SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________.
Commission File No.: 0-23038
CORRECTIONAL SERVICES CORPORATION
(Exact name of small business issuer in its charter)
Delaware 11-2872782
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1819 Main Street, Suite 1000, Sarasota, Florida 34236
(Address of principal executive offices)
Issuer's telephone number: (941) 953-9199
ESMOR CORRECTIONAL SERVICES, INC.
(Former name or former address, 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 [
]
The number of shares outstanding of the issuer's Common Stock, par value
$.01 per share, as of August 9, 1996, was 5,157,478.
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
INDEX
Page No.
------------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet - December 31, 1995
and June 30, 1996........................................3
Condensed Consolidated Statements
of Income - Six and Three Months
Ended June 30, 1996 and 1995 ............................4
Condensed Consolidated Statement
of Cash Flows - Six and Three Months
Ended June 30, 1996 and 1995 ............................5
Notes to Financial Statements ........................6-13
Item 2. Management's Discussion and Analysis
or Plan of Operation.............................14-23
Part II. Other Information .......................................24-26
Signature ..............................................27
2
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<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
(formerly ESMOR CORRECTIONAL SERVICES,INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
<CAPTION>
ASSETS June 30, December 31,
1996 1995
As Restated
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $37,757 $3,756,748
Restricted cash $233,761 $750,000
Accounts receivable 3,785,150 3,374,229
Receivable from sale of equipment
and leasehold improvements 738,000 --
Prepaid expenses and other current asset 1,008,725 1,415,306
Total current assets 5,803,393 9,296,283
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS AT COST, NET 11,693,805 7,226,323
RECEIVABLE FROM SALE OF EQUIPMENT AND LEASEHOLD
IMPROVEMENTS 2,769,882 3,207,882
OTHER ASSETS
Deferred development and start-up costs, 2,774,791 1,729,270
Deferred income taxes 1,120,000 1,120,000
Other 674,239 760,769
$24,836,110 $23,340,527
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $3,431,109 $3,535,165
Current portion of long-term debt 2,973,545 1,221,022
Total current liabilities 6,404,654 4,756,187
LONG-TERM LIABILITIES
Long-term debt, less current maturities 3,598,498 4,000,000
Suinated promissory notes 4,031,734 5,362,295
7,630,232 9,362,295
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
1,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, $.01 par value,
30,000,000 shares authorized,
4,911,688 and 514,503 and shares issued 51,455 49,117
Additional paid-in capital 11,069,802 9,479,436
Deficit (320,033) (306,508)
Total stockholders' equity 10,801,224 9,222,045
$24,836,110 $23,340,527
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
(formerly ESMOR CORRECTIONAL SERVICES,INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Resident fees $14,713,854 $15,793,952 $7,765,310 $7,915,829
Other income 358,857 612,409 139,649 367,528
15,072,711 16,406,361 7,904,959 8,283,357
Expenses:
Operating 10,241,743 9,914,657 5,344,512 4,994,640
General and administrative 4,401,982 5,064,367 2,363,322 2,749,337
New Jersey facility closure -- 1,488,000 -- 1,488,000
Interest 452,511 214,908 239,372 116,934
15,096,236 16,681,932 7,947,206 9,348,911
Loss before income taxes (23,525) (275,571) (42,247)(1,065,554)
Income tax expense (benefit) (10,000) 21,000 (18,000) (304,000)
Net Loss ($13,525) ($296,571) ($24,247) ($761,554)
Net Loss per common share $0.00 ($0.07) $0.00 ($0.17)
Weighted average shares
outstanding 4,974,752 4,407,828 5,032,605 4,407,828
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
<PAGE>
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
(formerly ESMOR CORRECTIONAL SERVICES,INC.)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) earnings ($13,525) ($296,571) ($24,246) ($761,554)
Adjustments to reconcile net (loss)
earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization 480,605 1,940,366 324,852 1,460,470
