in financing activities for the three months ended
March 31, 1999 as compared to $464,000 used in financing activities for the
three months ended March 31, 1998. During the 1999 period the Company's primary
uses of funds were net repayments of $2,500,000 on the Company's revolving
credit agreement offset by proceeds of $1,736,000 from the exercise of stock
options and warrants.
In the comparable period for 1998 the primary uses of funds were net repayments
of $1,029,000 on the Company's revolving credit agreement offset by proceeds of
$564,000 received from the exercise of stock options and warrants.
In August of 1998 the Company initiated an amendment to its current credit
agreement with a syndicate of banks led by NationsBank N.A. Under the
amendment, which was finalized on October 16, 1998, the Company received an
additional $17,500,000 temporary increase in its credit facility.
On March 31, 1999 the Company finalized a second amendment to its credit
agreement with a syndicate of banks led by Nationsbank N.A. Under the
amendment, the Company received, among other items, the consent to merge with
YSI. The banks also 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 credit facility was extended
to June 15, 1999. Upon receipt of junior capital the increase in the credit
facility will become permanent. If the Company is unable to:
- extend the temporary increase;
- amend the credit facility to provide an increased borrowing base; or
- obtain alternative financing;
then it may have to curtail its growth relating to the construction and
operation of potential new facilities. As of March 31, 1999 the total amount
outstanding on the revolver was $9,000,000 and the total amount outstanding on
the operating lease facility was $16,922,000.
In addition, the Company would be required to repay any balance outstanding at
the time of termination of the increased credit facility. Failure to do so would
enable NationsBank to exercise their rights and remedies under the loan
agreement. Any such action could have a material adverse effect on the financial
condition and results of operations of the Company. There can be no assurance
that the Company will be able to issue the necessary junior capital and receive
the subsequent increase in its credit facility.
As part of its long term capital plan, the Company will need to obtain
additional debt or equity financing to fund the redemption of up to $32.2
million of YSI's 7% Convertible Subordinated Debentures due 2006 within one year
after the merger. The holders of approximately $1.7 million of the debentures
are entitled to redemption of their debentures within 90 days after the merger
and the holders of the debentures representing approximately $30.5 million
balance have agreed to extend the redemption date for their redemption's until
one year after the merger. We cannot assure that we will be able to obtain
financing to fund the redemption obligations or, if able, that we will do so on
favorable terms. If we cannot fund this redemption obligation through new
financing, our financial viability may be impaired.
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.
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<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 that 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 estimated 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).
13
<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 represents 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>
<TABLE>
<CAPTION>
Expected Maturity Dates
-----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Therafter Total Fair Value
--------- ----- ----- ----- ----- --------- ----- ----------
Fixed rate debt 1,103,455 2,290 2,524 2,783 3,069 308,665 1,422,786 1,422,786
--------- ----- ----- ----- ----- ------- --------- ---------
--------- ----- ----- ----- ----- ------- --------- ---------
Weighted average interest
rate at March 31, 1999 10.00%
------
------
Variable rate LIBOR debt - - 9,000,000 - - - 9,000,000 9,000,000
----- ----- --------- ---- ----- ----- --------- ---------
----- ----- --------- ---- ----- ----- --------- ---------
Weighted average interest
rate at March 31, 1999 8.32%
-----
-----
</TABLE>
14
<PAGE>
PART II. - - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
CSC held a special meeting of shareholders on March 31, 1999 at
which time the shareholders of CSC voted to approve the merger of Palm
Merger Corp., a subsidiary of CSC, with and into Youth Services
International, Inc. ("YSI") pursuant to the agreement and plan of
merger, dated as of September 23, 1998, and as amended as of
January 12, 1999 and March 2, 1999 among CSC, Palm Merger Corp. and YSI.
There was a total of 4,672,509 shares voted for the merger, 27,683 shares
voted against the merger and 11,357 abstentions.
Item 5. Other Information
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This document contains forward looking statements involving risks and
uncertainties. Actual results could differ materially from those projected due
to factors which may include population fluctuations, acquisition risks, market
conditions, government funding and availability of financing. These and other
risk factors are outlined in the reports filed by the Company with the
Securities and Exchange Commission.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
10.47.2 Amendment No. 1 dated May 3, 1999 to Employment Agreement
between CSC and Ira M. Cotler of July 9, 1997.
10.47.3 Change in Control Agreement between CSC and Ira M. Cotler,
dated May 3, 1999.
10.60.2 Amendment No. 2 to credit facility with NationsBank and a
syndicate of banks, dated March 31, 1999.
11. Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on January 21, 1999 relating to Amendment No. 1 to the
Agreement and Plan of Merger dated as of September 23, 1998, as amended,
among YSI, CSC and Palm Merger Corp.
Form 8-K filed on March 3, 1999 relating to an Amendment No. 2 to the
Agreement and Plan of Merger dated as of September 23, 1998, as amended,
among YSI, CSC and Palm Merger Corp.
16
<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: May 17, 1999
17
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT DATED JULY 9, 1997 BETWEEN
CORRECTIONAL SERVICES CORPORATION AND IRA M. COTLER
Paragraph 3 of the Agreement shall be deleted and replaced as follows:
As full compensation for all services to be rendered by the Executive
to the Company pursuant to the terms of this Agreement, the Company shall pay
you a base salary (the "Base Salary") as follows: (a) Two hundred Thousand
($200,000) dollars per annum until February 26, 2000 (b) Two hundred ten
thousand ($210,000) dollars until February 26, 2001 and (c) an amount to be
renegotiated by the parties, but in no event less than Two hundred and ten
thousand ($210,000) dollars until February 26, 2002.
Paragraph 4 of the Agreement shall amended whereas the first two sentences
shall be deleted and replaced as follows:
For each year in which you are employed by the Company, you shall be
entitled to receive a bonus equal to the product of 0.004 (four tenths of one
percent) times the Company's earnings before interest, taxes, depreciation,
amortization and start-up, which shall not exceed $100,000 per annum ("Bonus
Cap").
