<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 2000
-----------------------------
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to ______________________
Commissioner file number 000-28295
--------------------
CORRECTIONAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 33-0607766
- ----------------------------------------- ------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
6910 "A" MIRAMAR ROAD, SAN DIEGO, CA 92121
- ----------------------------------------- ------------------------------
(Address of Principal Executive Offices) (Zip Code)
(858) 566-9816
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------------- -------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Age after the distribution of
securities under a plan confirmed by a court.
Yes X No
------------- -------------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,644,400 SHARES
---------------------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements.
Correctional Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Assets
MARCH 31,
2000 DECEMBER 31,
(Unaudited) 1999
---------- ----------
<S> <C> <C>
Current Assets
Cash $472,618 $472,488
Accounts Receivable Net of Allowances of $5,000 827,638 792,746
Other Current Assets 68,670 63,075
---------- ----------
Total Current Assets 1,368,926 1,328,309
---------- ----------
Property and Equipment:
Land 105,278 105,278
Building 1,321,219 1,314,336
Furniture and Equipment 352,418 348,824
Less: Accumulated Depreciation (123,835) (98,371)
---------- ----------
Total Property and Equipment 1,655,080 1,670,067
---------- ----------
Related Party Notes and Interest Receivable 109,333 109,333
Goodwill Net of Accumulated Amortization of $105,215 and $90,004,
respectively 1,216,116 1,231,971
Other Intangibles, net of accumulated amortization of $32,605 and
$27,151, respectively 577,395 582,849
Deposits and Other Assets 34,094 17,374
---------- ----------
$4,960,944 $4,939,903
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable $194,877 $188,281
Accrued Liabilities 462,821 439,515
Current Portion of Long - Term Debt 133,104 132,170
---------- ----------
Total Current Liabilities 790,802 759,966
---------- ----------
Long - Term Debt Net of Current Portion 1,123,889 1,156,681
Deferred Income Taxes 2,621 2,621
Commitment and Contingencies
Shareholders' Equity
Convertible Preferred Stock,$.001 Par Value,10,000,000 Shares
Authorized 3,363,636 Shares of Series A Issued and Outstanding 3,364 3,364
Common Stock, $.001 Par Value, 40,000,000 Shares Authorized,
3,644,400 Shares Issued and Outstanding 3,644 3,644
Additional Paid-In Capital 3,691,317 3,691,317
Accumulated Deficit (654,693) (677,690)
---------- ----------
3,043,632 3,020,635
---------- ----------
$4,960,944 $4,939,903
========== ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
Correctional Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Quarters Ended
Unaudited
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $2,065,240 $1,517,737
Expenses:
Salaries and Wages 815,137 601,629
Depreciation and Amortization 47,435 34,717
Other Operating Expenses 834,793 531,853
General and Administrative Expenses 309,119 288,997
--------- ---------
Total Expenses 2,006,484 1,457,196
--------- ---------
Operating Income 58,756 60,541
Other Income (Expense)
Interest Expense, Net (25,890) (2,399)
Other Expenses (2,654)
--------- ---------
Total Other Income (Expense) (28,544) (2,399)
--------- ---------
Income Before Provision for Income Taxes 30,212 58,142
Provision for Income Taxes 7,215 13,954
--------- ---------
Net Income $22,997 $44,188
========= =========
Basic Income Per Share $ 0.01 $ 0.01
Diluted Income Per Share $ 0.00 $ 0.01
Weighted Average Common Shares Outstanding - Basic 3,494,400 3,374,400
Weighted Average Common Shares Outstanding - Diluted 6,866,479 6,738,036
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
For the Quarters Ended:
Unaudited
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $22,997 $44,188
Adjustments to Reconcile Net Income to Net Cash Provided by
(Used in) Operations
Depreciation and Amortization 47,435 34,717
Increase in Accounts Receivable (34,892) (40,883)
Increase in Other Current Assets (5,595) (5,662)
Increase in Deposits and Other Assets (7,883) (11,475)
Increase (Decrease) in Accounts Payable 6,596 (56,553)
Increase (Decrease) in Accrued Liabilities 23,306 (16,869)
--------- ---------
Net Cash Provided by (Used In) Operations 51,964 (52,537)
--------- ---------
Cash Flows from Investing Activities:
Purchase of Fixed Assets and Other (19,976) -
--------- ---------
Net Cash Used in Investing Activities (19,976)
--------- ---------