Amortization of subordinated
promissory note discount 49,894 -- 27,588 --
Amortization of deferred loan costs 127,118 -- 63,389 --
Deferred income tax benefit -- (272,000) -- (187,000)
Changes in operating assets and liabilities:
Accounts receivable (410,921) 659,853 (726,910) (344,221)
Prepaid expenses and other current
assets 406,581 (1,121,750) (310,930) (809,889)
Accounts payable and accrued
liabilities (104,056) 1,744,790 (111,024) 722,436
Reserve for New Jersey facility
carrying costs (300,000) -- (150,000) --
Net cash provided by operating
activities 235,696 2,654,688 (907,281) 80,242
Cash flows from investing activities:
Capital expenditures (4,738,933) (2,652,457) (975,791) (1,028,729)
Development and start-up costs (1,254,675) (1,034,351) 669,788) (683,445)
Decrease in unexpended construction
costs 516,239 -- 516,239 --
Other assets 0 0 0 0
Net cash (used in) investing
activities (5,477,369) (3,686,808) (1,129,338) (1,712,174)
Cash flows from financing activities:
Proceeds from long-term borrowing 21,966 1,200,000 4,545 460,000
Payment on long-term borrowings (418,922) -- (353,422) --
Proceeds (payments) on short-term
debt 1,747,978 (179,024) 1,837,724 788,153
Proceeds from excercise of stock
options and warrants 212,248 -- 147,374 --
Other assets (40,588) (58,908) (12,925) (17,735)
Net cash (used in) financing
activities 1,522,682 962,068 1,623,296 1,230,418
NET INCREASE IN CASH
AND CASH EQUIVALENTS (3,718,991) (70,052) (413,323) (401,514)
Cash and cash equivalents at beginning
of period 3,756,748 308,446 451,080 639,908
Cash and cash equivalents at end
of period $37,757 $238,394 $37,757 $238,394
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $482,044 $121,350 $263,304 $83,246
Income taxes $81,910 $725,435 $58,525 $67,489
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
<PAGE>
CORRECTIONAL SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
NOTE 1 - In August 1996, the Company changed its name from Esmor
Correctional Services, Inc. to Correctional Services Corporation. In the opinion
of management of Correctional Services Corporation and subsidiaries (the
"Company"), the accompanying unaudited condensed consolidated financial
statements as of June 30, 1996 and for the three and six months ended June 30,
1996 include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation. These statements should be read in
conjunction with the consolidated financial statements and the related notes
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995 and do not include all the information and footnote disclosure
required by generally accepted accounting principles for complete financial
statements.
NOTE 2 - The results of operations for the three and six months ended June
30, 1996 are not necessarily indicative of the results to be expected for the
full year.
NOTE 3 - The computation of net loss per common share is based upon the
weighted average number of common shares outstanding during the periods. Common
stock equivalents were not included for the periods ended June 30, 1996 as their
effect would be anti-dilutive.
6
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NOTE 4 - Effective December 31, 1995, the Company entered into an
$11,000,000 Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
NationsBank, N.A. ("NationsBank"). Pursuant to the terms of the Loan Agreement
as amended, NationsBank will make revolving credit loans to the Company, from
time to time, in amounts not to exceed, in the aggregate, the lesser of
$6,000,000 or the Borrowing Base (defined in the Loan Agreement to be
eighty-five (85%) percent of the Company's and its subsidiaries' eligible
accounts receivable). Proceeds of revolving credit loans are to be used for
working capital purposes (including, without limitation, deferred development
and start-up costs in connection with the Company's new or existing facilities).
Interest on the revolving credit loans is computed at the Company's option, at
either NationsBank's prime rate plus 0.75% or the London International Bank Rate
plus 3.35%. As part of the Loan Agreement, NationsBank also made a term loan to
the Company in the principal amount of $5,000,000. Proceeds of the term loan
were used to repay the Company's existing indebtedness to its former lender.