Paragraph 9 shall be deleted and replaced as follows:
You shall be entitled to terminate your employment with the Company
and to receive in a lump sum payment three times your Base Salary
plus Bonus at the Bonus Cap ($100,000 per annum or the pro rata
amount) if you are required to relocate to a location not within 50 miles of
your present office, except for required travel on the Company's business to
an extent substantially consistent with your present travel obligations.
Paragraph 10 section (a) of the agreement shall be modified as follows:
The first three words of the second sentence shall be modified to read
"For the three year".
CORRECTIONAL SERVICES
CORPORATION IRA M. COTLER
By: /s/ James F. Slattery By: /s/ Ira M. Cotler
Title: President Title: Executive Vice President
Date: May 3, 1999 Date: May 3, 1999
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (this "Agreement") is made this
3rd day of May, 1999, by and between CORRECTIONAL SERVICES CORPORATION, a
Delaware corporation ("CSC") and Ira M. Cotler (thereinafter the
"Employee").
WHEREAS, Correctional Services Corporation is engaged in the
business of providing rehabilitative services for adults, youths and
criminally at risk youths;
WHEREAS, the Employee has certain expertise and acumen and is
entering into an Amended Employment Agreement of same date herewith
providing for the continued employment of the Employee by CSC (the
"Employment Agreement"); and
WHEREAS, CSC and the Employee desire to enter into this Agreement
to establish certain rights and obligations of the parties in the event
the employment relationship ends under the circumstances described
herein;
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained herein, and in the Employment Agreement, the parties
hereto agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth opposite such terms. All other
capitalized terms used in this Agreement shall have the meanings given
them in this Agreement, or if no definition is provided herein, the
meanings given such terms in thc Employment Agreement.
(a) Cause. "Cause" shall have the meaning given such term in
the Employee's Employment Agreement.
(b) Change in Control. A "Change in Control" (i) shall mean a
change in control of the Company of a nature that would be required to be
reported in response to item 6(e) of schedule 14A of regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") whether or not the Company is in fact required to comply
therewith at the time of such Change in Control, and (ii) without
limitation by the foregoing, shall be deemed to have occurred if:
(A) for any period of two consecutive years beginning on any date
from and after the date hereof, if the Board of Directors at any time
during or at the end of such period is not comprised so that a majority of the
directors are either (i) individuals who constitute the Board of Directors at
the beginning of such period or (ii) individuals who joined the board;
(B) the stockholders of the Company approve a
merger, share exchange or consolidation of the Company with or into any
other corporation wherein immediately following such merger, the
shareholders of the Company prior to the transaction own less than 51% of
the outstanding voting stock of the Company (if it is the survivor of the
transaction) or the surviving entity; or
(C) the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's
assets.
(c) Company. "Company" shall mean Correctional Services
Corporation and any successor, whether direct or indirect, by purchase,
merger, share exchange, consolidation or otherwise, whether by operation
of law or otherwise, to all or substantially all of the business and/or
assets of the Company.
(d) Date of Termination. The "Date of Termination" shall be
the date specified in the written Notice of Termination which in no event
shall be later than 60 days after the date the written Notice of
Termination is given.
(e) Notice of Termination. "Notice of Termination" shall mean
a written notice from the Employee who shall have the right, at his sole
option, to give such notice upon a Change of Control. Notwithstanding
any provision in the Employment Agreement to the contrary, such Notice of
Termination shall not be deemed a breach by Employee of the Employment
Agreement or any provision thereof.
2. Severance Resulting From Change in Control of the Company. In
the event the Employee provides a Notice of Termination following a
Change in Control or if the Company terminates Employee in contemplation
of, upon the occurrence of or following a Change in Control without
Cause, the Employee shall be provided with the following benefits:
(a) The Company shall pay the Employee his full base salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given, plus all other amounts and benefits to which the
Employee is entitled under his Employment Agreement or pursuant to any
plan of the Company in which the Employee is participating at the time of
termination, including any compensation or bonus plan, payable at the
time such payments or benefits are due, except as otherwise provided
below.
(b) In lieu of any further salary payments to the Employee for
periods subsequent to the Date of Termination, the Company shall pay as
severance pay to the Employee a lump sum severance payment equal to the
sum of (A) 2.99 times the Employee's annual base salary in effect
immediately prior to the occurrence of the circumstance giving rise to
the Notice of Termination given in respect thereof and (B) $600,000 as
payment for the employee's agreement to extend his agreement not to
compete under his employment agreement to three years following the date
of termination.
(c) The Company shall pay to the Employee any deferred
compensation allocated or credited to the Employee or his account as of
the date of termination.
(d) If the payments provided under Subsections (b) and/or (c)
above (the "Contract Payments") or any other portion of the Total Payments(as
defined below) will be subject to the tax imposed by Section 4999 of the Code
(the "Excise Tax"), the Company shall pay to the Employee at the time
specified in subsection (f) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Employee, after deduction
of any Excise Tax on the Contract Payments and such other Total Payments and
any federal and state and local income tax and Excise Tax upon the payment
provided for by this clause, shall be equal to the Contract Payments and such
other Total Payments. For purposes of determining whether any of the payments
will be subject to the Excise Tax and the amount of such Excise Tax,(i) any
other payments or benefits received or to be received by the Employee in
connection with a Change in Control of the Company or the Employee's
termination of employment (whether payable pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, its
successors, any person whose actions result in a Change in Control of the
Company or any corporation affiliated (or which, as a result of the completion
of a transaction causing a Change in Control of the Company, will become
affiliated) with the Company within the meaning of Section 1504 of the Code)
(together with the Contract Payments, the "Total Payments") shall be treated
as "parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section 280G(b)(1)
shall be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company's independent auditors and acceptable to the
Employee the Total Payments (in whole or in part) do not constitute parachute
payments, or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the meaning of
Section 280G(b)(4)(B) of the Code either to the extent such reasonable
compensation is in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii)
the amount of the Total Payments that shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the Total
Payments or (B)the amount of excess parachute payments within the meaning of
Section 280G(b)(1) (after applying clause (i), above), and (iii) the value of
any non-cash benefits or any deferred payment or benefit as determined by the
Company's independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of the
Gross-Up Payment, the Employee shall be deemed to pay federal income taxes at
the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at
the highest marginal rate of taxation in the state and locality of the
employee's residence on the Date of Termination, net of the maximum reduction
in federal income taxes which could be obtained from deduction of such state
and local taxes. In the event that the Excise Tax is subsequently determined
to be less than the amount taken into account hereunder at the time of
termination of the Employee's employment, the employee shall repay to the
Company at the time that the amount of such reduction in Excise Tax is finally
determined the portion of the Gross-Up Payment attributable to such reduction
(plus the portion of the Gross-Up Payment attributable to the Excise Tax and
federal and state and local income tax imposed on the Gross-Up Payment being
repaid by the Employee if such repayment results in a reduction in Excise Tax
and/or a federal and state and local income tax deduction) plus interest on
the amount of such repayment at the rate provided in Section 1274(d) of the
Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Employee's
employment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest payable with respect to such excess) at the time that the amount of
such excess is finally determined.