Cash Flows From Financing Activities:
Borrowing on Notes Payable - 9,325
Payments on Notes Payable (31,858) -
Payments on Line of Credit - (1,206)
--------- ---------
Net Cash Provided by (Used In) Financing Activities (31,858) 8,119
--------- ---------
Increase (Decrease) in Cash 130 (44,418)
Cash, Beginning of Year 472,488 489,096
--------- ---------
Cash, End of Period $472,618 $444,678
========= =========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
Correctional Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
March 31, 2000
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the
instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation
have been included. For further information, refer to the audited
consolidated financial statements for the fiscal year ended
December 31, 1999 and footnotes thereto, included in the Company's
Annual Report on Form 10-KSB which was filed with the Securities
and Exchange Commission. Operating results for the three month
period ended March 31, 2000 are not necessarily indicative of the
results of operations that may be expected for the year ending
December 31, 2000.
The Company was incorporated in the state of California on March
31, 1994. In October 1999 the Company reincorporated in the state
of Delaware. CSI operates correctional facilities on behalf of
counties under the terms of multi-year contracts with local
government agencies. The population of the correctional facilities
typically consists of arrestees, self-pay inmates, sentenced county
work furlough inmates, sentenced federal inmates serving short-term
sentences and individuals requiring detoxification. Through a
subsidiary, the Company also operates a community corrections
facility known as Reality House, Inc. (RHI). RHI primarily provides
work furlough programs and counseling, funded by the Bureau of
Prisons. The Company's subsidiary, Sentencing Concepts, Inc. (SCI),
provides non-imprisonment alternatives to individuals who would
have otherwise been subject to standard judicial punishment. The
services include electronic home monitoring, drug, alcohol, and
anger management counseling; and drug use testing. The Company has
contracted with various municipal judicial systems to provide these
services.
Risk Factors
Based on total assets and annual revenues, the Company is
significantly smaller than many of its competitors. These
competitors include large privately-held and publicly-held
companies that have substantially greater financial, marketing and
other resources than the Company. These companies offer services
and operate in markets in which the Company competes. The services
offered by these companies in some cases are similar to the
services that the Company offers. The Company expects that
competition will increase substantially as a result of industry
consolidations and alliances, as well as the emergence of new
competitors. There can be no assurance that the Company will be
able to compete successfully with the existing or new competitors
or that competitive pressures faced by the Company will not
materially and adversely effect its business, operating results and
financial condition.
The Company has grown internally, by procuring agreements to
operate correctional facilities, and externally, by acquiring
existing operators of correctional facilities. The Company intends
to continue its development and growth in this manner. Its ability
to manage this development and intended growth will depend on the
efforts of its key management and employees. The Company plans to
use incentives, including competitive compensation and stock plans,
to retain well-qualified employees and attract new employees to
accommodate any expansion. There can be no assurance, however, that
the Company will be able to retain and attract personnel with the
requisite capabilities and experience. The loss of one or more
current key management personnel could also materially effect the
Company.
The Company anticipates that it will need to undertake private
placement or a public offering of its securities at a future date,
depending upon the market conditions, in order to obtain sufficient
capital to implement its intended growth plan. No assurance can be
given that it will be successful in raising additional investment
capital in the future, or that, if it is successful, the financial
resources obtained will be sufficient to successfully carry out the
Company's intended growth plan. The Company believes, based on its
intended business plan, that it has sufficient capital in the
short term to meet its business objectives, using both
available cash and the Company's positive working capital position.
