<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1999.
__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): March 31, 1999
CORRECTIONAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-23038 11-3182580
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
1819 Main Street
Suite 1000
Sarasota, Florida 34326
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941) 953-9199
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information And Exhibits
(a) Financial Statements of Businesses Acquired. The consolidated
financial statements of YSI and its subsidiaries as at December 31, 1998 and
1997 and for the three years ended December 31, 1998 are included elsewhere in
this Current Report on Form 8-K/A commencing on page F-1.
(b) Pro Forma Financial Information. The pro forma financial
information required pursuant to Article 11 of Regulation S-X are included
elsewhere in this Current Report on Form 8-K/A commencing on page G-1.
(c) Exhibits. The following exhibits are filed herewith or incorporated
by reference hereto:
No. DESCRIPTION
- ----- -----------
4.2.1 Amendment to Fiscal and Paying Agency Agreement, dated March 31,
1999, by and among YSI, The Chase Manhattan Bank, N.A., New York,
The Chase Manhattan Bank, N.A., London and Chase Manhattan Bank
Luxembourg S.A.
4.3.1 Amendment to Indenture, dated March 31, 1999, by and between YSI
and The Chase Manhattan Bank, as trustee.
99 Press release announcing the completion of the Merger dated
April 1, 1999.
- ---------------------
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997, AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997,
THE SIX MONTHS ENDED DECEMBER 31, 1996
AND THE YEAR ENDED JUNE 30, 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS AND
SUPPLEMENTARY CONSOLIDATING INFORMATION
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Youth Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Youth Services
International, Inc. (a Maryland corporation) and subsidiaries (collectively, the
Company) as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1998 and 1997, the six months ended December 31, 1996, and
the year ended June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Youth Services
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the years ended December 31,
1998 and 1997, the six months ended December 31, 1996, and the year ended June
30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position and results of
operations of the individual companies. This information has been subjected to
the auditing procedures applied in our audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
Baltimore, Maryland,
March 5, 1999
F-2
<PAGE>
Page 1 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 5,903 $ 8,015
Restricted cash 69 264
Accounts receivable, net of allowance for doubtful
accounts of $1,195 and $433, respectively 15,879 16,589
Proceeds receivable from sale of behavioral health
business - 4,500
Receivables from related parties - 108
Prepaid expenses, supplies and other 2,454 2,845
Deferred tax asset 2,071 769
------- -------
Total current assets 26,376 33,090
------- -------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 2,022 1,976
Leasehold improvements 11,414 9,401
Program equipment 5,219 1,949
Buildings 10,792 8,715
Office furniture and equipment 905 3,339
Vehicles 1,922 1,675
------- -------
32,274 27,055
Less- Accumulated depreciation (8,655) (6,013)
------- -------
Property, equipment and improvements, net 23,619 21,042
------- -------
OTHER ASSETS:
Deferred debt issue costs, net 1,571 1,819
Goodwill, net 1,790 2,165
Deferred tax asset 5,048 6,512
Other assets, net 1,294 1,739
------- -------
Total other assets 9,703 12,235
------- -------
Total assets $59,698 $66,367
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
Page 2 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,325 $ 1,353
Accrued expenses 12,005 6,694
Deferred revenue - 1,243
Current portion of long-term liabilities 20 664
-------- --------
Total current liabilities 13,350 9,954
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 32,200
12% SUBORDINATED DEBENTURES, net of unamortized
original issue discount of $0 and $3, respectively - 797
LONG-TERM DEBT, less current portion 45 81
-------- --------
Total liabilities 45,595 43,032
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
70,000,000 shares authorized, 11,325,869 and
11,107,970 issued and outstanding, respectively 113 111
Additional paid-in capital 36,454 35,055
Accumulated deficit (22,464) (11,831)
-------- --------
Total shareholders' equity 14,103 23,335
-------- --------
Total liabilities and shareholders' equity $ 59,698 $ 66,367
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Year Six Months Ended Year
Ended December Ended December December 31, Ended
31, 31, June 30,
1998 1997 1996 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $ 90,065 $116,102 $59,761 $103,642
PROGRAM EXPENSES:
Direct operating 85,233 100,496 50,977 89,421
Start-up costs 494 211 189 58
-------- -------- ------- --------
Contribution from operations 4,338 15,395 8,595 14,163
OTHER OPERATING EXPENSES:
General and administrative 10,856 10,289 4,222 6,307
College Station closure costs 2,327 - - -
Strategic deal costs 803 - - -
CCI special bonuses - 1,440 - -
Costs related to CCI transaction 306 - - -
Loss on sale of behavioral health
business - 20,898 - -
Costs of attempted acquisitions - - - 569
-------- -------- ------- --------
(Loss) income from operations (9,954) (17,232) 4,373 7,287
-------- -------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense (2,286) (3,095) (1,939) (3,209)
Interest income 368 473 502 645
Loss on sale of investments - (203) (45) -
Other income (expense), net 461 (105) (196) (463)
-------- -------- ------- --------
(1,457) (2,930) (1,678) (3,027)
-------- -------- ------- --------
(Loss) income before income taxes (11,411) (20,162) 2,695 4,260
Income tax benefit (expense) 837 3,085 (946) (1,856)
-------- -------- ------- --------
Net (loss) income $(10,574) $(17,077) $ 1,749 $ 2,404
======== ======== ======= ========
(Loss) earnings per common share:
Basic $(0.94) $(1.57) $0.18 $0.26
======== ======== ======= ========
Diluted $(0.94) $(1.57) $0.16 $0.24
======== ======== ======= ========
Weighted average common shares
outstanding:
Basic 11,269 10,911 9,981 9,138
======== ======== ======= ========
Diluted 11,269 10,911 10,894 10,134
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
Page 1 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Accumulated Investments Total
Common Paid-in (Deficit) Available- Shareholders'
Stock Capital Earnings for-Sale Equity
------ ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 $ 90 $16,331 $ 1,222 $ - $ 17,643
Tax benefit realized due to exercise
of nonqualified stock options - 1,029 - - 1,029
Issuance of 490,946 shares of common
stock under stock option and stock
purchase plans 5 2,733 - - 2,738
Unrealized loss on investments
available-for-sale, net of tax effect - - - (255) (255)
Net income - - 2,404 - 2,404
---- ------- -------- ----------- --------
BALANCE, June 30, 1996 95 20,093 3,626 (255) 23,559
Tax benefit realized due to exercise
of nonqualified stock options - 522 - - 522
Issuance of 193,641 shares of common
stock under stock option and stock
purchase plans 2 1,032 - - 1,034
Issuance of 7,428 shares of common stock
as compensation - 125 - - 125
Stock issuance costs - (23) - - (23)
Unrealized gain on investments
available-for-sale, net of tax effect - - - 197 197
Conversion of subordinated debentures to
common stock 5 5,745 - - 5,750
Net income - - 1,749 - 1,749
---- ------- -------- ----------- --------
BALANCE, December 31, 1996 102 27,494 5,375 (58) 32,913
Tax benefit realized due to exercise
of nonqualified stock options - 2,805 - - 2,805
Issuance of 863,471 shares of common
stock under stock option and stock
purchase plans 9 3,267 - - 3,276
Issuance of 8,205 shares of common stock
as compensation - 107 - - 107
Transfer of shares as compensation - 1,440 - - 1,440
Stock issuance costs - (58) - - (58)
Unrealized gain on investments
available-for-sale, net of tax effect - - - 58 58
Dividend distribution - - (129) - (129)
Net loss - - (17,077) - (17,077)
---- ------- -------- ----------- --------
BALANCE, December 31, 1997 $111 $35,055 $(11,831) $ - $ 23,335
---- ------- -------- ----------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
Page 2 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Accumulated Investments Total
Common Paid-in (Deficit) Available- Shareholders'
Stock Capital Earnings for-Sale Equity
------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 $111 $35,055 $(11,831) $ - $ 23,335
Tax benefit realized due to exercise
of nonqualified stock options - 352 - - 352
Issuance of 199,607 shares of common
stock under stock option and stock
purchase plans 2 942 - - 944
Issuance of 18,292 shares of common stock
as compensation - 109 - - 109
Stock issuance costs - (4) - - (4)
Dividend distribution - - (59) - (59)
Net loss - - (10,574) - (10,574)
---- ------- -------- ----------- --------
BALANCE, December 31, 1998 $113 $36,454 $(22,464) $ - $ 14,103
==== ======= ======== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
Page 1 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Year Year Six Months Ended Year Ended
Ended December 31, Ended December 31, December 31, June 30,
1998 1997 1996 1996
------------------ ------------------ ------------------ ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(10,574) $(17,077) $ 1,749 $ 2,404
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
(Income) loss on Introspect operations - - (371) 296
Stock granted as compensation 109 1,547 125 -
Depreciation and amortization 3,666 5,199 3,069 3,452
Loss on sale of property, equipment and
improvements 17 23 12 105
Loss on sale of behavioral health business - 20,898 - -
Loss on sale of investments - 203 45 -
Write off of other assets 321 - - -
Deferred income taxes 162 (6,621) (2) (304)
Tax benefit realized due to exercise of
nonqualified stock options 352 2,805 522 1,029
Net change in operating assets and liabilities 5,670 (2,035) (6,440) (4,798)
-------- -------- -------- --------
Net cash (used in) provided by operating activities (277) 4,942 (1,291) 2,184
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property, equipment and
improvements (5,319) (12,091) (4,284) (5,947)
Proceeds from sale of property, equipment and
improvements 27 984 33 674
Cash paid for acquired businesses, net of cash
received - (628) (4,023) (6,449)
Net proceeds from sale of behavioral health
business 4,500 14,154 - -
Disbursements for notes receivable - - - (4,271)
Collection of notes receivable 38 3,184 62 25
Purchases of investments - - - (10,223)
Proceeds from sale of investments - 5,100 4,875 -
Other long-term assets (489) (413) (471) (1,816)
-------- -------- -------- --------
Net cash (used in) provided by investing activities (1,243) 10,290 (3,808) (28,007)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings and
long-term debt - 528 14,326 4,739
Issuance of 7% convertible subordinated
debentures - - - 37,950
Repayments of short-term borrowings,
long-term debt and capital lease obligations (1,477) (13,954) (14,198) (10,708)
Dividend distribution (59) (129) - -
Proceeds from issuance of common stock
under stock option and stock purchase
plans, net 944 3,218 1,011 2,738
Deferred debt issue costs - - - (2,664)
-------- -------- -------- --------
Net cash (used in) provided by financing activities (592) (10,337) 1,139 32,055
-------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH (2,112) 4,895 (3,960) 6,232
CASH, beginning of period 8,015 3,120 7,080 848
-------- -------- -------- --------
CASH, end of period $ 5,903 $ 8,015 $ 3,120 $ 7,080
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
Page 2 of 2
-----------
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Year
Year Year Six Months Ended Ended
Ended December 31, Ended December 31, December 31, June 30,
1998 1997 1996 1996
------------------ ------------------ ------------------ ---------
<S> <C> <C> <C> <C>
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF EFFECTS OF BUSINESS
ACQUISITIONS AND DISPOSITIONS:
Cash held in escrow $ - $ - $ - $ 2,543
Restricted cash 195 107 131 156
Accounts receivable 1,177 (1,895) (3,297) (8,452)
Receivables from related parties 108 1,029 (1,125) -
Refundable income taxes - 1,046 - (1,006)
Prepaid expenses, supplies and other 391 127 (1,392) (666)
Deposits (118) 154 (3) 79
Management fee receivable - - - 60
Accounts payable (28) (295) (15) (998)
Accrued expenses 5,188 (2,083) (2,170) 3,513
Deferred revenue (1,243) (225) 1,431 (27)
------- ------- ------- -------
Net change in operating assets and liabilities $ 5,670 $(2,035) $(6,440) $(4,798)
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 2,260 $ 3,086 $ 2,081 $ 970
======= ======= ======= =======
Cash paid for taxes $ 374 $ 279 $ 723 $ 2,292
======= ======= ======= =======
Capital lease obligation $ - $ - $ - $ 230
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------------
Organization and Nature of Operations
- -------------------------------------
Youth Services International, Inc. and its subsidiaries (collectively, the
Company) are organized to privately manage and operate educational,
developmental and rehabilitative programs for troubled youth who have been
adjudicated. The Company's programs are provided in residential and non-
residential settings. The Company commenced the operation of its first program
in February 1992. On February 3, 1994, the Company sold 1,950,000 shares in
connection with its initial public offering of common stock at $6.67 per share
pursuant to its Registration Statement filed on Form SB-2 with the Securities
and Exchange Commission.