($5,002,689 at December 31, 1995). The Term Loan bears interest at a fixed rate
of 8.92% and is repayable in monthly installments of $83,333 until January 15,
1998, at which time the Loan Agreement terminates and the remaining unpaid
balances are due and payable. After September 30, 1996, the interest rate
charged under the revolving credit and the term loan will be based on the
Company's financial performance as set forth in the Loan Agreement. The Company
may prepay any borrowings without interest or penalty. The Company's
subsidiaries have guaranteed the Company's obligations under the Loan Agreement
and the Company has granted NationsBank a first priority security interest
7
<PAGE>
in all of its assets, including a first real estate mortgage on the land
and building used for the Arizona DWI prison. The Company is required to pay
NationsBank one-quarter of one percent of the average unused portion of the
facility. The Loan Agreement contains certain financial covenants including a
debt service coverage ratio (as amended effective for June 30, 1996 and for
subsequent periods), and a senior liabilities to tangible net worth and
subordinated debt ratio. The Loan Agreement precludes the payment of dividends
and stock repurchases or redemption's prior to December 31, 1996. Thereafter,
such dividends, repurchases or redemption's are limited to 10% of the Company's
net earnings after taxes provided that the Company is in compliance with the
above-noted financial covenants.
NOTE 5 - Due to a disturbance at the Company's Elizabeth, New Jersey
facility on June 18, 1995, the facility was closed and all detainees located
therein were moved by the INS to other facilities.
On December 15, 1995, the Company and a publicly-traded company (the
"Buyer") which also operates and manages detention and correctional facilities,
entered into an asset purchase agreement pursuant to which Buyer purchased for
$6,223,000 the equipment, inventory and of supplies, contact rights and records,
leasehold and land improvements of the Company's New Jersey facility. The
purchase price will be payable in monthly non-interest bearing installments of
$123,000 following the month that the Buyer commences operations under the
present INS contract through August 1999. The
8
<PAGE>
unpaid balance due after August 1999, if the INS re-awards its contract to
the Buyer, shall be payable in monthly non-interest bearing installments of
$123,000 until the $6,223,000 is paid. On June 13, 1996 the Company, the Buyer
and the INS executed a Novation Agreement whereby the Buyer became the Company's
successor in interest in and to the contract with the INS. In addition, the
Company's lease agreement on the New Jersey facility was assigned to the Buyer.
The Company has no continuing obligation at the Elizabeth New Jersey facility.
Receivable from Sale of the Equipment and Leasehold Improvements reflected
in the balance sheet at December 31, 1995 and June 30, 1996 represents the fair
value of the consideration to be received through August 31, 1999, of $3,507,882
and $2,769,882 (unaudited), respectively ($4,428,000 discounted using an
interest rate of 11.5% per annum) reduced by the estimated closing costs (legal
and consulting) and the facility's estimated carrying costs through July 1,
1996, the transfer date. The statement of operations for 1995 reflects a
provision, "New Jersey facility closure costs," of $3,909,700 which represents
$416,201 from the write-off of deferred development costs related to the
facility and $3,493,429 resulting from the adjustment of the carrying value of
the related assets discussed above. During the six months ended June 30, 1996
the reserve for carrying and closing costs were reduced by approximately
$300,000 of cash payments for rent and other carrying and closing costs.
9
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NOTE 6 - On March 6, 1996 former inmates at one of the Company's facilities
filed an action in the Supreme Court of the State of New York, County of Bronx.
Plaintiffs claim on behalf of themselves and other similarly situated, personal
injuries and property damage purportedly caused by negligence and intentional
acts of the Company. The lawsuit claims $500,000,000 each for compensatory and
punitive damages. The Company intends to vigorously defend itself in this
action. The Company has notified its insurance carrier and has requested
indemnity and defense. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made to the consolidated
financial statements.