However, there is no assurance that the Company will not need
additional capital in the future.
2. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of CSI
and its wholly-owned subsidiaries, SCI and RHI. All significant
intercompany accounts and transactions have been eliminated.
<PAGE>
Cash
Cash includes cash in readily available checking accounts and money
markets.
Property and Equipment
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets using the straight-line
method.
Goodwill and Intangibles
Goodwill is amortized on a straight-line basis over a period not to
exceed 20 years. Other intangibles, which represent certain
operating rights, are amortized on a straight-line basis over a
period not to exceed 40 years.
Long-Lived Assets
The Company accounts for long-lived assets in accordance with
Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS No. 121"). SFAS 121
requires that long-lived assets and certain identifiable
intangibles to be held by an entity be reviewed for possible
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
The Company periodically re-evaluates the carrying value and
estimated lives of its long-lived assets based on expected
undiscounted cash flows and recognizes impairments, if any.
Revenue Recognition
Revenue is generally recognized as services are provided under
provisions of contracts entered into with governmental agencies,
either at a fixed monthly rate or at a net rate per inmate.
Under contracts entered into by SCI, the Company must provide
services to all clients referred by the judicial process,
regardless of the client's ability to pay. Further, the contracts
allow for SCI to charge its clients fees based on a prearranged
sliding fee schedule. SCI contracts do not guarantee a specified
level of revenue nor do the provide for reimbursement for losses
relating to servicing clients who are unable to pay. As a result,
portions of SCI's clients receive services for a nominal or for no
fees. Accordingly, losses for services provided are recognized when
identified. Fees received in advance of services are recorded a
deferred revenue until services are rendered.
Net Income Per Share
Basic and diluted net income per share for the 3 months ended
March 31, 2000 and 1999 have been computed pursuant to
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". For 1999, the reconciliation between the
weighted average common shares outstanding for basic earnings per
share compared to diluted earnings per share includes the assumed
conversion of preferred stock of 3,363,636 shares and the assumed
exercise of 30,000 stock options. Shares held in escrow until
certain conditions are met are excluded from the weighted average
number of shares outstanding in 2000 and 1999.
Income Taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standard No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Under SFAS 109, deferred assets and
liabilities reflect the future tax consequences of the temporary
differences between the financial reporting and tax basis of
assets and liabilities using current enacted tax rates.
<PAGE>
Stock Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation," requires that the
Company either recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on
new fair value accounting rules or using intrinsic value method and
provide proforma disclosure as if the fair value method had been
applied. The Company has elected to use the intrinsic value method
with proforma disclosure of fair value method.
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 reported
period. Actual results could differ from those estimated.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, other current
assets, accounts payable, and accrued liabilities approximate fair
value because of the short-term nature of those instruments. Based
on borrowing rates currently available to the Company for credit
arrangements with similar terms, the carrying amounts of balances
under capital lease and notes payable obligations approximate fair
value.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivatives Instruments and Hedging Activities" ("SFAS No.
133") establishes accounting and reporting standards for derivative
interments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments
at fair value. The Company does not believe the adoption of SFAS
No. 133 will have an impact on the financial statements.
Certain reclassifications have been made to the March 31, 1999
financial statements to conform to the March 31, 2000 presentation.
3. Acquisition of McCabe Center
In July 1999, the Company entered into an asset purchase agreement
with Austin Recovery Center, Inc. ("ARC"), under which certain
assets of an operating subdivision of ARC known as the McCabe
Center were acquired and certain contract rights were assumed by
the Company. The consideration paid under the agreement was
$1,050,000, of which $550,000 was paid in cash and $500,000 is
payable under a secured promissory note with monthly payments due
through July 2011 (see Note 4). This transaction was accounted for
as an asset purchase.