On October 31, 1997, the Company consummated the sale of certain of its
subsidiaries which comprised its behavioral health business (see Note 13 for
further discussion of the sale). As of December 31, 1998, the Company managed
and operated 27 programs for adjudicated youth.
Change in Year-end
- ------------------
On April 25, 1997, the Board of Directors approved a resolution to change the
Company's year-end from June 30 to December 31. The accompanying financial
statements include the financial position and results of operations for the
Company's transition period comprised of the six months ended December 31, 1996.
Pooling-of-Interests Business Combination
- -----------------------------------------
On June 30, 1998, the Company exchanged 866,772 shares of the Company's common
stock for all of the common stock of Community Corrections, Inc. (CCI). CCI
operates residential boot camp and detention facilities with a total capacity of
353 beds in Texas and provides aftercare services to adjudicated youth in
Georgia. CCI was a Subchapter S corporation for federal income tax purposes
whereby the earnings of the corporation pass through to the respective owners.
It was the policy of CCI to distribute necessary amounts to the owners on a
periodic basis in order to allow them to fund their personal tax liabilities
attributable to the earnings of CCI. During the years ended December 31, 1998
and 1997, income tax dividends were distributed to the owners totaling
approximately $59,000 and $129,000.
The above transaction has been accounted for as a pooling-of-interests and,
accordingly, the accompanying consolidated financial statements for the periods
presented have been retroactively adjusted to reflect the business combination.
F-10
<PAGE>
Revenue and net (loss) income of the separate companies for the periods
preceding the CCI merger were as follows (in thousands):
<TABLE>
<CAPTION>
Pro Forma
Net (Loss) Net (Loss)
Revenue Income Income
---------------- ----------------- -----------------
<S> <C> <C> <C>
Year ended December 31, 1997:
YSI, as previously reported $108,129 $(15,971) $(15,971)
CCI 7,973 (1,106) (1,230)
-------- -------- --------
Combined $116,102 $(17,077) $(17,201)
======== ======== ========
Six months ended December 31, 1996:
YSI, as previously reported $ 57,043 $ 1,534 $ 1,534
CCI 2,718 215 135
-------- -------- --------
Combined $ 59,761 $ 1,749 $ 1,669
======== ======== ========
Year ended June 30, 1996:
YSI, as previously reported $100,353 $2,271 $2,271
CCI 3,289 133 83
-------- ------ ------
Combined $103,642 $2,404 $2,354
======== ====== ======
</TABLE>
Pro forma net (loss) income reflects adjustments to net income to record an
estimated provision for income taxes for each period presented assuming CCI was
a taxpaying entity.
Principles of Consolidation
- ---------------------------
As of December 31, 1998, the consolidated financial statements included the
accounts of Youth Services International, Inc. and the following wholly owned
subsidiaries:
. Youth Services International of Iowa, Inc.
. Youth Services International of Tennessee, Inc.
. Youth Services International of Baltimore, Inc.
. Youth Services International of Maryland, Inc.
. Youth Services International of Northern Iowa, Inc.
. Youth Services International of South Dakota, Inc.
. Youth Services International of Missouri, Inc.
. Youth Services International of Central Iowa, Inc.
. Youth Services International of Texas, Inc.
. Youth Services International of Virginia, Inc.
. Youth Services International of Delaware, Inc.
. Youth Services International Southeastern Programs, Inc.
. Youth Services International of Minnesota, Inc.
. Youth Services International of Illinois, Inc.
. Youth Services International of Michigan, Inc.
. Community Corrections, Inc.
F-11
<PAGE>
Significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company manages and operates certain of its programs pursuant to
subcontracts or similar relationships with not-for-profit entities. These not-
for-profit entities hold contracts directly with state and local governments to
provide rehabilitative services to adjudicated youth and subcontract management
responsibility to the Company. These not-for-profit entities are each
controlled by independent Boards of Directors which have the right to terminate
their contract with the Company under certain circumstances. The accompanying
consolidated balance sheets include net accounts receivable pursuant to these
contracts of $4,277,000 and $5,437,000 as of December 31, 1998 and 1997,
respectively.
Revenue Recognition and Contract Provisions
- -------------------------------------------
The Company's programs are typically provided pursuant to contracts directly
with governmental entities or subcontracts with not-for-profit entities that
contract directly with governmental entities. These contracts generally provide
for fixed per diem payments based upon program occupancy. Revenues on fixed per
diem and management contracts are recognized as the services are performed.
One of the Company's significant programs operates under a contract whereby
revenues are recognized as reimbursable costs are incurred through a gross
maximum price cost reimbursement arrangement. This contract has costs,
including indirect costs, subject to audit and adjustment by negotiations with
government representatives. Contract revenues subject to audit relating to this
contract of $13,638,000, $13,519,000, $6,835,000 and $13,583,000 have been
recorded for the years ended December 31, 1998 and 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively, which are the
amounts expected to be realized. Subsequent adjustments, if any, resulting from
the audit process are recorded when known.
Contract terms with government and not-for-profit entities generally range from
one to five years in duration and expire at various dates through June 2002.
Most of these contracts are subject to termination for convenience by the
governmental entity. Management of the Company is not aware of any
circumstances that would cause any governmental entity to terminate any existing
agreement.
Included in the consolidated statement of operations for the year ended December
31, 1998, is $1,020,000 of revenues related to the behavioral health facilities
sold on October 31, 1997.
Concentration of Credit Risk
- ----------------------------
Accounts receivable are uncollateralized and are due primarily from state and
local governments and not-for-profit entities under contracts.
F-12
<PAGE>
Property, Equipment and Improvements
- ------------------------------------
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives ranging from 3 to 39 years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
Goodwill
- --------
Goodwill representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses is stated at cost and is
amortized over 10 years using the straight-line method.
Amortization expense for the years ended December 31, 1998 and 1997, the six
months ended December 31, 1996 and the year ended June 30, 1996, was $375,000,
$894,000, $1,011,000 and $1,038,000, respectively. Accumulated amortization at
December 31, 1998 and 1997 was $2,031,000 and $1,656,000, respectively. (See
Note 13 for discussion of the loss related to the disposition of the behavioral
health business recognized during the year ended December 31, 1997.)
Realizability of Long-Lived Assets and Goodwill
- -----------------------------------------------
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement requires that long-lived assets and certain identifiable intangibles
including goodwill to be held and used or disposed of by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company uses an
estimate of the undiscounted cash flows over the remaining life of its long-
lived assets and goodwill in measuring whether the assets to be held and used
will be realizable.
Fair Value of Financial Instruments
- -----------------------------------
The Company determines fair value of their financial instruments held based on
quoted market values where applicable or discounted cash flow analyses. As of
December 31, 1998 and 1997, the carrying value of its financial instruments
approximates fair value.
Deferred Revenue
- ----------------
Deferred revenue consists of advance payments for services which will be
recognized as revenue as the related services are performed.
Strategic Deal Costs
- --------------------
The Company has incurred various costs in connection with their contemplated
merger with Correctional Services Corporation (CSC) (see Note 16). These costs,
which consist primarily of professional fees, have been expensed as incurred.
F-13
<PAGE>
Income Taxes
- ------------
The Company accounts for income taxes utilizing the liability method in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes".
Under this method, deferred tax assets and liabilities are determined based on
the differences between financial reporting and tax bases of assets and
liabilities and are measured using the rates and laws that are projected to be
in effect when the differences are expected to reverse. Any resulting deferred
tax asset along with the tax benefits related to operating loss and tax credit
carryforwards are recognized if management believes, based on available
evidence, that it is more likely than not they will be realized (see Note 11).
Stock Split
- -----------
A three-for-two stock split in the form of a stock dividend was effected May 24,
1996, with the issuance of 2,823,544 shares of common stock. All share and per
share amounts in the accompanying consolidated financial statements and notes
thereto have been retroactively restated to reflect this split.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain reclassifications have been made to prior year balances in order to
conform with current year presentation.