(e) The payments provided for in Subsections (b), (c), and
(d) above, shall be made not later than the fifth day following the
Date of Termination, provided, however, that if the amounts of such
payments cannot be finally determined on or before such day, the Company
shall pay to the Employee on such day an estimate, as determined in
good faith by the Company, of the minimum amount of such payments and
shall pay the remainder of such payments as soon as the amount thereof
can be determined but in no event later than the thirtieth day after the
Date of Termination.
(f) Any options held by the Employee to purchase any
securities of the Company which are not exercisable as of the Date of
Termination, shall become fully vested and exercisable as of the Date of
Termination. All other terms of the options shall remain in full force
and effect.
(g) The Company shall arrange to provide and pay the Employee
with life, disability, accident and health insurance benefits
substantially similar to those that the Employee was receiving
immediately prior to the Notice of Termination, for the period beginning
on the Date of Termination and ending on the earlier of (A) the end of
the 36th month after the Date of Termination or (B) the date the
Employee becomes eligible for such benefits under any plan offered by an
employer with which Employee is employed on a full-time basis.
(h) In addition to all other amounts payable to the Employee,
the Employee shall be entitled to receive all benefits payable to the
Employee under any applicable retirement, thrift, and incentive plans as
well as any other plan or agreement sponsored by the Company or any of
its subsidiaries relating to retirement benefits.
2. Notice of Termination. Any purported termination of the
Employee's employment by the Company or by the Employee shall be
communicated by written Notice of Termination to the other party hereto
in accordance with Section 7 of this Agreement.
3. No Mitigation. The Employee shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owed by
the Employee to the Company, or otherwise except as specifically provided
in Subsection l(h).
4. Termination in Contemplation of Change in Control. In
connection with a termination of Employee's employment by the Company in
contemplation of, upon the occurrence of or after a Change in Control,
any reference in this Agreement with regard to any measurement date or
time that references the time or date of the Change in Control or the
Date of Termination shall be deemed to mean either (a) the date or time
of the occurrence constituting the Date of Termination by the Company, as
the case may be, or (b) the date or time of the Change in Control, as the
context would require to effectuate the intent of the provisions of this
Agreement to provide Employee with the payments and benefits hereunder.
5. Death. If the Employee should die while any amount would still
be payable to the Employee hereunder if the Employee had continued to
live, all such amounts, unless otherwise provided herein, shall be paid
to the Employee's legatee or other designee or, if there is no such
designee, to the Employee's estate.
6. Successors; Binding Agreement.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, share exchange, consolidation or otherwise
and whether by operation of law or otherwise) to all or substantially all
of the business and/or assets of the Company to assume expressly and to
agree to perform the obligations of the Company under this Agreement.
Failure of the Company to obtain such assumption and agreement prior to
the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Employee to compensation from the Company
in the same amount and on the same terms as the Employee would be
entitled to hereunder as if the Employee terminated the Employee's
employment following a Change in Control of the Company, except that for
purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives,
executors, administrators, heirs, distributees and legatees.
(c) In the event that the Employee is employed by a
subsidiary of the Company wherever in this Agreement reference is made to
the "Company," unless the context otherwise requires, such reference
shall also include such subsidiary. The Company shall cause such
subsidiary to carry out the terms of this Agreement insofar as they
relate to the employment relationship between the Employee and such
subsidiary, and the Company shall indemnify the Employee and save the
Employee harmless from and against all liability and damage the Employee
may suffer as a consequence of such subsidiary's failure to perform and
carry out such terms.
7. Notices. Any notice required or permitted to be given under
this Agreement shall be given in writing, and shall be delivered by hand
or by certified mail, postage prepaid and return receipt requested,
addressed as set forth below:
If to the Company: Correctional Services Corporation
1819 Main Street, Suite 1000
Sarasota, FL 34236
If to the Employee: Ira M. Cotler
4724 Sweet Meadow Circle
Sarasota, FL 34238
All notices delivered by certified mail shall be deemed delivered on
the second day (not including Sundays or holidays observed by the U.S.
postal service) after mailing. Notices delivered by hand to the Employee
must be delivered in person to the Employee. Notices delivered by hand to
the Company must be delivered to a person at the offices of the Company
or in person to the Chief Executive Officer. Any change of address by
either the Company or the Employee must be promptly communicated in
writing and delivered in accordance with this Section 7.
8. Waiver. The waiver by any party hereto of a breach of any
provision of this Agreement by any other party hereto shall not operate
or be construed as a waiver of any subsequent breach by the breaching
party.
9. Binding Effect. Except as otherwise expressly provided herein,
the rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon its successors and
assigns. The Company has agreed to enter into this Agreement with
Employee in connection with his employment by the Company. Accordingly,
the Employee may not assign any of his rights or delegate any of his
duties or obligations under this Agreement except as otherwise provided
herein.
10. Entire Agreement. This Agreement and the Employment Agreement
constitutes the entire understanding of the Employee and the Company in
respect of the subject matter hereof and supersedes any and all prior
understandings and agreements, written or oral, relating to such subject
matter of this Agreement. This Agreement and the provisions hereof may
not be changed, waived or canceled orally, but may be changed, waived, or
canceled only by an instrument in writing signed by the parties hereto.
11. Section Headings. The section headings of this Agreement are
for convenience of reference only and shall not limit or otherwise
affect any of the provisions of this Agreement.
12. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
13. Survival. The parties understand and agree that this
Agreement in its entirety survives the termination or expiration of the
Employee's employment.
14. Law and Interpretation. This Agreement shall be governed by
the 1aws of the State of Florida, and the invalidity or unenforceability
of any provisions hereof shall in no way affect the validity or
enforceability of any other provisions.
15. Arbitration. Any dispute or controversy arising under this
Agreement or relating in any way to the Employee's employment with the
Company shall be settled exclusively by arbitration in the State of
Florida in accordance with the rules of the American Arbitration
Association then in effect. The parties hereto agree that except as
otherwise provided herein, each of them shall bear their own costs,
including attorney's fees, incurred in any such arbitration and further
agree that the cost of the arbitrator shall be shared equally between
them. The parties further agree that judgment may be entered on the
arbitrator's award in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement under seal as of the date first above written.
ATTEST: CORRECTIONAL SERVICES CORPORATION
By: /s/ Ira M. Cotler By: /s/ James F. Slattery
- -------------------------------- ---------------------------- (SEAL)
Name: Ira M. Cotler Name: James F. Slattery
Title: Executive Vice President Title: President
AMENDMENT NO. 2 TO CREDIT AGREEMENT
THIS AMENDMENT NO. 2 (this "Amendment") dated as of March 31, 1999, to
the Credit Agreement referenced below, is by and among CORRECTIONAL SERVICES
CORPORATION, a Delaware corporation, the subsidiaries and affiliates
identified herein, the lenders identified herein, and NATIONSBANK, N.A., as
Administrative Agent. Terms used but not otherwise defined shall have the
meanings provided in the Credit Agreement.
W I T N E S S E T H
WHEREAS, a $10 million credit facility has been established in favor of
CORRECTIONAL SERVICES CORPORATION, a Delaware corporation (the "Borrower"),
pursuant to the terms of that Credit Agreement dated as of March 30, 1998 (as
amended and modified, the "Credit Agreement") among the Borrower, the
Guarantors and Lenders identified therein, and NationsBank, N.A., as
Administrative Agent;
WHEREAS, the Credit Agreement has been previously amended by that
certain Amendment No. 1 to Credit Agreement dated as of October 16, 1998 (the
"First Amendment") among the Borrower, the Guarantors, the Lenders and the
Administrative Agent;
WHEREAS, in connection with the proposed merger transaction between the
Borrower and Youth Services International, Inc., the Borrower has requested
certain additional modifications to the Credit Agreement;
WHEREAS, certain of the requested modifications require the unanimous
consent of the Lenders;
WHEREAS, the Lenders have agreed to the requested modifications on the
terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Section 1.1 shall be amended to modify the following defined terms
as follows:
"Aggregate Revolving Committed Amount" means, (i) during the
Interim Period, TWENTY-SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS
($27,500,000), and (ii) after the Interim Period, TEN MILLION DOLLARS
($10,000,000); provided, in the event Borrower has received at least
$20,000,000 in proceeds from new Subordinated Debt during the Interim Period,
the term Aggregate Revolving Committed Amount after the Interim Period means
TWELVE MILLION FIVE HUNDRED THOUSAND DOLLARS ($12,500,000).
"Borrowing Base" means eighty-five percent (85%) of Eligible
Receivables for the Consolidated Group.
"Consolidated Current Liabilities" means, as of any date for the
Consolidated Group, current liabilities as determined in accordance with GAAP,
exclusive of those certain 7% Convertible Subordinated Debentures
("Debentures") issued by Youth Services International, Inc. ("YSI") due
2006 issued under an Indenture dated as of October 15, 1996 (the
"Indenture") between YSI and The Chase Manhattan Bank, as Trustee, but only
to the extent that such Debentures are subject to a letter agreement dated on
or about November 23, 1998 between YSI and the holder of such Debentures
whereby the holder of such Debenture has agreed, among other things, not to
surrender any of the Debentures, deliver a redemption notice or take any other
action to exercise any rights to require YSI to redeem the Debentures on the
Holder Redemption Date, as defined in the Indenture, as a result of the
contemplated merger transaction between YSI and the Borrower.
"Consolidated EBITDA" means for any period for the Consolidated
Group, the sum of Consolidated Net Income plus Consolidated Interest Expense
plus all provisions for any Federal, state or other domestic and foreign
income taxes plus depreciation and amortization minus interest income minus
any current period cash expenditures related to the costs of operating the
facilities located in Fort Worth, Texas and New York, New York, to the extent
such costs are not included in current period expenses (such cash expenditures
to include rental expense, real estate taxes, insurance costs, closure costs
and other related costs), in each case on a consolidated basis determined in
accordance with GAAP applied on a consistent basis, but excluding for purposes
hereof extraordinary gains and losses and related tax effects thereon. Except
as otherwise expressly provided, the applicable period shall be for the four
consecutive fiscal quarters ending as of the date of determination.
Notwithstanding the foregoing, any determination of Consolidated EBITDA shall
be exclusive of (i) the following charges related to the merger transaction
between Borrower and Youth Services International, Inc. ("YSI"), not to
exceed the following amounts:
Write off of redundant assets and excess capacity $ 3,000,000
Personnel costs 2,585,000
Cancellation of contractual obligations 800,000
Financial advisory fees 1,700,000
Legal and accounting services 2,000,000
Integration Costs (not included above):
Write off debt issuance costs 1,400,000
Computer integration costs 1,500,000
Travel/printing/filing fees/marketing materials 1,250,000
Merger/Litigation 500,000
YSI Pooling of Interest 306,000
YSI Sales Tax Payments 271,000
YSI College Station Facility Closure Costs 2,327,000
-----------
Total $17,639,000
-----------
-----------
and (ii) the effect of Borrower's adoption of FASB SOP 98-5 in an amount not
to exceed $18,000,000.
"Interim Period" shall mean the period from the date of this
Amendment until the earlier of (i) the date on which Borrower has received at
least $20,000,000 in proceeds from new Subordinated Debt, or (ii) June 15,
1999.