4. Long-Term Debt Obligations
During 1999, the Company entered into two significant debt
agreements. The first agreement is a promissory note payable to ABN
Amro for $788,400, under which the real property used in the
operations of RHI is secured as collateral. The second agreement is
a promissory note payable to Austin Recovery Center, Inc. for
$500,000, under which the real property used in the operations of
the McCabe Center is secured as collateral.
<PAGE>
The Company's long-term debt as of March 31, 2000 and December 31,
1999 consists of the following:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
ABN Amro, secured by real property with interest at 9.288%
and monthly principal and interest payments of $12,800,
maturing July 2006 $ 711,804 $ 733,343
Austin Recovery Center, Inc., secured by real property with
interest at 8% and monthly principal and interest payments
of $5,412, maturing July 2011 482,975 489,466
Other notes payable, secured by equipment, with interest
rates ranging from 6% to 26% and due at various dates
through September 2004 62,214 66,042
------------ -----------
Total 1,256,993 1,288,851
Less - current portion 133,104 132,170
------------ -----------
Total long-term debt $1,123,889 $ 1,156,681
============ ===========
</TABLE>
A schedule of maturities on long-term debt is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
Capital
Notes Payable Leases Total
------------- ---------- -------------
<S> <C> <C> <C>
2000 $ 171,736 $12,339 $ 184,075
2001 228,981 14,239 243,220
2002 222,205 14,239 236,444
2003 222,205 14,239 236,444
2004 221,590 3,231 224,821
Thereafter 619,588 - 619,588
------------- ---------- -------------
Total 1,686,305 58,287 1,744,592
Less - amount representing interest 469,162 18,437 487,599
------------- ---------- -------------
Present value of payments 1,217,143 39,850 1,256,973
Less - current portion 127,472 5,632 133,104
------------- ---------- -------------
Long-term obligations, net $1,089,671 $34,218 $1,123,889
============= ========== =============
</TABLE>
<PAGE>
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS OR PLAN OF
OPERATION.
The following financial analysis should be read in conjunction with the
Company's financial statements and notes thereto for the year ended December 31,
1999, included in the Company's Annual Report on Form 10K-SB and for the 3
months ended March 31, 2000, included in form 10Q-SB. Interim results are not
necessarily indicative of the operating results for the entire year.
Statements in this section regarding anticipated capital expenditures and
anticipated performance in future periods constitutes forward looking statements
within the meaning of the Securities Exchange Act of 1934. These statements are
subject to certain risks and uncertainties that could cause actual amounts to
differ materially from those projected. We believe these forward looking
statements are reasonable; however, undue reliance should not be placed on such
forward looking statements, which are based on current expectations.
With respect to anticipated capital expenditures, we have made certain
assumptions regarding, among other things, maintenance of existing facilities
and equipment, availability and desirability of new technologically advanced
equipment, installation and start up times, cost estimates and continued
availability of financial resources. The estimated amount of capital
expenditures is subject to certain risks, including, among other things, the
risk that unexpected capital expenditures will be required and unexpected costs
and expenses will be incurred.
General
At present, the Company has contracts to manage nine city jails and one county
jail, three community pre-release centers and an alternative sentencing
division.
The Company's largest customer is the Federal Bureau of Prisons. If the Company
were to experience difficulty in continuing to provide services to this
customer, or collecting these accounts receivable, it could have a material
adverse effect on the Company's business financial conditions and results of
operations. In addition, a loss of this customer could materially and adversely
affect the Company's net revenue.
City / County Jail Operations.
With the exception of the Seal Beach facility, each of the contracts provides
that the Company will be reimbursed for all of its direct operating costs and
certain overhead expenses in addition to a management fee that is either fixed
or a percentage of operating expenses. These contracts require the Company to
operate within certain annual budget restrictions. In the event that the jail's
operating costs exceed the budgeted amounts, the city is no longer obligated to
pay the management fee. In contrast to the other jails, the Seal Beach facility
primarily houses Bureau of Prison and self-pay inmates on a per diem bases. The
Seal Beach agreement provides for payment to Correctional Systems of a amount
based upon operating income; in the event there is no operating income, the
Company is responsible for one-half of the operating expenses.