Newly Issued Accounting Standards
- ---------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. The
statement establishes standards for reporting and display of comprehensive
income and its components. The Company adopted this new standard on January 1,
1998 and its implementation did not have an effect on the consolidated statement
of operations for the year ended December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. The statement establishes revised standards
under which an entity must report business segment information in its financial
statements. The Company's adoption of this new standard in the year beginning
January 1, 1998 did not result in any additional disclosures in the consolidated
financial statements for the year ended December 31, 1998.
F-14
<PAGE>
2. (LOSS) EARNINGS PER SHARE:
--------------------------
In March 1997, the Company adopted SFAS No. 128, "Earnings Per Share," effective
December 15, 1997. As a result, the Company is required to provide additional
disclosure of basic (loss) earnings per share. Despite certain new calculation
criteria, diluted earnings per share, as defined and reported under the new
SFAS, was equivalent to the historically reported fully diluted earnings per
share.
The following illustrates the calculation of basic and diluted (loss) earnings
per share for all years presented (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net (loss) income $(10,574) $(17,077) $ 1,749 $ 2,404
-------- -------- ------- -------
Weighted average common
shares outstanding 11,269 10,911 9,981 9,138
Dilutive effects of options
and warrants - - 913 996
-------- -------- ------- -------
Weighted average common
and common equivalent
shares outstanding 11,269 10,911 10,894 10,134
======== ======== ======= =======
Basic (loss) earnings per
common share $ (0.94) $ (1.57) $ 0.18 $ 0.26
======== ======== ======= =======
Diluted (loss) earnings per
common share $ (0.94) $ (1.57) $ 0.16 $ 0.24
======== ======== ======= =======
</TABLE>
Basic (loss) earnings per common share were computed by dividing net (loss)
income by the weighted average number of common shares outstanding during the
year. Diluted (loss) earnings per common share were computed by dividing net
(loss) income by the weighted average number of common and common equivalent
shares outstanding during the year. The Company's 7% Convertible Subordinated
Debentures (see Note 5) are excluded from the diluted (loss) earnings per common
share calculation due to their anti-dilutive effect. The dilutive effects of
options and warrants were not provided for the years ended December 31, 1998 and
1997, as losses are not diluted for earnings per share purposes.
F-15
<PAGE>
3. ACCRUED EXPENSES:
-----------------
Accrued expenses consist of the following as of December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Accrued payroll $ 1,961 $1,384
Accrued interest 942 948
Accrued employee medical costs 1,093 550
Accrual for disallowed costs 2,002 -
Accrued contract buy-out costs 1,150 -
Other 4,857 3,812
------- ------
$12,005 $6,694
======= ======
</TABLE>
4. SHORT-TERM BORROWINGS:
----------------------
Lines of Credit
- -----------------
During the year ended June 30, 1995, the Company entered into an operating line
of credit arrangement with a bank, under which it could borrow the lesser of
$5,000,000 or 85% of eligible accounts receivable. Amounts drawn under this
line of credit bore interest at prime plus one-half percent and were payable on
demand. The line was secured by accounts receivable of the Company. This line
of credit was canceled during the year ended June 30, 1996, and replaced with
the line of credit facility included in Note 6.
Lines of credit information for the year ended June 30, 1996, prior to the line
of credit facility included in Note 6, is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June
30,
1996
-----------------
<S> <C>
Maximum amount outstanding during the year $ 70
Average outstanding month-end balance during the year 70
Weighted average interest rate during the year 10.0%
</TABLE>
5. SUBORDINATED DEBENTURES:
--------------------------
12% Subordinated Debentures
- ---------------------------
During the year ended June 30, 1993, the Company issued 12% Subordinated
Debentures in the principal amount of $1,000,000 due in 10 equal semi-annual
installments beginning June 30, 1998. Debentures in the principal amount of
$580,000 were held by shareholders or their close relatives. The debentures
were issued with an original issue discount of $50,000, which was being
amortized over the life of the debentures using the effective interest method.
The 12% Subordinated Debentures were redeemed by the Company on January 1, 1998,
and a loss of $53,000 was incurred by the Company in connection with this early
extinguishment.
F-16
<PAGE>
In connection with the issuance of the debentures, warrants to purchase 231,900
shares of common stock at an exercise price of $3.23 per share were issued.
These warrants were exercisable beginning in April 1993 and expire at various
dates through November 1999. The warrants have been assigned a value of
$50,000.
7% Convertible Subordinated Debentures
- --------------------------------------
During the year ended June 30, 1996, the Company issued 7% Convertible
Subordinated Debentures due February 1, 2006, in the principal amount of
$37,950,000. Interest is payable semi-annually in arrears. The debentures are
convertible into common stock at the rate of one share for each $12.47 of
principal. The 7% Convertible Subordinated Debentures may be redeemed at the
option of the Company, in whole or in part at any time after February 1, 1999,
at a redemption price equal to that percentage of their principal amount set
forth below:
On or after February 1, Premium
----------------------- ----------------
1999 103%
2000 102%
2001 101%
2002 100%
See Note 16 for discussion of mandatory redemption upon consummation of the
proposed merger agreement.
The Company incurred approximately $2,500,000 of direct costs in connection with
the issuance of the 7% Convertible Subordinated Debentures. These costs have
been included within deferred debt issue costs in the accompanying consolidated
balance sheets and are being amortized over the life of the related debentures.
In July 1996, holders of an aggregate principal amount of $5,750,000 of 7%
Convertible Subordinated Debentures surrendered such debentures for conversion
and received 461,106 shares of common stock. A conversion premium of $297,000
was paid by the Company. The conversion premium has been included in other
expense in the accompanying consolidated statement of operations for the year
ended June 30, 1996.
F-17
<PAGE>
6. LONG-TERM DEBT:
---------------
Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Bank Loans:
Revolving line of credit payable to a bank, permitted borrowings equal to
the lesser of $20,000,000 or 85% of eligible accounts receivable plus 95%
of cash balances on deposit, secured by accounts receivable and cash
balances on deposit, bearing interest at the prime rate or LIBOR plus
2.25%, (7.32% as of December 31, 1998) due February 1999. $ - $ -
Community Corrections, Inc.:
Various notes payable with interest rates ranging from 9.5% to 13%,
interest payable monthly with principal generally due one year from the
date of issuance - 452
Mortgage Payable:
Mortgage payable to the City of Springfield, South Dakota secured by
property in the City of Springfield, South Dakota, bearing interest at
3.5%, principal and interest due in annual installments through June 2002. 60 75
Forest Ridge Purchase Note:
Note payable to a non-affiliated individual, in the face amount of
$150,000 discounted to $117,000, at an imputed interest rate of 10%,
payable in monthly installments beginning March 1993. - 5
Other 5 13
----- -----
65 545
Less: Current portion 20 464
----- -----
Total $ 45 $ 81
===== =====
</TABLE>
Included in the consolidated balance sheet as of December 31, 1997, is $200,000
related to the current portion of the 12% Subordinated Debentures (see Note 5).
F-18
<PAGE>
Borrowings information with respect to the revolving line of credit for the
years ended December 31, 1998 and 1997, the six months ended December 31, 1996,
and the year ended June 30, 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
---------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Maximum amount outstanding
during the year $ - $5,310 $11,124 $7,295
Average outstanding month-end
balance during the year - 3,087 5,042 5,295
Weighted average interest rate
during the year - 6.7% 7.8% 8.3%
</TABLE>
Certain of these agreements require that the Company maintain a minimum current
ratio and level of tangible net worth, as well as meet certain other financial
standards. As of December 31, 1998, the Company was not in compliance with
certain agreements under the revolving line of credit agreement. On February
28, 1999, the agreement with respect to the Company's line of credit expired.
The agreement was not extended by the Company. As no amounts were drawn on this
line during 1998 or from January 1, 1999 to February 28, 1999, there is no
effect on the accompanying consolidated financial statements.
7. OPERATING LEASES:
-----------------
The Company leases certain operating facilities and computer and office
equipment under operating leases expiring through 2010.
Future minimum lease payments, by year and in the aggregate are as follows (in
thousands):
<TABLE>
<CAPTION>
For the Year
Ending December 31,
-------------------
<S> <C>
1999 $ 2,662
2000 2,175
2001 1,503
2002 678
2003 465
2004 and thereafter 4,502
-------
$11,985
=======
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997, the six months
ended December 31, 1996, and the year ended June 30, 1996, was $3,539,000,
$4,210,000, $2,270,000 and $3,041,000, respectively.
F-19
<PAGE>
8. EMPLOYEE RETIREMENT PLAN:
-------------------------
Effective July 1, 1992, the Company established the YSI 401(k) Retirement Plan
(the Plan) pursuant to Section 401(k) of the Internal Revenue Code. The Plan
covers all full-time employees of the Company who have satisfied eligibility
requirements. Contributions are made by the Company at its discretion. During
the years ended December 31, 1998 and 1997, the six months ended December 31,
1996, and the year ended June 30, 1996, the Company expensed $0, $42,000,
$120,000 and $191,000, respectively, in matching contributions and
administrative fees related to the Plan.
9. CONTINGENCIES:
--------------
The Company has been named as defendant in various legal proceedings arising
from the performance of its normal activities. It is the opinion of management,
after consultation with legal counsel, that the amount, if any, of the Company's
ultimate liability under all current legal proceedings will not have a material
adverse effect on the financial position of the Company.
10. EQUITY PARTICIPATION PLANS:
---------------------------
Stock Option Plans
- ------------------
During the year ended June 30, 1992, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1992 Stock Option Plan
(the 1992 Stock Option Plan), under which the Company may grant to eligible
employees nonqualified stock options to purchase up to 1,125,000 shares of
common stock. Options granted under the 1992 Stock Option Plan allow for the
purchase of common stock at prices not less than the fair market value of the
common stock at the date of grant, for a term of no more than ten years.