2. As of the effective date of this Amendment, the financial covenant
set forth in Section 7.9(a) relating to Consolidated Net Worth is amended and
modified to read as follows:
"(a) Consolidated Net Worth. As of the end of each fiscal
quarter, Consolidated Net Worth shall be not less than the sum of $38,000,000
plus on the last day of each fiscal quarter (commencing with the fiscal
quarter ending December 31, 1997), ninety percent (90%) of Consolidated Net
Income for the fiscal quarter then ended, such increases to be cumulative and
without deductions for losses, if any, plus one hundred percent (100%) of the
net proceeds from Equity Transactions occurring after the Closing Date."
3. As of the effective date of this Amendment, the following is added
at the end of Section 11.6 is hereby amended and modified to read as follows:
11.6 Amendments, Waivers and Consents.
Subject to the last paragraph of this Section 11.6, neither this Credit
Agreement nor any other Credit Document nor any of the terms hereof or thereof
may be amended, changed, waived, discharged or terminated unless such amendment,
change, waiver, discharge or termination is in writing entered into by, or
approved in writing by, the Required Lenders and the Borrower, provided,
however, that:
(a) without the consent of each Lender affected thereby,
(i) extend the final maturity of any Loan or the time of
payment of any reimbursement obligation, or any portion thereof,
arising from drawings under Letters of Credit,
(ii) reduce the rate or extend the time of payment of
interest (other than as a result of waiving the applicability of any
increase in interest rates after the occurrence of an Event of
Default or on account of a failure to deliver financial statements
on a timely basis) thereon or Fees hereunder,
(iii) reduce or waive the principal amount of any Loan or of
any reimbursement obligation, or any portion thereof, arising from
drawings under Letters of Credit,
(iv) increase the Commitment of a Lender over the amount
thereof in effect (it being understood and agreed that a waiver of
any Default or Event of Default or mandatory reduction in the
Commitments shall not constitute a change in the terms of any
Commitment of any Lender),
(v) except as the result of or in connection with a
dissolution, merger or disposition of a Subsidiary permitted under
Section 8.4 or any sale of assets permitted under Section 8.4,
release the Borrower or substantially all of the other Credit
Parties from its or their obligations under the Credit Documents or
release all or substantially all of the collateral securing the
obligations hereunder,
(vi) amend, modify or waive any provision of this Section
11.6 or Section 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14,
9.1(a), 11.2, 11.3, 11.5 or 11.9,
(vii) reduce any percentage specified in, or otherwise modify,
the definition of Required Lenders, or
(viii) consent to the assignment or transfer by the Borrower
(or another Credit Party) of any of its rights and obligations under
(or in respect of) the Credit Documents except as permitted thereby;
(b) without the consent of the Administrative Agent, no provision
of Section 10 may be amended;
(c) without the consent of the Issuing Lender, no provision of
Section 2.2 may be amended.
Notwithstanding the fact that the consent of all the Lenders is required
in certain circumstances as set forth above, (x) each Lender is entitled to
vote as such Lender sees fit on any bankruptcy reorganization plan that affects
the Loans, and each Lender acknowledges that the provisions of Section 1126(c)
of the Bankruptcy Code supersedes the unanimous consent provisions set forth
herein and (y) the Required Lenders may consent to allow a Credit Party to use
cash collateral in the context of a bankruptcy or insolvency proceeding.
Notwithstanding anything in this Section 11.6 or in any other Credit
Document to the contrary, so long as Summit Bank and NationsBank, N.A. are the
only Lenders, neither this Credit Agreement nor any other Credit Document nor
any of the terms hereof or thereof may be amended, changed, waived, discharged
or terminated unless such amendment, change, waiver, discharge or termination
is in writing entered into by, or approved in writing by, both Summit Bank and
NationsBank, N.A."
4. Schedule 2.1(a) of the Credit Agreement is hereby amended and
restated in its entirety to read as Schedule 2.1(a) attached hereto.
5. In the event that the Borrower has not received at least
$20,000,000 in proceeds from new Subordinated Debt during the Interim Period,
all outstanding Obligations in excess of the lesser of $10,000,000 or the
Borrowing Base, together with any interest thereon, shall be due and payable
in full on the first Business Day after the end of the Interim Period.
6. Each of the Lenders hereby waives any Default or Event of Default
arising solely from a breach of any of the covenants of the Borrower set forth
in Section 8.4 of the Credit Agreement as a result of the consummation of the
contemplated merger transaction between the Borrower and Youth Services
International, Inc.
7. This Amendment shall be effective upon the execution of this
Amendment by the Credit Parties and the Lenders.
8. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (including without limitation the First Amendment and all
Schedules and Exhibits) shall remain in full force and effect.
9. The Borrower agree to pay all reasonable costs and expenses of the
Administrative Agent in connection with the preparation, execution and
delivery of this Amendment, including without limitation the reasonable fees
and expenses of Moore & Van Allen, PLLC.
10. This Amendment may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original and it
shall not be necessary in making proof of this Amendment to produce or account
for more than one such counterpart.
