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 March 31, 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
ESMOR CORRECTIONAL SERVICES, INC.
(Exact name of small business issuer in its charter)
Delaware 11-2872782
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1819 Main Street, Suite 1000, Sarasota, Florida 34236
(Address of principal executive offices)
Issuer's telephone number: (941) 953-9199
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 May 13, 1996, was 4,956,584
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
INDEX
Page No
--------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet - December 31, 1995
and March 31, 1996 ........................................ 3
Condensed Consolidated Statements
of Income - Three Months
Ended March 31, 1996 and 1995 ............................. 4
Condensed Consolidated Statement
of Cash Flows - Three Months
Ended March 31, 1996 and 1995 ............................. 5
Notes to Financial Statements ............................ 6-8
Item 2. Management's Discussion and Analysis
or Plan of Operation ................................. 9-10
Part II. Other Information ............................................. 11
Signature ................................................. 12
Exhibit Index ............................................ 13
2
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $451,080 $3,756,749
Restricted cash $750,000 $750,000
Accounts receivable 3,058,240 3,374,229
Prepaid expenses and other current assets 697,794 1,415,305
--------- ---------
Total current assets 4,957,114 9,296,283
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS AT COST, NET 10,887,193 6,689,184
EQUIPMENT AND LEASEHOLD
UNDER AGREEMENT FOR SALE 4,657,882 4,507,882
OTHER ASSETS
Deferred development and start-up costs, net 2,262,679 2,266,409
Deferred income taxes 600,000 600,000
Other 722,702 760,769
---------- ----------
$24,087,570 $24,120,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $3,542,133 $3,535,165
Current portion of long-term debt 1,227,545 1,221,022
--------- ---------
Total current liabilities 4,769,678 4,756,187
LONG-TERM LIABILITIES
Long-term debt, less current maturities 3,921,151 4,000,000
Subordinated notes payable, net
discount of $314,305 $ 5,318,227 $5,362,295
--------- ---------
9,239,378 9,362,295
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value,
1,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, $.01 par value, 10,000,000 shares
authorized, 4,911,688 and 4,922,468
shares issued and outstanding 49,224 49,117
Additional paid-in capital 9,545,076 9,479,436
Retained earnings 484,214 473,492
---------- ----------
Total stockholders' equity 10,078,514 10,002,045
---------- ----------
$24,087,570 $24,120,527
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
--------- --------
<S> <C> <C>
Revenues:
Resident fees $6,948,544 $7,878,123
Other income 219,208 244,881
--------- ---------
7,167,752 8,123,004
--------- ---------
Expenses:
Operating 4,897,231 4,920,017
General and administrative 2,038,660 2,315,030
Interest 213,139 97,974
--------- ---------
7,149,030 7,333,021
--------- ---------
Income before income taxes 18,722 789,983
Income tax provision 8,000 325,000
--------- ---------
Net Income $10,722 $464,983
========= =========
Net Income per share $0.00 $0.10
========= =========
Weighted average shares outstanding 5,404,053 4,638,920
========= =========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
ESMOR CORRECTIONAL SERVICES,INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $10,722 $464,983
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 241,789 479,896
Deferred income taxes -- (85,000)
Changes in operating assets and liabilities:
Accounts receivable 315,989 1,004,074
Prepaid expenses and other current assets 717,512 (311,861)
Accounts payable and accrued liabilities 6,964 1,022,354
--------- ---------
Net cash provided by operating activities: 1,292,976 2,574,446
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (3,763,144) (1,623,728)
Equipment and leasehold improvements under
agreement for sale (150,000) --
Development and start-up costs (584,889) (350,906)
--------- ---------
Net cash (used in) investing activities: (4,498,033) (1,974,634)
--------- ---------
Cash flows from financing activities:
Other assets (27,662) (41,173)
Proceeds on short-term and long-term debt, net (137,825) (227,177)
Gross proceeds received from excercise
of stock warrants, net of warrant
registration costs 64,874 --
--------- ---------
Net cash (used in) financing activities: (100,613) (268,350)
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS (3,305,670) 331,462
Cash and cash equivalents at beginning of period 4,506,749 308,446
--------- ---------
Cash and cash equivalents at end of period $1,201,079 $639,908
========= =========
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $218,740 $83,246
========= =========
Income taxes $23,385 $67,489
========= =========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
NOTE 1 - In the opinion of management of Esmor Correctional Services, Inc.
and subsidiaries (the "Company"), the accompanying unaudited condensed
consolidated quarterly financial statements 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 months ended March 31,
1996 are not necessarily indicative of the results to be expected for the full
year.
NOTE 3 - Earnings per share for the three months ended March 31, 1996
includes the dilutive effect of outstanding stock options and warrants.