During the year ended June 30, 1994, the Board of Directors and shareholders
approved the establishment of the Youth Services International, Inc. 1995
Employee Stock Option Plan and the Youth Services International, Inc. 1995
Director Stock Option Plan (the 1995 Stock Option Plan and the 1995 Director
Stock Option Plan, respectively). Under the 1995 Stock Option Plan, the Company
may grant to eligible employees nonqualified stock options to purchase up to
750,000 shares of common stock beginning July 1, 1994. The 1995 Stock Option
Plan provides for the purchase of common stock at the fair market value of the
common stock at the date of grant. Under the 1995 Director Stock Option Plan,
the Company may grant options to purchase up to 200,000 shares of common stock
to nonemployee members of the Board of Directors. The 1995 Director Stock
Option Plan provides for the automatic granting of options to purchase 7,500
shares of the Company's common stock each year on the anniversary date of the
appointment of a non-employee director to the Board of Directors. The 1995
Director Stock Option Plan provides for the purchase of common stock at the fair
market value of the common stock at the date of grant.
During the year ended June 30, 1995, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1996 Employee Stock
Option Plan (the 1996 Stock Option Plan). Under the 1996 Stock Option Plan, the
Company may grant to eligible employees nonqualified stock options to purchase
up to 450,000 shares of common stock beginning July 1, 1995. The 1996 Stock
Option Plan provides for the purchase of common stock at the fair market value
of the common stock at the date of grant. During 1997, the last of the
available options under the 1995 Director Stock Option Plan was granted. No
additional options have been made available or granted under the 1995 Director
Stock Option Plan.
F-20
<PAGE>
During the six months ended December 31, 1996, the Board of Directors approved
the establishment of the Youth Services International, Inc. 1997 Employee Stock
Option Plan (the 1997 Stock Option Plan). Under the 1997 Stock Option Plan, the
Company may grant to eligible employees incentive stock options or nonqualified
stock options to purchase up to 500,000 shares of common stock beginning July 1,
1996. The 1997 Stock Option Plan provides for the purchase of common stock at
the fair market value of the common stock at the date of grant.
During 1998, the Board of Directors approved the establishment of the Youth
Services International, Inc. 1998 Director Stock Option Plan (the 1998 Director
Stock Option Plan) and Amendment No. 1 to the 1998 Director Stock Compensation
Plan. The 1998 Director Stock Option Plan provides for the automatic grant on
January 1 of each year to each non-employee director of options to purchase
7,500 shares of the Company's common stock. The options vest in equal quarterly
installments during the year on the last day of each calendar quarter. The 1998
Director Stock Option Plan provides for the purchase of common stock at the fair
market value of the common stock at the date of grant. The 1998 Director Stock
Compensation Plan, as amended, provides for the automatic grant at the end of
each calendar quarter to each non-employee director of shares of the Company's
common stock with a market value of $3,750, based on the fair market value of
the common stock on the date of grant.
At the discretion of the Board of Directors, the options granted to employees
may also be subject to certain vesting provisions. The majority of the options
granted to employees to date contain a three-year vesting period.
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996, and June 30, 1996, is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996 June 30, 1996
------------------- -------------------- -------------------- --------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex.Price Shares Ex.Price Shares Ex.Price Shares Ex. Price
--------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period 728,298 $11.51 1,414,628 $ 6.36 1,444,753 $ 5.17 1,520,646 $ 2.83
Granted 504,706 13.66 305,184 11.05 147,500 16.46 373,050 11.06
Exercised (101,100) 8.07 (827,508) 3.27 (177,625) 5.05 (448,943) 2.15
Forfeited (246,863) 14.26 (164,006) 8.04 - - - -
-------- --------- --------- ---------
Outstanding, end of period 885,041 $12.76 728,298 $11.46 1,414,628 $ 6.36 1,444,753 $ 5.17
======== ====== ========= ====== ========= ====== ========= ======
Exercisable, end of period 418,308 $13.21 333,798 $10.94 1,109,078 $ 4.68 1,226,620 $ 4.59
======== ====== ========= ====== ========= ====== ========= ======
</TABLE>
Stock Purchase Plan
- -------------------
During the year ended June 30, 1994, the Company established an Employee Stock
Purchase Plan (the Plan). Under the Plan, the Company was authorized to grant
to eligible employees opportunities to purchase 225,000, 300,000 and 450,000
shares of common stock beginning July 1, 1994, 1995 and 1996, respectively. The
Stock Purchase Plan allowed for the purchase of
F-21
<PAGE>
common stock at 85% of the fair market value of the common stock at the date of
grant. During the six months ended December 31, 1996, and the year ended June
30, 1996, employees
purchased approximately 7,000 and 250,000 shares of common stock, respectively,
for proceeds to the Company of approximately $91,000 and $1,917,000,
respectively. The Company has discontinued this plan and no shares were issued
during the years ended December 31, 1998 and 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting For Stock Based
Compensation." This statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages but
does not require all entities to adopt that method of accounting for all of
their employee stock compensation plans. Entities electing not to make the
change in accounting methods must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company has elected to account for these plans under APB Opinion
No. 25, under which no compensation cost has been recognized. Had compensation
cost for these plans been determined consistent with SFAS No. 123,
the Company's net (loss) income and (loss) earnings per share would have been
(increased) reduced to the following pro forma amounts for the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996, and the year
ended June 30, 1996, and (in thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended Year Ended December 31, Year Ended June
December 31, December 31, 30,
1998 1997 1996 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net (loss) income: As reported $(10,574) $(17,077) $1,749 $2,404
======== ======== ====== ======
Pro Forma $(14,493) $(18,896) $1,027 $ 544
======== ======== ====== ======
Basic EPS: As reported $ (0.94) $ (1.57) $ 0.18 $ 0.26
======== ======== ====== ======
Pro Forma $ (1.29) $ (1.73) $ 0.10 $ 0.06
======== ======== ====== ======
Diluted EPS: As reported $ (0.94) $ (1.57) $ 0.16 $ 0.24
======== ======== ====== ======
Pro Forma $ (1.29) $ (1.73) $ 0.09 $ 0.05
======== ======== ====== ======
</TABLE>
Because the SFAS No. 123 accounting method does not apply to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The weighted average fair value per option granted during the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996, and the year
ended June 30, 1996, was $10.03, $6.73, $10.09 and $6.78, respectively.
F-22
<PAGE>
The above information was calculated utilizing the Black-Scholes option-pricing
model and the following key assumptions:
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Risk-free interest rate 6.5% 6.5% 5.9% 5.9%
Volatility 90% 75% 60% 60%
Expected life (months) 60 48 24 24
</TABLE>
11. INCOME TAXES:
-------------
The income tax benefit (expense) for the years ended December 31, 1998 and 1997,
the six months ended December 31, 1996, and the year ended June 30, 1996,
included the following components (in thousands):
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Federal income tax benefit (expense) $ 730 $2,902 $(829) $(1,616)
State income tax benefit (expense) 107 183 (117) (240)
------ ------ ----- -------
Total $ 837 $3,085 $(946) $(1,856)
====== ====== ===== =======
Current income tax benefit (expense) $1,351 $ (731) $(948) $(2,160)
Deferred income tax (expense) benefit (514) 3,816 2 304
------ ------ ----- -------
Total $ 837 $3,085 $(946) $(1,856)
====== ====== ===== =======
</TABLE>
F-23
<PAGE>
A reconciliation between the actual income tax (benefit) provision and the
amount computed by applying the federal statutory tax rate of 34% to the income
before income tax expense is as follows:
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Income tax (benefit) provision at
federal statutory rate (34.0)% (34.0)% 34.0% 34.0%
State income taxes, net of federal
income tax effect (5.0) (5.0) 5.0 5.0
Loss on Introspect operations - - (5.1) 2.4
Non-deductible goodwill - 21.1 3.6 1.6
Effects of CCI S Corporation status (.8) .9 (3.0) (1.4)
Non-recognition of tax benefit of
operating losses 29.2 - - -
Non-deductible merger costs 3.3 - - -
Other - 1.7 .6 2.0
------ ------ ---- ----
Total (7.3)% (15.3)% 35.1% 43.6%
====== ====== ==== ====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Loss carryforwards $ 3,707 $5,740
Depreciation and amortization 1,293 613
Accruals and reserves 3,432 1,200
Start-up losses 119 173
Prepaid expenses and inventory (1,361) (431)
Other (71) (14)
------- ------
Deferred tax asset $ 7,119 $7,281
======= ======
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $12,185,000 and $22,750,000 for federal and state income tax
purposes, respectively, that expire through 2012. At December 31, 1998, the
Company also has a capital loss carryforward of approximately $10,304,000 that
expires in 2002.
12. RELATED PARTY TRANSACTIONS:
---------------------------
During the six months ended December 31, 1996, the Company entered into an
agreement with International Youth Institute (IYI), a company in which an
officer and shareholder is a relative of a former officer and director of the
Company. Under this agreement, the Company outsources the training of its staff
workers to IYI. In connection with this agreement, a number of Company
employees who were trainers of other Company employees were hired by IYI. In
order to compensate the Company for the knowledge, training materials and other
intellectual property that had been transferred, IYI paid the Company $700,000
and was not compensated for training
F-24
<PAGE>
services IYI provided prior to January 1, 1997. The sale amount of $700,000 has
been included in revenues in the accompanying statement of operations for the
six months ended December 31, 1996. The Company and IYI also entered into a
training services agreement pursuant to which IYI would provide certain training
services to the Company for a period of five years at a rate of approximately
$34 per month per full-time employee of the Company.
In December 1998, the Company agreed with Golden Eagle Education and Training,
Inc. (Golden Eagle, formerly IYI) to buy-out the contract under which Golden
Eagle provided training to employees of the Company. The Company agreed to pay
Golden Eagle $1,150,000 to buy-out the remaining term of the contract. The cost
of this buy-out is included in general and administrative expense in the
accompanying consolidated statements of operations for the year ended December
31, 1998.
In connection with the resignation of the Founder of the Company from the Board
of Directors effective July 1, 1997, the Company appointed the Founder as
Chairman Emeritus and entered into a four-year Representation Agreement with
him. Under the Representation Agreement, the Chairman Emeritus agrees to
represent the Company's interest with current and potential customers,
governmental bodies and the public as and to the extent requested by the Company
and in exchange, the Company pays him $20,000 per quarter during the four-year
term.
13. DISPOSITION OF BEHAVIORAL HEALTH BUSINESS:
------------------------------------------
During the period January 1, 1994 through January 1, 1997, the Company acquired
the operating assets or stock of the following companies:
. Western Youth Inc.