11. This Amendment shall be deemed to be a contract made under, and
for all purposes shall be construed in accordance with the laws of the State
of Florida.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: CORRECTIONAL SERVICES CORPORATION,
a Delaware corporation
By: /s/ Ira Cotler
Name: Ira Cottler
Title: Executive Vice President
GUARANTORS: ESMOR NEW JERSEY, INC.,
a New Jersey corporation
By: /s/ Ira Cotler
Name: Ira Cottler
Title: Attorney-In-Fact
CSC MANAGEMENT DE PUERTO RICO, INC.,
a Puerto Rico corporation
By: /s/ Ira Cotler
Name: Ira Cotler
Title: Director
LENDERS: NATIONSBANK, N.A.,
individually in its capacity as a
Lender and in its capacity as
Administrative Agent
By: /s/ Joseph Caballero
Name: Joseph Caballero
Title: Vice President
SUMMIT BANK, as Lender
By: /s/ Lisa Cohen
Name: Lisa Cohen
Title: Vice President
<PAGE>
Schedule 2.1(a)
Schedule of Lenders and Commitments
(During the Interim Period)
Revolving Revolving LOC
Lender Committed Amount Commitment Percentage Committed Amount
------ --------------- --------------------- ----------------
NationsBank, N.A. $21,388,895.00 77.7778% $777,777.78
Summit Bank $6,111,105.00 22.2222% $222,222.22
(After the Interim Period if Borrower does not receive at least $20,000,000
in proceeds from new Subordinated Debt)
Revolving Revolving LOC
Lender Committed Amount Commitment Percentage Committed Amount
------ --------------- --------------------- ----------------
NationsBank, N.A. $7,777,777.78 77.7778% $777,777.78
Summit Bank $2,222,222.22 22.2222% $222,222.22
(After the Interim period, provided Borrower has received proceeds of at least
$20,000,000 from new Subordinated Debt)
Revolving Revolving LOC
Lender Committed Amount Commitment Percentage Committed Amount
------ --------------- --------------------- ----------------
NationsBank, N.A. $9,722,225.00 77.7778% $777,777.78
Summit Bank $2,777,775.00 22.2222% $222,222.22
<PAGE>
AMENDMENT NO. 2 TO THE PARTICIPATION AGREEMENT,
THE CREDIT AGREEMENT, THE TRUST AGREEMENT
AND OTHER OPERATIVE AGREEMENTS
THIS AMENDMENT NO. 2 (this "Amendment") dated as of March 31, 1999, is
by and among CORRECTIONAL SERVICES CORPORATION, a Delaware corporation (the
"Lessee" or the "Construction Agent"); the various parties listed on the
signature pages hereto as guarantors (subject to the definition of Guarantors
in Appendix A to the Participation Agreement referenced below, individually, a
"Guarantor" and collectively, the "Guarantors"); FIRST SECURITY BANK,
NATIONAL ASSOCIATION, a national banking association, not individually but
solely as the Owner Trustee under the CSC Trust 1997-1 (the "Owner Trustee"
or the "Lessor"); the various banks and other lending institutions listed on
the signature pages hereto (subject to the definition of Lenders in Appendix A
to the Participation Agreement referenced below, individually, a "Lender"
and collectively, the "Lenders"); NATIONSBANK, N.A., a national banking
association, as the agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of
their interests (in such capacity, the "Agent"); and the various banks and
other lending institutions listed on the signature pages hereto as holders of
certificates issued with respect to the CSC Trust 1997-1 (subject to the
definition of Holders in Appendix A to the Participation Agreement referenced
below, individually, a "Holder" and collectively, the "Holders").
Capitalized terms used in this Amendment but not otherwise defined herein
shall have the meanings set forth in Appendix A to the Participation Agreement
(hereinafter defined).
W I T N E S S E T H
WHEREAS, the parties to this Amendment are parties to that certain
Participation Agreement dated as of March 30, 1998 (the "Participation
Agreement"), certain of the parties to this Amendment are parties to that
certain Credit Agreement dated as of March 30, 1998 (the "Credit
Agreement"), certain of the parties to this Amendment are parties to that
certain Trust Agreement dated as of March 30, 1998 (the "Trust Agreement")
and certain of the parties to this Amendment are parties to the other
Operative Agreements relating to a $20 million tax retention operating lease
facility (the "Facility") that has been established in favor of the Lessee;
WHEREAS, the Participation Agreement, the Credit Agreement, the Trust
Agreement and the other Operative Agreements have been previously amended by
that certain Amendment No. 1 to the Participation Agreement, the Credit
Agreement, the Trust Agreement and Other Operative Agreements dated as of
October 16, 1998 (the "First Amendment") among the Lessee and the
Construction Agent, the Guarantors, the Owner Trustee, the Lenders, the
Holders and the Agent.
WHEREAS, in connection with the proposed merger transaction between the
Lessee and Youth Services International, Inc., the Lessee has requested
certain additional modifications to the Participation Agreement, the Credit
Agreement, the Trust Agreement and the other Operative Agreements in
connection with the Facility;
WHEREAS, certain of the requested modifications require the unanimous
consent of the Financing Parties;
WHEREAS, the Financing Parties have agreed to the requested
modifications on the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Appendix A to the Participation Agreement shall be amended to
modify the following defined terms as follows:
"Consolidated EBITDA" means for any period for the Lessee on a
consolidated basis, the sum of Consolidated Net Income plus Consolidated
Interest Expense plus all provisions for any Federal, state or other domestic
and foreign income taxes plus depreciation and amortization minus interest
income minus any current period cash expenditures related to the costs of
operating the facilities located in Fort Worth, Texas and New York, New York,
to the extent such costs are not included in current period expenses (such
cash expenditures to include rental expense, real estate taxes, insurance
costs, closure costs and other related costs), in each case on a consolidated
basis determined in accordance with GAAP applied on a consistent basis, but
excluding for purposes hereof extraordinary gains and losses and related tax
effects thereon. Except as otherwise expressly provided, the applicable
period shall be for the four consecutive fiscal quarters ending as of the date
of determination. Notwithstanding the foregoing, any determination of
Consolidated EBITDA shall be exclusive of (i) the following charges related
to the merger transaction between Lessee and Youth Services International,
Inc. ("YSI"), not to exceed the following amounts:
Write off of redundant assets and excess capacity $3,000,000
Personnel costs 2,585,000
Cancellation of contractual obligations 800,000
Financial advisory fees 1,700,000
Legal and accounting services 2,000,000
Integration Costs (not included above):
Write off debt issuance costs 1,400,000
Computer integration costs 1,500,000
Travel/printing/filing fees/marketing materials 1,250,000
Merger/Litigation 500,000
YSI Pooling of Interest 306,000
YSI Sales Tax Payments 271,000
YSI College Station Facility Closure Costs 2,327,000
-----------
Total $17,639,000
-----------
-----------
and (ii) the effect of Lessee's adoption of FASB SOP 98-5 in an amount not to
exceed $18,000,000.
"Holder Commitments" shall mean $600,000; provided, in the event
the Lessee has received at $20,000,000 in proceeds from new Subordinated Debt
during the Interim Period, the term Holder Commitments shall mean $1,050,000;
provided, further, if there shall be more than one (1) Holder, the Holder
Commitment of each Holder shall be as set forth in Schedule I to the Trust
Agreement as such Schedule I may be amended and replaced from time to time.