In July 1996, a lawsuit was filed with the Superior Court for the State of
New Jersey by nine plaintiffs who were detainees at the Company's former
Elizabeth, New Jersey facility (or their spouses). The detainees allege that
they were mistreated at the hands of local law enforcement authorities while
they were detainees at a facility formerly operated by the Company. No specific
damage amounts are set forth in the complaint. However, in claim forms submitted
to the Company prior to the commencement of the litigation, individual damages
of $10,000,000 per plaintiff were demanded. The action has been moved to the
United States District Court for the District of New Jersey, Newark Division.
The Company intends to vigorously defend itself in this action. The ultimate
outcome of the lawsuit cannot be determined at this time, and accordingly, no
adjustment has been made to the consolidated financial statements.
10
<PAGE>
NOTE 7 - In January, 1996 the Company entered into three year employment
agreements with the Chief Operating Officer and the Executive Vice President
Finance. Pursuant to the terms of the employment agreements, each executive was
granted an option to purchase 100,000 shares of Common Stock and is entitled to
receive a 3% bonus (not to exceed $50,000 and $75,000, respectively) based on
profits in excess of $1,000,000 as defined in the agreements.
NOTE 8 - On April 11, 1996, the Company opened a 400 bed DWI facility
located in Phoenix, Arizona.
In October 1995 the Company signed contracts with the State of Florida to
operate two 350 bed facilities for juvenile offenders. Operations at these
facilities are scheduled to begin in the first quarter of 1997.
In July 1996, the Company entered into an agreement to operate a 100-bed
military- style boot camp in Eagle Lake, Texas for juvenile offenders aged 12 to
17. The agreement is for an initial five-year term with three five-year renewal
options to the County. The Company will act as an advisor to the County during
the construction phase, which is expected to commence in the first quarter of
1997, with the facility scheduled to be completed and become operational during
the fourth quarter of 1997.
11
<PAGE>
In August 1996, the Company was advised it had been selected through a
competitive RFP procedure, to own and manage a 600-bed adult prison in Florence,
Arizona, which is anticipated to become operational in the fourth quarter of
1997. The agreement, which is to be negotiated, will be for an initial
three-year term with one two-year renewal option to the Arizona Department of
Corrections, as provided in the RFP. The Company will own the facility and is
responsible for the related costs, including design, development, construction
and start-up expenses, currently estimated at approximately $15 million.
NOTE 9 - In July 1996 the Company's Certificate of Incorporation was
amended which changed the name of the Company to Correctional Services
Corporation and increased the number of authorized shares of Common Stock from
10,000,000 shares to 30,000,000 shares.
NOTE 10 - The Company acts as a fiduciary disbursing agent on behalf of a
governmental entity whereby certain governmental entity funds are maintained in
a separate bank account. These funds are for payments to the general contractor
which is constructing a government owned facility. The Company is responsible
for managing the construction process. Once completed, operations at these
facilities will be managed by the Company. At June 30, 1996, approximately
$1,126,000 of such funds were being held in the separate bank account which was
disbursed to the
12
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general contractor in July 1996. The Company has no legal rights to the
funds and accordingly, such funds do not appear in the accompanying financial
statements.
NOTE 11 - Proposed Public Offering of Securities - The Company has filed a
registration statement for a proposed sale of 2,450,000 shares of common stock.
Of the 2,450,000 shares of common stock offered, 2,000,000 shares are being sold
by the Company and 450,000 shares by certain stockholders. The Company will not
receive any proceeds from the shares being sold by stockholders. The Company
intends to retire bank indebtedness with a portion of the net proceeds of the
proposed offering.
13
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operation
Six Months ended June 30, 1996 Compared to Six Months ended June 30, 1995
Revenue decreased 8.1% from $16,406.361 for the six months ended June 30,
1995 to $15,072,711 for the six months ended June 30, 1996. The net decrease in
revenues for the 1996 periods as compared to the 1995 periods resulted
principally from the discontinuance of the Company's operations at its
Elizabeth, New Jersey INS facility on June 18, 1995 and lower occupancy rates at
the Company's Fort Worth and Houston, Texas facilities. This decrease was offset
in part by revenues generated by the Canadian, Texas facility which began
operations in April 1995, the Bartow, Florida facility which began operations in
July 1995 and the Phoenix, Arizona facility which began operations in April
1996.