. Parc Place, Limited Partnership
. Promise House, Inc.
. Developmental Behavioral Consultants, Inc.
. Desert Hills Center for Youth and Families of New Mexico, Inc.
. Desert Hills of Texas, Inc.
. Tampa Bay Academy, Ltd.
. Youth Quest Inc.
. Introspect HealthCare, Corporation
. Texas Children's Health Services Inc. (Los Hermanos)
Following their respective acquisitions, the Company operated each of the
companies listed above as distinct businesses. Due to their related nature,
however, these businesses comprised the Company's behavioral health business.
The total acquisition price for these companies, including assumed liabilities
and acquisition costs, was approximately $41,100,000 with approximately
$19,800,000 of the total purchase price being allocated to goodwill in
connection with purchase accounting.
F-25
<PAGE>
In March 1997, the Board of Directors of the Company approved, and management
committed to, a plan to sell the programs that comprised the Company's
behavioral health business. On October 31, 1997, the Company consummated the
sale of the behavioral health business, other than the College Station and Los
Hermanos programs in Texas, for $20,400,000 resulting in a loss on sale of
$20,898,000. In September 1998, the Company closed the College Station program.
The Company continues to operate the Los Hermanos program as a juvenile justice
program.
Unaudited revenues and contribution from operations for the behavioral health
businesses including the College Station program for the years ended December
31, 1998 and 1997, the six months ended December 31, 1996, and the year ended
June 30, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Year Six Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues $1,566 $34,733 $24,869 $44,759
Contribution from Operations (787) 95 1,659 3,394
</TABLE>
The Company has also recorded a liability of $2,327,000 to provide for the
anticipated future losses related to the College Station facility. The major
components of the charge are as follows:
<TABLE>
<S> <C>
Future lease payments $1,250,000
Continuing maintenance and occupancy costs 858,000
Write-down of leasehold improvements and
other fixed assets 219,000
----------
$2,327,000
==========
</TABLE>
This charge has been recorded as College Station closure costs in the
accompanying consolidated statements of operations for the year ended December
31, 1998.
15. SIGNIFICANT CUSTOMER:
---------------------
The Company derives a significant portion of its revenues from two contracts
with one state agency. This state agency provided 27%, 22%, 22% and 24% of
total revenues for the years ended December 31, 1998 and 1997, the six months
ended December 31, 1996, and the year ended June 30, 1996, respectively. One of
the two contracts with this state agency was due to expire on June 30, 1998.
During 1998, this contract was extended through March 31, 1999. Subsequent to
December 31, 1998, this contract was further extended through June 30, 2004
(including option periods).
F-26
<PAGE>
15. UNAUDITED FINANCIAL INFORMATION:
--------------------------------
The unaudited summary results of operations for the six month period ended
December 31, 1995, including the effects of CCI, was as follows (in thousands):
<TABLE>
<S> <C>
Revenues $49,240
Program expenses 42,227
-------
Contributions from operations 7,013
Development costs 526
General and administrative expenses 2,775
-------
Income from operations 3,712
-------
Income before income tax expense 2,255
Income tax expense 978
-------
Net income $ 1,277
=======
Earnings per common share:
Basic $ 0.14
=======
Diluted $ 0.13
=======
</TABLE>
16. MERGER WITH CORRECTIONAL SERVICES CORPORATION:
----------------------------------------------
On September 24, 1998, the Company announced that it had entered into a
definitive merger agreement with CSC, under which each outstanding share of the
Company's common stock would be converted into .375 shares of CSC common stock.
Subsequently, an amended agreement was executed under which each outstanding
share of the Company's common stock would be converted into .275 shares of CSC
common stock. Under the merger agreement, the Company would become a wholly
owned subsidiary of CSC. In addition, due to certain provisions of the
Indenture, at the merger close date, the 7% Convertible Subordinated Debentures
described in Note 5 may become immediately redeemable at the option of the
holder.
F-27
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
SUPPLEMENTARY CONSOLIDATING BALANCE SHEET
-----------------------------------------
AS OF DECEMBER 31, 1998
-----------------------
ASSETS
------
(In thousands)
<TABLE>
<CAPTION>
YSI, Inc. YSII YSIT YSIB YSIM YSINI YSISD YSIMO YSICI
---------- -------- ----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,802 $ 5 $ 1 $ 4 $ 1 $ 8 $ 4 $ 3 $ 2
Restricted cash - - - - 69 - - - -
Accounts receivable, net 2,309 518 409 877 780 1,561 830 1,226 1,237
Proceeds receivable from sale of
behavioral health business - - - - - - - - -
Receivables from related parties - - - - - - - - -
Due from affiliates 6,779 - - 3,627 679 - - - -
Prepaid expenses, supplies and
other 322 252 52 323 157 128 66 336 54
Deferred tax asset 23 - - - - - - - -
------- ------- ----- ------ ------ ------ ------ ------- ------
Total current assets 14,235 775 462 4,831 1,686 1,697 900 1,565 1,293
------- ------- ----- ------ ------ ------ ------ ------- ------
PROPERTY, EQUIPMENT AND
IMPROVEMENTS:
Land 1,500 - - - - 101 189 - -
Leasehold improvements 512 1,490 552 283 385 578 648 2,837 187
Program equipment 664 635 121 268 382 481 367 729 141
Buildings 3,554 1,546 - - 111 1,473 1,091 9 -
Office furniture and equipment 206 63 41 7 46 37 211 39 17
Vehicles 1,486 - - 47 62 17 3 43 -
------- ------- ----- ------ ------ ------ ------ ------- ------
7,922 3,734 714 605 986 2,687 2,509 3,657 345
Less - Accumulated depreciation (1,218) (1,363) (276) (517) (655) (957) (897) (1,381) (161)
------- ------- ----- ------ ------ ------ ------ ------- ------
Property, equipment and
improvements, net 6,704 2,371 438 88 331 1,730 1,612 2,276 184
------- ------- ----- ------ ------ ------ ------ ------- ------
OTHER ASSETS:
Deferred debt issue costs, net 1,571 - - - - - - - -
Goodwill, net - - - - - - 1,790 - -
Deferred tax asset 7,096 - - - - - - - -
Other assets, net 1,100 17 6 23 20 13 7 25 4
Investment in subsidiaries 21,983 - - - - - - - -
------- ------- ----- ------ ------ ------ ------ ------- ------
Total other assets 31,750 17 6 23 20 13 1,797 25 4
------- ------- ----- ------ ------ ------ ------ ------- ------
Total assets $52,689 $ 3,163 $ 906 $4,942 $2,037 $3,440 $4,309 $ 3,866 $1,481
======= ======= ===== ====== ====== ====== ====== ======= ======
<CAPTION>
YSI
Holdings,
YSITX YSIV YSIMI YSISP YSIDE YSIMN YSIIL CCI Inc.
------ ------ ------ ------ ----- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 11 $ 3 $ 2 $ 10 $ 1 $ 1 $ 1 $ 106 $ 938
Restricted cash - - - - - - - - -
Accounts receivable, net 215 758 1,170 1,948 59 429 357 1,196 -
Proceeds receivable from sale of
behavioral health business -
Receivables from related parties - - - - - - - - -
Due from affiliates - - - - - - - - 20,899
Prepaid expenses, supplies and
other 27
Deferred tax asset - - - - - - - - -
------ ------ ------ ------ ---- ------ ------ ------ ---------
Total current assets 253 875 1,318 2,150 94 478 396 1,467 21,837
------ ------ ------ ------ ---- ------ ------ ------ ---------
PROPERTY, EQUIPMENT AND
IMPROVEMENTS:
Land 226 - - - - 6 - - -
Leasehold improvements - 526 2,150 125 3 133 961 44 -
Program equipment 250 208 376 221 8 104 91 173 -
Buildings 445 226 172 - - 2,094 - 71 -
Office furniture and equipment 22 14 25 20 - 18 8 131 -
Vehicles 7 - 28 2 6 7 2 212 -
------ ------ ------ ------ ---- ------ ------ ------ ---------
950 974 2,751 368 17 2,362 1,062 631 -
Less - Accumulated depreciation (151) (383) (253) (73) (3) (78) (33) (256) -
------ ------ ------ ------ ---- ------ ------ ------ ---------
Property, equipment and
------- ------- ------- ------- ----- ------- ------- ------- ---------
improvements, net 799 591 2,498 295 14 2,284 1,029 375 -
------ ------ ------ ------ ---- ------ ------ ------ ---------
OTHER ASSETS:
Deferred debt issue costs, net - - - - - - - - -
Goodwill, net - - - - - - - - -
Deferred tax asset - - - - - - - - -
Other assets, net - 16 22 30 - 3 3 5 -
Investment in subsidiaries - - - - - - - - -
------ ------ ------ ------ ---- ------ ------ ------ ---------
Total other assets - 16 22 30 - 3 3 5 -
------ ------ ------ ------ ---- ------ ------ ------ ---------
Total assets $1,052 $1,482 $3,838 $2,475 $108 $2,765 $1,428 $1,847 $21,837
====== ====== ====== ====== ==== ====== ====== ====== =========
<CAPTION>
Eliminations Consolidated
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ - $ 5,903
Restricted cash - 69
Accounts receivable, net - 15,879
Proceeds receivable from sale of
behavioral health business
Receivables from related parties - -
Due from affiliates (31,984) -
Prepaid expenses, supplies and
other
Deferred tax asset - 23
------------ -------
Total current assets (31,984) 24,328
------------ -------
PROPERTY, EQUIPMENT AND
IMPROVEMENTS:
Land - 2,022
Leasehold improvements - 11,414
Program equipment - 5,219
Buildings - 10,792
Office furniture and equipment - 905
Vehicles - 1,922
------------ -------
- 32,274
Less - Accumulated depreciation - (8,655)
------------ -------
Property, equipment and
------------ ------------
improvements, net - 23,619
------------ -------
OTHER ASSETS:
Deferred debt issue costs, net - 1,571
Goodwill, net - 1,790
Deferred tax asset - 7,096
Other assets, net - 1,294
Investment in subsidiaries (21,983) -
------------ -------
Total other assets (21,983) 11,751
------------ -------
Total assets $(53,967) $59,698
============ =======
</TABLE>
The accompanying notes are an integral part of this supplementary consolidating
balance sheet.