"Interim Period" shall mean the period from the date of this
Amendment until the earlier of (i) the date on which Borrower has received at
least $20,000,000 in proceeds from new Subordinated Debt, or (ii) June 15,
1999.
"Lender Commitments" shall mean $19,400,000; provided, in the
event the Lessee has received at least $20,000,000 in proceeds from new
Subordinated Debt during the Interim Period, the term Lender Commitments shall
mean $33,950,000; provided, further, if there shall be more than one (1)
Lender, the Lender Commitment of each Lender shall be as set forth in Schedule
1.1 to the Credit Agreement as such Schedule 1.1 may be amended and replaced
from time to time.
2. Section 12.4 of the Participation Agreement is hereby amended and
modified as follows:
12.4 Terminations, Amendments, Waivers, Etc.; Unanimous Vote Matters.
Each Operative Agreement may be terminated, amended, supplemented,
waived or modified only by an instrument in writing signed by, subject to
Article VIII of the Trust Agreement regarding termination of the Trust
Agreement, the Majority Secured Parties and each Credit Party (to the extent
such Credit Party is a party to such Operative Agreement); provided, to the
extent no Default or Event of Default shall have occurred and be continuing,
the Majority Secured Parties shall not amend, supplement, waive or modify any
provision of any Operative Agreement in such a manner as to adversely affect
the rights of a Credit Party without the prior written consent (not to be
unreasonably withheld or delayed) of such Credit Party; provided, further, so
long as Summit Bank and NationsBank, N.A. are the only Lenders and/or Holders,
no Operative Agreement nor any of the terms thereof may be terminated,
amended, supplemented, waived or modified unless such termination, amendment,
supplement, waiver or modification is in writing entered into by, or approved
in writing by, both Summit Bank and NationsBank, N.A. In addition, (a) the
Unanimous Vote Matters shall require the consent of each Lender and each
Holder affected by such matter and (b) any provision of any Operative
Agreement incorporated by reference or otherwise referenced in a second
Operative Agreement shall remain, respecting such second Operative Agreement,
in its original form without regard to any such termination, amendment,
supplement, waiver or modification in the first Operative Agreement except if
such has been agreed to by an instrument in writing signed by, subject to
Article VIII of the Trust Agreement regarding termination of the Trust
Agreement, the Majority Secured Parties and the Lessee and/or the Construction
Agent (to the extent such Credit Party is a party to such Operative
Agreement).
Notwithstanding the foregoing, no such termination, amendment,
supplement, waiver or modification shall, without the consent of the Agent
and, to the extent affected thereby, each Lender and each Holder
(collectively, the "Unanimous Vote Matters") (i) reduce the amount of any
Note or any Certificate, extend the scheduled date of maturity of any Note,
extend the scheduled Expiration Date, extend any payment date of any Note or
Certificate, reduce the stated rate of interest payable on any Note, reduce
the stated Holder Yield payable on any Certificate (other than as a result of
waiving the applicability of any post-default increase in interest rates or
Holder Yields), modify the priority of any Lien in favor of the Agent under
any Security Document, subordinate any obligation owed to any Lender or
Holder, reduce any Lender Unused Fees or any Holder Unused Fees payable under
this Participation Agreement, extend the scheduled date of payment of any
Lender Unused Fees or any Holder Unused Fees or increase the amount or extend
the expiration date of any Lender's Commitment or the Holder Commitment of any
Holder, or (ii) terminate, amend, supplement, waive or modify any provision of
this Section 12.4 or reduce the percentages specified in the definitions of
Majority Lenders, Majority Holders or Majority Secured Parties, or consent to
the assignment or transfer by the Owner Trustee of any of its rights and
obligations under any Credit Document or release a material portion of the
Collateral (except in accordance with Section 8.8) or release any Credit Party
from its obligations under any Operative Agreement or otherwise alter any
payment obligations of any Credit Party to the Lessor or any Financing Party
under the Operative Agreements, or (iii) terminate, amend, supplement, waive
or modify any provision of Section 7 of the Credit Agreement (which shall also
require the consent of the Agent), or (iv) permit Advances for Work in excess
of the Construction Budget if, as a result of such Advances, the sum of all
Advances made or to be made under the Construction Budgets with respect to all
of the Properties will exceed the sum of the Holder Commitments and the Lender
Commitments; provided, however, that the Majority Secured Parties may permit
Advances for Work in excess of a particular Construction Budget so long as the
sum of all Advances made or to be made under the aggregate of the Construction
Budgets for all of the Properties (including the amount by which an Advance
with respect to any Property will exceed the Construction Budget for such
Property) does not exceed the sum of the Holder Commitments and the Lender
Commitments, or (v) eliminate the automatic option under Section 5.3(b) of the
Agency Agreement requiring that the Construction Agent pay certain liquidated
damages in exchange for the conveyance of a Property to the Construction
Agent. Any such termination, amendment, supplement, waiver or modification
shall apply equally to each of the Lenders and the Holders and shall be
binding upon all the parties to this Agreement. In the case of any waiver,
each party to this Agreement shall be restored to its former position and
rights under the Operative Agreements existing prior to the event or condition
waived, and any Default or Event of Default waived shall be deemed to be cured
and not continuing; but no such waiver shall extend to any subsequent or other
Default or Event of Default, or impair any right consequent thereon.
If at a time when the conditions precedent set forth in the Operative
Agreements to any Loan are, in the opinion of the Majority Lenders, satisfied,
any Lender shall fail to fulfill its obligations to make such Loan (any such
Lender, a "Defaulting Lender") then, for so long as such failure shall
continue, the Defaulting Lender shall (unless the Lessee and the Majority
Lenders, determined as if the Defaulting Lender were not a "Lender", shall
otherwise consent in writing) be deemed for all purposes relating to
terminations, amendments, supplements, waivers or modifications under the
Operative Agreements to have no Loans, shall not be treated as a "Lender"
when performing the computation of Majority Lenders or Majority Secured
Parties, and shall have no rights under this Section 12.4; provided that any
action taken pursuant to the second paragraph of this Section 12.4 shall not
be effective as against the Defaulting Lender unless it otherwise consents.