The population of these jails is arrestees, self-pay inmates, sentenced county
work furlough inmates and federal inmates serving short-term sentences.
All of these jails are in Los Angeles/Orange County California, with the
exception of the Lincoln County New Mexico operations.
Community Pre-Release Centers
At present, the Company has 3 pre-release community corrections centers. Reality
House ("RHI"), a wholly owned subsidiary, is located in Brownsville Texas and
the capacity to house 65 inmates. As its primary source of revenue, the facility
has a contract with the Bureau of Prisons that runs though the year 2000. The
Company has submitted a bid to renew this contract and management believes that
the contract will be re-awarded to the Company.
Mid-Valley House is located in McAllen, Texas and has the capacity to house 60
inmates. As its primary source of revenue the facility has contract with the
Bureau of Prisons that runs though the year 2003.
<PAGE>
McCabe Center, a Company owned facility, is located in Austin, Texas and has the
capacity to house 55 inmates. In addition to the contract with the Bureau of
Prisons, that runs though the year 2000, the facility also has a contract with
the US Courts to house inmates during pre-trial arraignment in addition to group
and individual counseling. The Company's management has submitted a bid to renew
the Bureau of Prisons contract and management believes that the contract will be
re-awarded to the Company.
As part of the Bureau of Prisons contracts, the community pre-release centers
monitor low risk offenders that are on home confinement.
Alternative Sentencing Division
The Company's wholly-owned subsidiary, Sentencing Concepts, Inc., ( "SCI" ),
provides alternatives to imprisonment for low risk offenders. SCI's programs
provide punishment options, i.e. home detention via electronic monitoring,
rehabilitative counseling, educational programs and substance abuse testing. SCI
has contracts with various judicial agencies to provide these services.
Currently SCI provides services to more than 1,000 offenders with California
offices in Anaheim, Lake Forrest, Stockton, San Luis Obispo and Santa Barbara.
SCI provides monitoring programs in the following California counties: San Luis
Obispo, Santa Barbara, Orange County San Joaquin and Placer County.
RESULTS OF OPERATIONS
Correctional Systems, Inc. revenues are recognized as services are provided
either on a fixed fee arrangement, percentage of expenses, per diem rate or fee
for service.
The Company's largest operating expenses are salaries and related payroll taxes.
Substantially all other operating expenses consist of food, subsistence items,
medical services related items, insurance, equipment rental, cost associated
with the sale of drug testing patches and other general operating expenses. The
Company believes that as the inmate population increases at the pre-release
centers and the Seal Beach facility and the clientele increases at SCI,
operating profits will improve. However, since a portion of the Company's
operations consist of effectively fixed fee contracts with cities/counties to
manage jails, increases in the inmate population, at these facilities, will have
little or no impact on the Company's operating margins.
The Company's general administrative expenses consist of officers and
administrative personnel salaries as well as legal, accounting, other
professional fees and travel.
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999.
The following table sets forth the Company's revenues and expenses for the
quarter ended March 31:
<TABLE>
<CAPTION>
% %
2000 OF REVENUE 1999 OF REVENUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Revenues $2,065,240 100% $1,517,737 100%
Salaries and Wages 815,137 39% 601,629 40%
Depreciation and Amortization 47,435 2% 34,717 2%
Other Operating Expenses 834,793 40% 531,853 35%
General and Administrative Expenses 309,119 16% 288,997 19%
Operating Income 58,756 3% 60,541 4%
Interest Income ( Expense ) Net (25,890) (1%) (2,399) -
Other (Expenses) (2,654) - - -
Pre-Tax Income 30,212 2% 58,142 4%
Provision for Taxes 7,215 1% 13,954 1%
Net Income $ 22,997 1% $ 44,188 3%
Basic Income Per Share $ 0.01 - $ 0.01 -
Diluted Income Per Share $ 0.00 - $ 0.01 -
</TABLE>
<PAGE>
In 2000, the increase in revenue of 36% over the same period in 1999, was due
primarily to the addition of the McCabe pre-release center (13% of revenue) and
the Whittier city jail (4% of revenue), and SCI's increased revenues from
electronic monitoring and drug testing patches offset by a reduction in revenues
at the RHI pre-release center.