F-28
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
SUPPLEMENTARY CONSOLIDATING BALANCE SHEET
-----------------------------------------
AS OF DECEMBER 31, 1998
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands)
<TABLE>
<CAPTION>
YSI, Inc. YSII YSIT YSIB YSIM YSINI YSISD YSIMO YSICI YSITX
--------- ------ ---- ------ ------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 291 $ 40 $ (2) $ 177 $ 72 $ 104 $ (53) $ 200 $ 10 $ 20
Accrued expenses 7,313 139 157 450 328 106 75 346 65 1,841
Deferred revenue - - - - - - - - - -
Current portion of long-term
liabilities 2 - - - - - 15 - 3
Due to affiliates - 2,624 2 - - 3,264 2,289 4,280 1,624 3,951
-------- ------ ---- ------ ------ ------ ------ ------ ------ -------
Total current liabilities 7,606 2,803 157 627 400 3,474 2,326 4,826 1,702 5,812
7% CONVERTIBLE SUBORDINATED
DEBENTURES 32,200 - - - - - - - -
12% SUBORDINATED
DEBENTURES - - - - - - - - -
LONG-TERM DEBT, less current
portion - - - - - - 45 - - -
-------- ------ ---- ------ ------ ------ ------ ------ ------ -------
Total liabilities 39,806 2,803 157 627 400 3,474 2,371 4,826 1,702 5,812
-------- ------ ---- ------ ------ ------ ------ ------ ------ -------
COMMITMENTS AND
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 113 - - - - - 1 - - -
Additional paid-in capital 35,010 225 25 1 100 179 99 1 - -
Accumulated (deficit) earnings (22,240) 135 724 4,314 1,537 (213) 1,838 (961) (221) (4,760)
-------- ------ ---- ------ ------ ------ ------ ------ ------ -------
Total shareholders' equity 12,883 360 749 4,315 1,637 (34) 1,938 (960) (221) (4,760)
-------- ------ ---- ------ ------ ------ ------ ------ ------ -------
Total liabilities and
shareholders' equity $ 52,689 $3,163 $906 $4,942 $2,037 $3,440 $4,309 $3,866 $1,481 $ 1,052
======== ====== ==== ====== ====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
YSI
Holdings,
YSIV YSIMI YSISP YSIDE YSIMN YSIIL CCI Inc. Eliminations Consolidated
------- -------- ------- ------- ------- --------- -------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 33 $ 108 $ 99 $ 3 $ 26 $ 16 $ 181 $ - $ - $ 1,325
Accrued expenses 118 131 387 25 59 42 423 - - 12,005
Deferred revenue - - - - - - - - - -
Current portion of long-term
liabilities -
Due to affiliates 1,686 3,825 2,520 101 3,317 1,899 602 - (31,984 ) -
------ ------ ------ ---- ------ ------ ------ --------- -------- --------
Total current liabilities 1,837 4,064 3,006 129 3,402 1,957 1,206 - (31,984 ) 13,350
7% CONVERTIBLE SUBORDINATED
DEBENTURES -
12% SUBORDINATED
DEBENTURES -
LONG-TERM DEBT, less current
portion - - - - - - - - - 45
------ ------ ------ ---- ------ ------ ------ --------- -------- --------
Total liabilities 1,837 4,064 3,006 129 3,402 1,957 1,206 - (31,984 ) 45,595
------ ------ ------ ---- ------ ------ ------ --------- -------- --------
COMMITMENTS AND
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock - - - - - - - - (1 ) 113
Additional paid-in capital - - - - - - 1,444 - (630 ) 36,454
Accumulated (deficit) earnings (355) (226) (531 ) (21) (637 ) (529) (803) 21,837 (21,352 ) (22,464)
------ ------ ------ ---- ------ ------ ------ --------- -------- --------
Total shareholders' equity (355) (226) (531 ) (21) (637 ) (529) 641 21,837 (21,983 ) 14,103
------ ------ ------ ---- ------ ------ ------ --------- -------- --------
Total liabilities and
shareholders' equity $1,482 $3,838 $2,475 $108 $2,765 $1,428 $1,847 $21,837 $(53,967 ) $ 59,698
====== ====== ====== ==== ====== ====== ====== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of this supplementary consolidating
balance sheet.
F-29
<PAGE>
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------------
SUPPLEMENTARY CONSOLIDATING STATEMENT OF OPERATIONS
---------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
(In thousands)
<TABLE>
<CAPTION>
YSI, Inc. YSII YSIT YSIB YSIM YSINI YSISD YSIMO YSICI YSITX
-------- ------ ------ ------- ------ ------ ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 10,036 $5,435 $2,411 $15,309 $8,651 $5,929 $5,243 $ 9,686 $2,526 $ 2,952
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
PROGRAM EXPENSES:
Direct operating 1,496 5,446 2,090 14,976 7,650 4,964 5,345 10,946 2,007 3,937
Start-up costs - - - - - - - - - -
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
Contribution operations 8,540 (11) 321 333 1,001 965 (102) (1,260) 519 (985)
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
OTHER OPERATING EXPENSES:
General and administrative 9,480 - - - - - - - - -
College Station closure costs - - - - - - - - - 2,327
Strategic deal costs 803 - - - - - - - - -
CCI special bonuses - - - - - - - - - -
Costs related to CCI
transaction 306 - - - - - - - -
Corporate management fee 98 924 241 - 866 1,008 - 969 430 295
Loss on sale behavioral health
business - - - - - - - - -
Costs of attempted acquisitions - - - - - - - - - -
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
Loss from operations (2,147) (935) 80 333 135 (43) (102) (2,229) 89 (3,607)
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
OTHER INCOME (EXPENSE):
Interest expense (3,770) - - - - - (3) - - -
Interest income 317 - - - - - - - - -
Loss on sale of investments - - - - - - - - - -
Other income (expense), net 473 - - - 3 - (9) (1) - (3)
Loss from subsidiaries (6,591) - - - - - - - - -
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
(Loss) Income before income
tax benefit (expense) (11,718) (935) 80 333 138 (43) (114) (2,230) 89
Income tax benefit (expense) 394 69 (6) (28) (11) 3 6 164 (6) 261
-------- ------ ------ ------- ------ ------ ------ ------- ------ -------
Net (loss) income $(11,324) $ (866) $ 74 $ 305 $ 127 $ (40) $ (108) $(2,066) $ 83 $(3,349)
======== ====== ====== ======= ====== ====== ====== ======= ====== =======
<CAPTION>
YSI
Holdings,
YSIV YSIMI YSISP YSIDE YSIMN YSIIL CCI Inc. Elliminations Consolidated
--------------- -------- ------ -------- ------- ------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $3,291 $5,256 $8,297 $636 $1,459 $ 861 $9,810 $ - $(7,723) $ 90,065
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
PROGRAM EXPENSES:
Direct operating 3,354 4,536 7,849 594 1,750 983 7,863 - (553) 85,233
Start-up costs - - - - 163 331 - - - 494
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
Contribution operations (63) 720 448 42 (454) (453) 1,947 - (7,170) 4,338
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
OTHER OPERATING EXPENSES:
General and administrative - - - - - - 1,376 - - 10,856
College Station closure costs - - - - - - - - - 2,327
Strategic deal costs - - - - - - - - - 803
CCI special bonuses - - - - - - - - - -
Costs related to CCI
transaction -
Corporate management fee 329 526 830 64 146 86 358 - (7,170) -
Loss on sale behavioral health
business -
Costs of attempted acquisitions - - - - - - - - - -
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
Loss from operations (392) 194 (382) (22) (600) (539) 213 - - (9,954)
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense - - - - - - (27) - 1,514 (2,286)
Interest income - - - - - - 3 1,562 (1,514) 368
Loss on sale of investments - - - - - - - - - -
Other income (expense), net - (1) - - - - (1) - - 461
Loss from subsidiaries - - - - - - - - 6,591 -
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
(Loss) Income before income
tax benefit (expense) (3,610)
Income tax benefit (expense) 27 (15) 27 1 44 38 (16) (115) - 837
------ ------ ------ ---- ------ ----- ------ --------- ------- --------
Net (loss) income $ (365) $ 178 $ (355) $(21) $ (556) $(501) $ 172 $1,447 $ 6,591 $(10,574)
====== ====== ======= ==== ====== ===== ====== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of this supplementary consolidating
statement.
F-30
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
We have accounted for the merger as a pooling-of-interest, which means CSC will
treat the companies as if they had always been combined for accounting and
financial reporting purposes. The following Unaudited Pro Forma Combined
Condensed Statements of Operations and Balance Sheet give effect to the
combination of CSC and YSI on a pooling-of-interests basis of accounting. These
Unaudited Pro Forma Combined Condensed Financial Statements have been prepared
from the historical consolidated financial statements of CSC and YSI and should
be read in conjunction therewith, and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations of CSC
and YSI. The amounts presented do not reflect any cost savings or other
synergies anticipated by CSC or YSI management as a result of the merger.
The adjusted historical financial statements of YSI includes for all periods the
financial results and accounts of Community Corrections, Inc. (CCI), which YSI
acquired in a pooling-of-interest transaction on June 30, 1998. The adjusted
historical financial statements of YSI excludes for the Behavioral Health
Business, which was comprised of seven programs YSI sold on October 31, 1997 and
one program YSI closed in September 1998, including the loss on such sale and
the costs of such closing. The historical financial statements of CSC and of
YSI are contained in the Company's Joint Proxy Statement/Prospectus.
This unaudited pro forma combined condensed financial information is not
necessarily indicative of actual or future operating results or financial
position that would have occurred or will occur upon consummation of the Merger.
The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the
Merger as if had occurred on December 31, 1998, combining the balance sheets of
CSC and YSI as of that date. The Unaudited Pro Forma Combined Condensed
Statements of Operations give effect to the Merger as if it had occurred on
January 1, 1998, combining results of CSC and YSI for the year ended December
31, 1998.