If at a time when the conditions precedent set forth in the Operative
Agreements to any Holder Advance are, in the opinion of the Majority Holders,
satisfied, any Holder shall fail to fulfill its obligations to make such
Holder Advance (any such Holder, a "Defaulting Holder") then, for so long as
such failure shall continue, the Defaulting Holder shall (unless the Lessee
and the Majority Holders, determined as if the Defaulting Holder were not a
"Holder", shall otherwise consent in writing) be deemed for all purposes
relating to terminations, amendments, supplements, waivers or modifications
under the Operative Agreements to have no Holder Advances, shall not be
treated as a "Holder" when performing the computation of Majority Holders or
Majority Secured Parties, and shall have no rights under this Section 12.4;
provided that any action taken pursuant to the second paragraph of this
Section 12.4 shall not be effective as against the Defaulting Holder unless it
otherwise consents."
3. If the Lessee receives at least $20,000,000 in proceeds from new
Subordinated Debt during the Interim Period, Schedule 1.1 of the Credit
Agreement shall be deemed amended and restated in its entirety on the Business
Day following confirmation by the Agent that such proceeds have been received
to read as Schedule 1.1 attached hereto and Schedule I of the Trust Agreement
shall be deemed amended and restated in its entirety on the Business Day
following confirmation by the Agent that such proceeds have been received to
read as Schedule I attached hereto.
4. Each of the Agent, the Lenders and the Holders hereby waives any
Default or Event of Default arising solely from a breach of any of the
covenants of the Lessee set forth in Section 8.3 of the Participation
Agreement or any of the Incorporated Covenants as a result of the consummation
of the contemplated merger transaction between the Borrower and Youth Services
International, Inc.
5. This Amendment shall be effective upon the execution of this
Amendment by the Credit Parties, the Lenders and the Holders.
6. Except as modified hereby, all of the terms and provisions of the
Operative Agreements (including without limitation the First Amendment and all
Schedules and Exhibits) shall remain in full force and effect.
7. The Lessee agrees to pay all reasonable costs and expenses of the
Agent in connection with the preparation, execution and delivery of this
Amendment, including without limitation the reasonable fees and expenses of
Moore & Van Allen, PLLC.
8. This Amendment may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original and it
shall not be necessary in making proof of this Amendment to produce or account
for more than one such counterpart.
9. This Amendment shall be deemed to be a contract made under, and
for all purposes shall be construed in accordance with the laws of the State
of Florida.
[The remainder of this page has been left blank intentionally.]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered as of the date first above
written.
CORRECTIONAL SERVICES CORPORATION, as the
Construction Agent, as the Lessee and as a
Tranche A Guarantor
By: /s/ Ira Cotler
Name: Ira Cotler
Title: Executive Vice President
ESMOR NEW JERSEY, INC., as a Guarantor
By: /s/ Ira Cotler
Name: Ira Cotler
Title: Attorney-In-Fact
CSC MANAGEMENT DE PUERTO RICO, INC., as a
Guarantor
By: /s/ Ira Cotler
Name: Ira Cotler
Title: Director
FIRST SECURITY BANK, NATIONAL ASSOCIATION,
not individually, except as expressly stated
herein, but solely as the Owner Trustee under
the CSC Trust 1997-1
By: /s/ Val T. Orton
Name: Val T. Orton
Title: Vice President
NATIONSBANK, N.A., as a Holder, as a Lender
and as the Agent
By: /s/ Joseph Caballero
Name: Joseph Caballero
Title: Vice President
SUMMIT BANK, as Lender
By: /s/ Lisa Cohen
Name: Lisa Cohen
Title: Vice President
<PAGE>
Schedule 1.1
This Schedule 1.1 shall only be effective if the Agent has confirmed that the
Lessee has received at least $20,000,000 in proceeds from new Subordinated
Debt during the Interim Period.
Tranche A Tranche B
Commitment Commitment
---------- ----------
Name and Address
of Lenders Amount Percentage Amount Percentage
- ---------------- ------ ---------- ------ ----------
NATIONSBANK, N.A. $23,743,874 77.0905% $2,428,350.75 77.0905%
400 North Ashley
PO Box 31590
Tampa, FL 33631-3590
Attn: Joseph Caballero
Ph: (813) 224-5975
Fax: (813) 224-3944
SUMMIT BANK $ 7,056,126 22.9095% $ 721,649.25 22.9095%
250 Moore St., 2nd Fl. ----------- ------- -------------- -------
Hackensack, NJ 07602
Attn: Lisa Cohen
Ph: (201) 646-5465
Fax: (201) 488-6185
TOTAL $30,800,000 100.0000% $ 3,150,000 100.0000%
<PAGE>
SCHEDULE I
HOLDER COMMITMENTS
This Schedule I shall only be effective if the Agent has confirmed that the
Lessee has received at least $20,000,000 in proceeds from new Subordinated
Debt during the Interim Period.
Holder Commitment
-----------------
Name of Holder Amount/Percentage
-------------- -----------------
NationsBank, N.A. $1,050,000 100%
400 South Ashley
PO Box 31590
Tampa, FL 33631-3590
Attn: Joseph Caballero
Telephone: (813) 224-5975
Telecopy: (813) 224-3944
TOTAL $1,050,000 100%
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:
Three Months Ended March 31, 1999
The effect of dilutive securities is anti-dilutive therefore, the
reconciliation has not been presented.
Three Months Ended March 31, 1998
Numerator:
Net Income $(2,947)
-------
-------
Denominator:
Basic earnings per share:
Weighted average shares outstanding 10,766
Effect of dilutive securities - stock options and warrants 537
-------
Denominator for diluted earnings per share 11,303
-------
-------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914670
<NAME> Correctional Services Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,727
<SECURITIES> 0
<RECEIVABLES> 35,999
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,958
<PP&E> 50,198
<DEPRECIATION> 1,526
<TOTAL-ASSETS> 119,791
<CURRENT-LIABILITIES> 32,857
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 81,286
<TOTAL-LIABILITY-AND-EQUITY> 119,761
<SALES> 58,934
<TOTAL-REVENUES> 58,934
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,401)
<INCOME-TAX> 2,976
<INCOME-CONTINUING> (9,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,425)
<EPS-PRIMARY> ($0.86)
<EPS-DILUTED> ($0.86)
</TABLE>