Operating expenses increased 3.3% from $9,914,657 for the six months ended
June 30, 1995 to $10,241,743 for the six months ended June 30, 1996 primarily
due to increases in payroll, which increased $483,908, or 7.9%, partially offset
by a $151,396, or 5.7%, decrease in resident expenses. These changes resulted
primarily from the opening of the facilities noted above, the addition of
management personnel in the corporate office, and the discontinuance of
operations at the Company's
14
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Elizabeth, New Jersey INS facility. As a percentage of revenues, operating
expenses increased from 60.4% for the six months ended June 30, 1995 to 67.9%
for the six months ended June 30, 1996.
General and administrative expenses decreased 13.1% from 5,064,367 for the
six months ended June 30, 1995 to $4,401,982 for the six months ended June 30,
1996. The decline in general and administrative expenses was attributable
primarily to the closure of the Elizabeth, New Jersey INS facility in June 1995.
As a percentage of revenues, general and administrative expenses were 30.9% and
29.2% for the six months ended June 30, 1995 and 1996, respectively. In
addition, at June 30, 1995 the Company accrued $1,488,000 for development and
other costs associated with the closure of the Elizabeth, New Jersey INS
facility.
Interest expense increased 110.6% from $214,908 for the six months ended
June 30, 1995 to $452,511 for the six months ended June 30, 1996. This increase
resulted primarily from indebtedness attributable to the placement of $5.6
million of subordinated debt at a 10% interest rate in the third quarter of
1995, proceeds of which were used to fund the purchase and renovation of the
Phoenix, Arizona facility.
As a result of the foregoing factors, the Company had a net loss of $13,525
or ($0.00) per share for the six months ended June 30, 1996 compared to a net
loss of $296,571 or ($0.07) per share for the six months ended June 30, 1995.
15
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Three Months ended June 30, 1996 Compared to Three Months ended June 30, 1995
Revenues decreased 4.5% from $8,283,357 for the three months ended June 30,
1995 to $7,904,959 for the three months ended June 30, 1996. The net decrease in
revenues for the 1996 periods as compared to the 1995 periods resulted
principally from the discontinuance of the Company's operations at its
Elizabeth, New Jersey INS facility on June 18, 1995 and lower occupancy rates at
the Company's Fort Worth and Houston, Texas facilities. This decrease was offset
in part by revenues generated by the Canadian, Texas facility which began
operations in April 1995, the Bartow, Florida facility which began operations in
July 1995 and the Phoenix, Arizona facility which began operations in April
1996.
Operating expenses increased 2% from $4,994,640 for the three months ended
June 30, 1995 to $5,344,512 for the three months ended June 30, 1996 primarily
due to increases in payroll, which increased $347,208, or 11.3%. Resident
expenses were similar in both periods. These changes resulted primarily from the
opening of the facilities noted above, the addition of management personnel in
the corporate office, and the discontinuance of operations at the Company's
Elizabeth, New Jersey INS facility. As a percentage of revenues, operating
expenses increased from 60.3% for the three months ended June 30, 1995 to 67.6%
for the three months ended June 30, 1996.
16
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General and administrative expenses decreased 13.9% from $2,363,322 for the
three months ended June 30, 1995 to $4,401,982 for the three months ended June
30, 1996. The decline in general and administrative expenses was attributable
primarily to the closure of the Elizabeth, New Jersey INS facility in June 1995.
As a percentage of revenues, general and administrative expenses were 33.2% and
30.0% for the three months ended June 30, 1995 and 1996, respectively. In
addition, at June 30, 1995 the Company accrued $1,488,000 for development and
other costs associated with the closure of the Elizabeth, New Jersey INS
facility.