G-1
<PAGE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Historical Historical Less: Adjusted Pro Forma
CSC YSI Behavorial Historical YSI Combined
1998 1998 Health Bsn. 1998 1998
---------------------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $97,928,000 $90,065,000 $2,586,000 $87,479,000 $185,407,000
------------- ------------- ------------ ------------- -------------
Expenses:
Operating 71,255,000 85,233,000 2,353,000 82,880,000 154,135,000
General and administrative 16,264,000 10,856,000 10,856,000 27,120,000
Startup and deferred development 11,630,000 494,000 494,000 12,124,000
Other Operating Expenses:
College Station shutdown charge 2,327,000 2,327,000 0 0
Strategic Deal Costs 803,000 803,000 803,000
Costs Related to CCI transaction 306,000 306,000 306,000
------------- ------------- ------------ ------------- -------------
99,149,000 100,019,000 4,680,000 95,339,000 194,488,000
------------- ------------- ------------ ------------- -------------
Operating loss (1,221,000) (9,954,000) (2,094,000) (7,860,000) (9,081,000)
Interest expense, net (694,000) (1,457,000) (1,457,000) (2,151,000)
------------- ------------- ------------ ------------- -------------
Loss before income taxes and cumulative
effect of change in accounting (1,915,000) (11,411,000) (2,094,000) (9,317,000) (11,232,000)
Income tax (provision) benefit 756,000 837,000 (86,000) 923,000 1,679,000
------------- ------------- ------------ ------------- -------------
Loss before cumulative effect of change
in accounting (1,159,000) (10,574,000) (2,180,000) (8,394,000) (9,553,000)
Cumulative effect of change in accounting, net
of tax (4,863,000) 0 0 (4,863,000)
------------- ------------- ------------ ------------- -------------
Net loss ($6,022,000) ($10,574,000) ($2,180,000) ($8,394,000) ($14,416,000)
============= ============= ============ ============= =============
Basic and diluted loss per share:
Loss before cumulative effect of change
in accounting ($0.15) ($0.94) ($0.74) ($0.88)
Cumulative effect of change in accounting ($0.63) $0.00 $0.00 ($0.45)
------------- ------------- ------------- -------------
Net loss ($0.78) ($0.94) ($0.74) ($1.33)
============= ============= ============= =============
Net income (loss) ($0.78) ($0.94) ($0.74) ($1.33)
============= ============= ============= =============
Number of shares used to compute EPS:
Basic 7,761,224 11,269,000 11,269,000 10,860,199
Diluted 7,761,224 11,269,000 11,269,000 10,860,199
</TABLE>
G-2
<PAGE>
CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical - Historical-
Correctional Youth Services
Services International, Pro Forma Pro Forma
Corporation Inc. Adjustments Combined
------------ -------------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,736 $ 5,903 $ - $ 7,639
Restricted cash 88 69 157
Accounts receivable 22,045 15,879 37,924
Receivable from sale of equipment and
Deferred tax asset - 23 23
leasehold improvements 994 - 994
Prepaid expenses and other current assets 2,967 2,454 (727)(3) 4,694
------------ -------------- --------- ---------
Total current assets 27,830 24,328 (727) 51,431
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS AT COST, NET 29,501 23,619 53,120
OTHER ASSETS
Deferred tax asset 4,114 7,096 4,500 (3) 15,710
Other 5,192 4,655 (1,400)(3) 8,447
------------ -------------- --------- ---------
$ 66,637 $ 59,698 $ 2,373 $128,708
============ ============== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 15,568 $ 13,330 $ 11,920 (3) $ 40,818
Subordinated promissory notes 1,101 - 1,101
Current portion of long-term obligations 2 20 22
------------ -------------- --------- ---------
Total current liabilities 16,671 13,350 11,920 41,941
LONG-TERM SENIOR DEBT 11,500 - 11,500
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 32,200
LONG-TERM OBLIGATIONS, less current portion 319 45 364
LONG-TERM PORTION OF FACILITY LOSS
RESERVES 224 - 224
STOCKHOLDERS' EQUITY
Preferred Stock - - -
Common Stock 78 113 (82)(6) 109
Additional paid-in capital 43,016 36,454 82 (6) 79,552
Accumulated deficit (5,171) (22,464) (9,547)(3) (31,182)
------------ -------------- --------- ---------
Total stockholders' equity 37,923 14,103 ( 9,547) 42,479
------------ -------------- --------- ---------
$ 66,637 $ 59,698 $ 2,373 $128,708
============ ============== ========= =========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
G-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1--PRO FORMA BASIS OF PRESENTATION
The Unaudited Pro Forma Combined Condensed Financial Statements reflect the
Exchange Ratio of .275 shares of CSC common stock for one share of YSI common
stock. The actual number of shares of CSC to be issued will be determined at the
effective time based on the number of shares of YSI common stock outstanding at
that date.
The Adjusted Historical Financial Statements of YSI give effect to YSI's
merger with Community Corrections, Inc. consummated on June 30, 1998 accounted
for as a pooling-of-interest. These financial statements exclude the results of
operations of the seven behavioral health programs YSI sold on October 31, 1997
and the College Station behavioral health program YSI closed on September 15,
1998, as well as the loss from such sale and the costs associated with such
closing. The Adjusted Historical Financial Statements of YSI serve to reflect
the historical results of the continuing operations of YSI existing as of
December 31, 1998.
NOTE 2--PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share amounts are based on the weighted average
number of common shares outstanding and dilutive common equivalent shares
assumed to be outstanding during the period using the treasury stock method,
giving effect to the Merger as if it had been consummated at the beginning of
the years presented given the assumptions described in Note 1.
NOTE 3--TRANSACTION COSTS AND RELATED EXPENSES
CSC and YSI estimate that they will incur direct and indirect costs of
approximately $14.85 million in connection with the merger as follows:
<TABLE>
<CAPTION>
(In
thousands)
------------
<S> <C>
Write off of redundant assets and excess capacity .................................. $ 3,600
Personnel costs .................................................................... 3,500
Cancellation of contractual obligations ............................................ 800
Financial advisory fees ............................................................ 1,700
Legal and accounting services ...................................................... 1,000
Integration Costs (not included above):
Write off debt issuance costs ................................................... 1,400
Computer integration costs ...................................................... 1,500
Travel/printing/filing fees/marketing materials ................................. 850
Other ........................................................................... 500
-------
$14,850
=======
</TABLE>
These nonrecurring costs will be charged to operations in the fiscal quarter
in which the Merger is consummated or as incurred depending on the nature of
such costs and except for certain transaction costs incurred by YSI which are
being expensed as incurred. As of December
G-4
<PAGE>
31, 1998, CSC has capitalized $727,000 and YSI has expensed $803,000 of
transaction and related costs.
The following describes the pro forma adjustments to record the effect of the
transaction and related costs as of December 31, 1998.
The pro forma adjustment to expense CSC's capitalized transaction costs totals
$727,000 as of December 31, 1998. As a result of the merger, the 7% convertible
subordinated debentures owed by YSI can be redeemed by the holders of such
debentures beginning one year from the consummation of the merger. As a result,
the $1,400,000 reduction of other assets represents the write off of the
unamortized debt issuance costs for periods beyond one year.
The adjustment to increase accounts payable and accrued liabilities by
$11,920,000 represents the $14.850 million of estimated total transaction costs
net of CSC and YSI incurred as of December 31, 1998 and net of the write off of
unamortized debt issuance costs described above.
The $9,547,000 adjustment to increase the deficit as of December 31, 1998
reflects the after tax effect of the adjustments described herein. The pro forma
adjustment to the deferred tax asset reflects the tax benefit of transaction
costs and related expenses. Based on its internal projections, CSC believes such
asset is recoverable well within the recovery period.
NOTE 4--CONFORMING ADJUSTMENTS
CSC has reviewed the status of the combined company's deferred taxes as if the
acquisition had occurred at the beginning of the first period presented and has
made necessary adjustments to the combined company's deferred taxes based upon
the combined company's profitability. Management of CSC and YSI are evaluating
the accounting policies and financial statement presentation currently utilized
by CSC and YSI to determine the policies and presentation to be adopted by the
combined company. Accordingly, the financial statements for the combined company
may differ from the presentation herein. Management does not believe the
adjustments, if any, will be material to such financial statements.
The deferred tax asset on the books of YSI represents net operating loss
carryforwards primarily generated over the past two years. Accordingly, these
carryforwards do not begin to expire until 2012. Based upon internal forecasts,
YSI and CSC believe the NOL will be utilized well within the available period.
NOTE 5--DILUTIVE DERIVATIVE SECURITIES
Under the treasury stock method, dilutive derivative securities are not
included in the computation of diluted weighted average shares outstanding for
any period in which the reporting company incurred a net loss. In the Unaudited
Pro Forma Combined Condensed Statements of Operations, the determination of
whether to include derivative securities in the computation of diluted weighted
average shares outstanding was based on the pro forma combined results of
operations. Accordingly, the diluted weighted average shares outstanding, and
consequently the diluted net earnings (loss) per share, for CSC or YSI will
differ from that reflected on its historical statements of operations if the
historical results were a loss and the pro forma combined
G-5
<PAGE>
results reflect net earnings or if the historical results reflect net earnings
and the pro forma combined results were a loss.
NOTE 6--STOCKHOLDERS' EQUITY
Adjustment to reflect the par value of CSC common stock assumed to be
outstanding at December 31, 1998 upon exchange of one share of YSI common stock
for .275 shares of CSC common stock.
G-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
Date: April 21, 1999
CORRECTIONAL SERVICES CORPORATION
By: /s/ James F. Slattery
----------------------------------
James F. Slattery
Chairman of the Board, Chief Executive
Officer and President
<PAGE>
EXHIBIT INDEX
4.2.1 Amendment to Fiscal and Paying Agency Agreement, dated March 31,
1999, by and among YSI, The Chase Manhattan Bank, N.A., New York,
The Chase Manhattan Bank, N.A., London and Chase Manhattan Bank
Luxembourg S.A.
4.3.1 Amendment to Indenture, dated March 31, 1999, by and between YSI
and The Chase Manhattan Bank, as trustee.
99 Press release announcing the completion of the Merger dated
April 1, 1999.