In 2000, the increase in salaries and wages of 35% over the same period in 1999,
was due primarily to the Company's expansion mentioned above, i.e. the addition
of the McCabe pre-release center and the Whittier city jail and SCI's increase
in salary and wages.
In 2000, the increase in depreciation and amortization of 36% over the same
period in 1999, was due primarily to depreciation associated with the McCabe
pre-release center and certain capital leases.
Operating expenses consists primarily of food, supplies and insurance. In 2000,
the increase in other operating expenses of 57% over the same period in 1999,
was due to the addition of the McCabe pre-release center and the Whittier city
jail and additional expenses associated with the SCI growth.
In 2000, the increase in general and administrative expenses of 7% over the same
period in 1999, was due to the additional staff and expenses required to keep
pace with the Company's expansion.
In 2000, the increase in interest expense of 979% over the same period in 1999
was due to the long-term financing on the RHI facility, completed in April
1999, of approximately $712,000 and the note payable issued in connection with
the acquisition of the McCabe facility, in July 1999, of approximately
$483,000.
In 2000 the decrease in the provision for income taxes of 48% over the same
period in 1999 is due a reduction in pre-tax profit.
LIQUIDITY AND CAPITAL RESOURCES:
Cash generated from operations for the 3 months ended March 31, 1999 was $51,964
as compared to cash used in operations of ($52,537) for the same period in 1999.
This was due primarily to a decrease in accounts receivable of $40,175 and an
increase in accounts payable of $60,149 over the same period in 1999 offset by a
decrease in net income. However, cash generated from operations during 2000 will
not be sufficient to provide long-term growth because of the capital-intensive
nature of the Company's business. As a result, the Company is continuously
looking for new sources of funds to finance growth.
The Company's working capital requirements have increased due to growth.
Management believes cash flows from operations will be sufficient to enable the
Company to meet our working capital requirements for the next 12 months.
However, in order to implement future growth plans, future equity financing will
be required.
Based on total assets and annual revenues, the Company is significantly smaller
than many of its competitors. These competitors include large privately-held and
publicly-held companies that have substantially greater financial, marketing and
other resources than the Company. These companies offer services and operate in
markets in which the Company competes. The services offered by these companies
in some cases are similar to the services that the Company offers. The Company
expects that competition will increase substantially as a result of industry
consolidations and alliances, as well as the emergence of new competitors. There
can be no assurance that the Company will be able to compete successfully with
the existing or new competitors or that competitive pressures faced by the
Company will not materially and adversely effect its business, operating results
and financial conditions.
<PAGE>
PART II - OTHER INFORMATION
Item 1--Legal proceedings
The Company is involved in routine litigation and proceedings in the ordinary
course of business. The Company is not currently involved in any other pending
litigation matters, which the Company believes would have material adverse
effect on the Company.
Item 2--Changes in Securities
None
Item 3--Defaults in Senior Securities
None
Item 4--Submission of Matters to a Vote of Securities Holders
None
Item 5--Other Information
None
Item 6--Exhibits and Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORRECTIONAL SYSTEMS, INC.
a California Corporation
Date: May 15, 2000
/s/ JOHN R. FORREN
--------------------------
By: John R. Forren
Its: President, Chief Executive Officer
and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN CORRECTIONAL SYSTEMS, INC.
FORM 10-QSB (3/31/00).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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0
3,364
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</TABLE>