Interest expense increased 104.76% from $116,934 for the three months ended
June 30, 1995 to $239,372 for the three months ended June 30, 1996. This
increase resulted primarily from indebtedness attributable to the placement of
$5.6 million of subordinated debt at a 10% interest rate in the third quarter of
1995, proceeds of which were used to fund the purchase and renovation of the
Phoenix, Arizona facility.
As a result of the foregoing factors, the Company had a net loss of $24,247
or ($0.00) per share for the three months ended June 30, 1996 compared to a net
loss of $761,554 or ($0.17) per share for the three months ended June 30, 1995.
Due to a disturbance at the Company's Elizabeth, New Jersey INS facility on
June 18, 1995, the facility was closed and all detainees located therein were
moved by the INS to other facilities.
17
<PAGE>
On December 15, 1995, the Company and a publicly-traded company (the
"Buyer") which also operates and manages detention and correctional facilities,
entered into an asset purchase agreement pursuant to which the Buyer purchased
the equipment, inventory and supplies, contract rights and records leasehold and
land improvements of the Company's New Jersey facility for $6,223,000. The
purchase price will be payable in non-interest bearing monthly installments of
$123,000 through August 31, 1999, following the month the Buyer commences
operations of the facility. The unpaid balance is due after August 31, 1999 if
the INS re-awards the contract to the Buyer, payable in non-interest bearing
monthly installments of $123,000 until the $6,223,000 is paid. On June 13, 1996
the Company, the Buyer and the INS executed a Novation Agreement whereby the
Buyer became the Company's successor in interest to the contract with the INS.
In addition, the Company's lease agreement to the New Jersey facility was
assigned to the Buyer. The Company has no continuing obligation at the
Elizabeth, New Jersey INS facility.
The receivable from the Sale of the equipment and leasehold improvements
reflected on the balance sheet at December 31, 1995 and June 30, 1996 represents
the present value of the consideration to be received through August 31, 1999,
of $3,507,882 and $2,769,882 (unaudited), respectively ($4,428,000 discounted
using an interest rate of 11.5% per annum) reduced by the estimated closing
costs (legal and consulting) and the facility's estimated carrying costs through
July 1, 1996, the estimated transfer dates. The statement of operations for 1995
reflects a provision for closure costs of
18
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$3,909,700, which represents $416,201 from the write-off of deferred development
costs related to the facility of $3,493,499 resulting from the adjustment of the
carrying value of the related assets discussed above. During the six months
ended June 30, 1996 the reserve for carrying and closing costs were reduced by
approximately $300,000 of cash payments for rent and other carrying and closing
costs.
The Company has revised the present value up to and including the
receivable from the sale of equipment and leasehold improvements described above
and reduced to zero the portion of the receivable contingent upon re-award of
the related management contract and increased the provision for closure costs
for a like amount of $1,300,000 for the year ended December 31, 1995. The effect
of the adjustments on the accompanying financial statements at December 31, 1995
is as follows:
As Previously
Reported As Restated
------------ -------------
Receivable from sale of equipment
and leasehold improvements.............. $4,507,882 $3,507,882
Deferred income taxes................... 600,000 1,120,000
Retained earnings (deficit)............. 473,492 (306,438)
If the INS contract is re-awarded to the Buyer in August 1999, the Company
will record as income the unpaid balance.
19
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Liquidity and Capital Resources
The Company has historically financed its operations through private
placements and public sales of its securities, cash generated from operations
and borrowings from banks.
The Company had a working capital deficit at June 30, 1996 of $601,261, a
decline of $5,141,357 from the Company's working capital at December 31, 1995,
principally attributable to funds used for construction of the Company's
Phoenix, Arizona facility, which opened April 11, 1996. The Company's current
ratio declined to 0.91 to 1 at June 30, 1996 from 1.95 to 1 at December 31,
1995. At June 30, 1996, the projected start-up costs for the two 350-bed
detention facilities in Florida, scheduled to become operational in the first
quarter of 1997, were estimated at $3.0 million. Thereafter, the Company
received awards for two new facilities, scheduled to become operational in the
fourth quarter of 1997, for which the projected costs to the Company are
estimated at $15.8 million. Approximately $18.8 million of the net proceeds of
this offering have been allocated to fund construction, start-up and related
costs with respect to these facilities.