- -------------------------------
<PAGE>
EXHIBIT 4.2.1
FIRST AMENDMENT TO FISCAL AND PAYING AGENCY AGREEMENT
This First Amendment ("Amendment") to the Fiscal and Paying Agency
Agreement dated as of January 29, 1996 (the "Original Indenture") by and among
Youth Services International, Inc. ("the Company"), The Chase Manhattan Bank,
N.A., New York, as Fiscal Agent, Paying Agent, Transfer Agent and Conversion
Agent (the "Fiscal Agent"), the Chase Manhattan Bank, N.A., London, as Paying
Agent, Conversion Agent and Transfer Agent, and Chase Manhattan Bank Luxembourg,
S.A., as Paying Agent, Conversion Agent and Transfer Agent (collectively, and
together with the Fiscal Agent, the "Agents"), is entered into as of this 31st
day of March, 1999 by and among the Company, the Agents and Correctional
Services Corporation, a Florida corporation ("CSC").
WHEREAS, Section 7(l) of the Original Agreement provides that, in the
case of certain mergers of the Company, the person obligated to issue securities
upon conversion of the Securities (as defined in the Original Agreement) shall
execute and deliver to the Fiscal Agent an amendment addressing certain issues;
WHEREAS, the Company, CSC and Palm Merger Corporation, a Maryland
corporation and wholly-owned subsidiary of CSC ("Merger Sub"), have entered into
an Agreement and Plan of Merger, dated as of September 23, 1998, as amended,
(the "Merger Agreement"), pursuant to which Merger Sub will merge with and into
YSI (the "Merger") and each stockholder of YSI will receive .275 shares of the
Common Stock of CSC, $.01 par value per share (the "CSC Common Stock") in
exchange for each share of the Common Stock of YSI, $.01 par value per share,
owned by such YSI stockholder;
WHEREAS, the Section 7(l) of the Original Agreement is applicable to
the Merger; and
WHEREAS, the parties desire to amend the terms of the Original
Agreement as set forth below, in accordance with the requirements of Section
7(l) of the Original Agreement;
NOW THEREFORE, in consideration of the covenants and agreements
contained herein, the Original Agreement is hereby amended as set forth below.
1. Capitalized Terms. Capitalized terms not otherwise defined herein shall
-----------------
have the meanings set forth in the Original Agreement.
2. Conversion of Securities. Pursuant to the requirements of Section 7(l) of
------------------------
the Original Agreement, each Security outstanding as of the date hereof
shall automatically, without the consent of any holder, become convertible
only into the number of shares of CSC Common Stock which the holder would
have owned immediately after the Effective Time if the holder had converted
the Security at the conversion price in effect immediately before the
Effective Time, subject to adjustments as nearly equivalent as
<PAGE>
may be practicable to the adjustments set forth in Section 7 of the
Original Agreement and in Section 4 of the Registered Securities and Bearer
Securities.
3. Counterparts. This Amendment may be executed in counterparts, each of
------------
which shall constitute one agreement, binding on the parties, and each
party hereby covenants and agrees to execute all duplicates or replacement
counterparts of this Amendment as may be required.
4. Agreement. The terms and provisions of the Original Agreement, as amended
---------
hereby, shall remain in full force and effect. All references to the
Agreement contained therein shall refer to the Original Agreement as
amended hereby.
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ Mark S. Demilio
---------------------------------------------
Name: Mark S. Demilio
Title: Senior Vice President, Acting Chief
Financial Officer and General Counsel
THE CHASE MANHATTAN BANK, N.A., New York, as Fiscal
Agent, Paying Agent, Conversion Agent and Transfer
Agent
By: /s/ Lucia Jaklitsch
---------------------------------------------
Name: Lucia Jaklitsch
Title: Assistant Vice President
[ADDITIONAL SIGNATURES ON
FOLLOWING PAGE]
2
<PAGE>
THE CHASE MANHATTAN BANK, N.A., London, as Paying
Agent, Conversion Agent and Transfer Agent
By: /s/ Lucia Jaklitsch
---------------------------------------------
Name: Lucia Jaklitsch
Title: Assistant Vice President
CHASE MANHATTAN BANK LUXEMBOURG, S.A., as Paying Agent,
Conversion Agent and Transfer Agent
By: /s/ Lucia Jaklitsch
---------------------------------------------
Name: Lucia Jaklitsch
Title: Assistant Vice President
CORRECTIONAL SERVICES CORPORATION
By: /s/ James F. Slattery
---------------------------------------------
Name: James F. Slattery
Title: President and Chief Executive Officer
3
<PAGE>
EXHIBIT 4.3.1
FIRST AMENDMENT TO INDENTURE
This First Amendment ("Amendment") to the Indenture dated as of
October 15, 1996 (the "Original Indenture") by and between Youth Services
International, Inc. ("the Company") and The Chase Manhattan Bank, as Trustee
(the "Trustee"), is entered into as of this 31st day of March, 1999 by and among
the Company, the Trustee and Correctional Services Corporation, a Florida
corporation ("CSC").
WHEREAS, Section 7(n) of the Original Indenture provides that, in the
case of certain mergers of the Company, the person obligated to issue securities
upon conversion of the Securities (as defined in the Original Indenture) shall
execute and deliver to the Trustee an amendment addressing certain issues;
WHEREAS, the Company, CSC and Palm Merger Corporation, a Maryland
corporation and wholly-owned subsidiary of CSC ("Merger Sub"), have entered into
an Agreement and Plan of Merger, dated as of September 23, 1998, as amended,
(the "Merger Agreement"), pursuant to which Merger Sub will merge with and into
YSI (the "Merger") and each stockholder of YSI will receive .275 shares of the
Common Stock of CSC, $.01 par value per share (the "CSC Common Stock") in
exchange for each share of the Common Stock of YSI, $.01 par value per share,
owned by such YSI stockholder;
WHEREAS, the Section 7(n) of the Original Indenture is applicable to
the Merger; and
WHEREAS, the parties desire to amend the terms of the Original
Indenture as set forth below, in accordance with the requirements of Section
7(n) of the Original Indenture;
NOW THEREFORE, in consideration of the covenants and agreements
contained herein, the Original Indenture is hereby amended as set forth below.
1. Capitalized Terms. Capitalized terms not otherwise defined herein shall
-----------------
have the meanings set forth in the Original Indenture.
2. Conversion of Securities. Pursuant to the requirements of Section 7(n) of
------------------------
the Original Indenture, each Security outstanding as of the date hereof
shall automatically, without the consent of any holder, become convertible
only into the number of shares of CSC Common Stock which the holder would
have owned immediately after the Effective Time if the holder had converted
the Security at the conversion price in effect immediately before the
Effective Time, subject to adjustments as nearly equivalent as may be
practicable to the adjustments set forth in Section 7 of the Original
Indenture.
3. Counterparts. This Amendment may be executed in counterparts, each of
------------
which shall constitute one agreement, binding on the parties, and each
party hereby covenants and
<PAGE>
agrees to execute all duplicates or replacement counterparts of this
Amendment as may be required.
4. Indenture. The terms and provisions of the Original Indenture, as amended
---------
hereby, shall remain in full force and effect. All references to the
Indenture contained therein shall refer to the Original Indenture as
amended hereby.
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ Mark S. Demilio
-------------------------------------------
Name: Mark S. Demilio
Title: Senior Vice President, Acting Chief
Financial Officer and General Counsel
THE CHASE MANHATTAN BANK
By: /s/ Lucia Jaklitsch
---------------------------------------------
Name: Lucia Jaklitsch
Title: Assistant Vice President
CORRECTIONAL SERVICES CORPORATION
By: /s/ James F. Slattery
---------------------------------------------
Name: James F. Slattery
Title: President and Chief Executive Officer
2
<PAGE>
EXHIBIT 99
CSC
CORRECTIONAL SERVICES CORPORATION
- --------------------------------------------------------------------------------
1819 Main Street Phone (941) 953-9199
Suite 1000 1-800-275-3766
Sarasota, Florida 34236 Fax (941) 953-9198
NEWS
For Immediate Release
COMPANY CONTACTS:
Ira Colter
Executive Vice President-Finance
(941) 953-9199
April 1, 1999
CORRECTIONAL SERVICES CORPORATION
COMPLETES MERGER WITH YOUTH SERVICES INTERNATIONAL
Sarasota, Florida -- Correctional Services Corporations (NASDAQ
NMS:CSCQ) announced today the completion of its merger with Youth Services
International (NASDAQ-NMS:YSII). The combined company is believed to be the
largest most comprehensive provider of juvenile rehabilitative services in the
nation with 45 facilities and approximately 5,800 juveniles in its care.
Correctional Services will issue .275 of a share of common stock in
exchange for each outstanding share of Youth Services common stock for a total
of approximately 3.1 million shares. The transactions were approved by each
company's shareholders on March 30, 1999. Correctional Services will continue
to trade on the NASDAQ National Market under the symbol CSCQ. Youth Services
will no longer trade publicly. Letters of transmittal will be issued to
shareholders by Correctional Services' transfer agent with instructions for the
share exchange.
Going forward, it is expected that all of the company's juvenile
programs will operate under the Youth Services name as a wholly owned subsidiary
of Correctional Services. With its adult and juvenile programs, Correctional
Services now manages 64 facilities with approximately 13,000 offenders.
James F. Slattery, President and CEO of Correctional Services,
commented, "We are excited about the opportunities we will have in helping to
address the needs of at-risk youth while simultaneously providing all
shareholders with the type of returns expected from the transaction. This
combination uniquely positions our company for the expected growth in the
juvenile corrections marketplace."
James Irving, Vice President, Juvenile Justice Division, added, "As a
former director of a state agency, it is clear to me the significant benefits
this merger brings to our company. We are now able to offer the broadest array
of juvenile services customized to fit the individual objectives of each client
agency."
Correctional Services Corporation is a leading developer and operator
of adult correctional facilities and is the nation's leading operator of
juvenile programs for adjudicated youth. The company has 64 contracts to manage
facilities in 20 states and Puerto Rico, representing approximately 13,000 beds
plus aftercare services.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This press release contains forward-looking statements involving various 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. Actual
results, including the level of earnings of both CSC and YSI, and the success of
the merger, could differ materially from those projected due to factors which
may include difficulties in the assimilation of operations, diversification of
management's attention from other business concerns, other acquisition risks,
population fluctuations, market and industry 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.
* * *
An Equal Opportunity Employer
www.correctionalservices.com