Net cash provided by operating activities was $235,696 for the six months
ended June 30, 1996 as compared to $2,654,688 for the six months ended June 30,
1995. The decrease was attributable primarily to the reduction in depreciation
and amortization
20
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resulting from the closure of the Elizabeth, New Jersey INS facility and changes
in working capital. Net cash of $5,477,369 was used in investing activities for
the six months ended June 30, 1996 as a result of fixed asset acquisition costs
of $4,738,933, the majority of which related to the Company's Phoenix, Arizona
facility and $1,254,675 in additional deferred development and start-up costs.
Net cash of $1,522,682 was provided by financing activities in the six months
ended June 30, 1996 as compared to $962,068 in the six months ended June 30,
1995. The principal source of such funds in both periods was bank borrowings.
Financing
Effective December 31, 1995, the Company entered into an $11,000,000
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
NationsBank, N.A. ("NationsBank"). Pursuant to the terms of the Loan Agreement,
the Company, from time to time, may borrow up to the lesser of $6,000,000 or
85.0% of the Company's eligible accounts receivable. Loan proceeds are to be
used for working capital, including deferred development and start-up costs in
connection with new or existing facilities. Interest on the revolving credit
loan is computed, at the Company's option, at either NationsBank prime rate plus
0.75% or the London International Bank Rate plus 3.35%. Under the Loan
Agreement, Nationsbank also made a term loan to the Company in the principal
amount of $5,000,000, which was applied to repay the Company's indebtedness of
$5,002,869 to another bank. The term loan bears interest
21
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at 8.92% and is repayable in monthly installments of $83,330 until January 15,
1998, at which time the Loan Agreement terminates and any remaining unpaid
balances are due and payable. After September 30, 1996, the interest rate
payable under the revolving credit loan will be based on the Company's financial
performances set forth in the Loan Agreement. The Company may prepay any
borrowings without interest or penalty. The Company has granted NationsBank a
first priority security interest in all of its assets, including a first real
estate mortgage on the land and building of the Phoenix, Arizona facility. The
Company is required to pay NationsBank 0.25% of the average unused portion of
the revolving credit loan. The Company was not in compliance with a cash
flow-based debt service coverage ratio at March 31, 1996 and renegotiated such
ratio. At June 30, 1996, the Company was in compliance with the amended ratio.
During the year ended December 31, 1995, the Company competed a private
placement of 5,676.6 units at $1,000 per unit, each unit consisting of (i) a ten
percent (10.0%) subordination promissory note due July 1, 1998 in the principal
amount of $1,000; and (ii) four year warrants to purchase 154 shares of Common
Stock at $7.75 per share. The Company received gross proceeds of $5,676,600 from
the sale of the units of which $365,000 was attributed to the value of the
warrants. During such period, the Company also completed the private placement
of 496,807 shares of Common Stock at $7.75 per share, receiving gross proceeds
of $3,850,254. Approximately $8,500,000 of the proceeds of the two placements
was used to finance
22
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costs associated with the Company's Phoenix, Arizona facility and the balance
for expenses related to the private placements and for working capital.
23
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
On March 6, 1996 former inmates at one of the Company's facilities filed an
action in the Supreme Court of the State of New York, County of Bronx.
Plaintiffs claim on behalf of themselves and other similarly situated, personal
injuries and property damage purportedly caused by negligence and intentional
acts of the Company. The lawsuit claims $500,000,000 each for compensatory and
punitive damages. The Company intends to vigorously defend itself in this
action. The Company has notified its insurance carrier and has requested
indemnity and defense. The ultimate outcome of the lawsuit cannot be determined
at this time, and accordingly, no adjustment has been made to the consolidated
financial statements.
In July 1996, a lawsuit was filed with the Superior Court for the State of
New Jersey by nine plaintiffs who were detainees at the Company's former
Elizabeth, New Jersey facility (or their spouses). The detainees allege that
they were mistreated at the hands of local law enforcement authorities while
they were detainees at a facility formerly operated by the Company. No specific
damage amounts are set forth in the complaint. However, the claim forms
submitted to the Company prior to the commencement of the litigation, individual
damages of $10,000,000 per plaintiff were demanded. The action has been moved to
the United States District Court for the District of New Jersey, Newark
Division. The Company intends to vigorously defend itself in this action. The
ultimate outcome of the lawsuit cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On July 28, 1996, certain stockholders of the Company owning in the
aggregate 2,867,014 shares of the Company's Common Stock, acting by written
consent in lieu of a meeting, voted to amend the Company's Certificate of
Incorporation to (a) change the Company's name to "Correctional Services
Corporation" and (b) increase the number of authorized shares of Common Stock
from 10,000,000 to 30,000,000. No other votes with respect to this action were
cast or withheld.
24
<PAGE>
(b) (i) On May 20, 1996, the Company held its Annual Meeting of
Stockholders (the "Meeting").
(ii) At the Meeting, the Stockholders of the Company elected William J.
Barrett, Raymond S. Evans, Stuart M. Gerson, Esther Horn, Diane McClure, James
F. Slattery, Aaron Speisman, Richard Staley and Melvin T. Stith as directors of
the Company.
(iii) In addition to electing directors at the Meeting, the Stockholders of
the Company approved the selection of Grant Thornton as the Company's
independent auditor for the year ending December 31, 1996.
(iv) The following sets forth the results of voting on each matter voted
upon at the Meeting:
1. Election of Directors
Name For Against
William J. Barrett 4,295,143 5,375
Raymond S. Evans 4,295,143 5,375
Stuart M. Gerson 4,294,143 6,375
Esther Horn 4,295,143 5,375
Diane McClure 4,294,143 6,375
James F. Slattery 4,295,143 5,375
Aaron Speisman 4,295,143 5,375
Richard Staley 4,294,143 6,375
Melvin T. Stith 3,984,180 6,375
2. Selection of Grant Thornton
For Against
4,293,227 1,653
Item 5. Other Information
In July 1996, the Company entered into an agreement to operate a 100-bed
military-style boot camp in Eagle Lake, Texas for juvenile offenders aged 12 to
17.
25
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The agreement is for an initial five-year term with three five-year renewal
options to the County. The Company will act as an advisor to the County during
the construction phase, which is expected to commence in the first quarter of
1997, with the facility scheduled to be completed and become operational during
the fourth quarter of 1997.
In August 1996, the Company was advised it had been selected through a
competitive RFP procedure to own and manage a 600-bed adult prison in Florence,
Arizona, which is anticipated to become operational in the fourth quarter of
1997. The agreement, which is to be negotiated, will be for an initial
three-year term with one two-year renewal option to the Arizona Department of
Corrections, as provided in the RFP. The Company will own the facility and is
responsible for the related costs, including design, development, construction
and start-up expenses, currently estimated at approximately $15 million.
The Company has filed a registration statement for a proposed sale of
2,450,000 shares of common stock. Of the 2,450,000 shares of common stock
offered, 2,000,000 shares are being sold by the Company and 450,000 shares by
certain stockholders. The Company will not receive any proceeds from the shares
being sold by stockholders. The Company intends to retire bank indebtedness with
a portion of the net proceeds of the proposed offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORRECTIONAL SERVICES CORPORATION
Registrant
By:\s\ Aaron Speisman
-------------------------------------
Aaron Speisman, Secretary
By:\s\ Lee Levinson
-------------------------------------
Lee Levinson, Chief Financial Officer
Dated: August 14, 1996
27
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-START> Jan-1-1996
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