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,
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 receivables). 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 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 Marine Midland Bank, N.A. ($5,002,689 at December 31,
1995, which amount was repaid to Marine Midland Bank on such date). 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 any 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 in all of its assets, including a first real estate
mortgage on the land and building to be used for its 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 and a senior liabilities to
tangible net worth and subordinated debt ratio. The Company was not in
compliance with its debt service coverage ratio as of March 31, 1996.
NationsBank has agreed to waive this covenant for March 31, 1996. 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.
6
<PAGE>
NOTE 5 - During the year ended December 31, 1995, the Company completed a
private placement of 5,676.6 units at $1,000 per unit, each unit consisting of
(i) a ten (10%) percent subordinated promissory note due July 1, 1998 in the
principal amount of $1,000; and (ii) a four- year warrant 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 included therein. Also during such quarter, the Company
completed the private placement of 496,807 shares of common stock at $7.75 per
share, receiving gross proceeds of $3,850,254. The net proceeds are being used
for the Company's Phoenix, Arizona facility.
NOTE 6 - Due to a disturbance at the Company's New Jersey Processing Center
on June 18, 1995, the facility was closed and all detainees located therein were
moved by the INS to other facilities. The INS has extended the time it has to
exercise its renewal option under the contract (the "INS Contract") in
anticipation of the assumption of the INS Contract by another operating company.
To date, the INS has not exercise its renewal option.
On December 15, 1995, the Company entered into an agreement with a buyer
which also operates and manages corrections and detention facilities ("Buyer")
pursuant to which the Company has agreed to sell and the Buyer has agreed to
purchase the equipment, inventory and supplies, contract rights and records, and
leasehold and land improvements (the "Assets") of the New Jersey Processing
Center. The purchase price for the Assets is the lesser of (a) $123,000
multiplied by the number of months remaining on the INS Contract upon
commencement of service under the INS Contract by the Buyer; or (b) $6,222,905.
The purchase price is payable in equal monthly installments of $123,000
beginning upon commencement of operations by the purchaser under the INS
Contract and ending August 1, 1999. The remaining balance due after August 1,
1999, shall be payable if and only if the INS Contact is renewed for an
additional five year period and shall be due within 30 days of the exercise by
the INS of its renewal option. The closing of the agreement is conditioned upon
the execution of a Novation Agreement by the INS, pursuant to which the Buyer
will become the Company's successor in interest in and to the INS Contract.
While management believes that the Novation Agreement will be executed by July
1, 1996, there can be no assurance that the Novation Agreement will be executed
or, if executed, that the INS Contract will be extended beyond August 1, 1999.
In addition, the Company's lease agreements on the New Jersey facility will be
assigned to the Buyer.
The Equipment and Leasehold Improvements Under Agreement for Sale reflected
in the balance sheet at March 31, 1996, represents the fair value of the
consideration to be received of $4,657,882 ($6,222,905 discounted using an
interest rate of 11.5% per annum) reduced by the agreement's estimated closing
costs (legal and consulting) and the facility's estimated carrying costs through
July 1, 1996, the expected transfer date. There can be no assurance that the
Company will be successful in executing such Novation Agreement and if the
Company is successful in executing the Novation Agreement, there can be no
assurance that the INS will extend the contract beyond August 1, 1999. The
ultimate realization of the carrying costs and the gross minimum rental
commitment of this facility of $1,080,000, is not certain at this time;
accordingly, the consolidated financial statements do not include any additional
adjustments than discussed above that might result from the outcome of this
uncertainty.
7
<PAGE>
NOTE 7 - On March 6, 1996, an action entitled Samson Brown, et. al. v.
Esmor Correctional Services, Inc., et. al., was filed in the Supreme Court of
the State of New York, Country of Bronx. This case has been removed to the U.S.
District Court, Southern District of New York. Plaintiffs claim on behalf of
themselves and others similarly situated, personal injuries and property damage
purportedly caused by negligence and intentional acts of the Company. The
lawsuit claims $500,000,000 in compensatory and an equal amount in 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 addition, the Company is subject to claims and suits in the ordinary
course of business. Management believes that the ultimate outcome of all such
proceedings will not have a material adverse effect on the Company.
NOTE 8 - In January, 1996 the Company entered into three year employment
agreements with its 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.
NOTE 9 - On April 11, 1996, the Company opened a 400 bed DWI facility
located in Phoenix, Arizona.
In October, 1995, the Company was contracts by 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.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operation
- --------------------
The Company had revenues of $7,167,752 and $8,123,003 for the three months
ended March 31, 1996 and 1995, respectively, a decrease of $955,252 or 11.8%.
The decrease in revenues is principally attributable to the closure in June,
1995, of the Company's Immigration and Naturalization Service facility in
Elizabeth, New Jersey. Revenues generated by the Company's Canadian, Texas and
Bartow, Florida facilities, which commenced operations in April and July 1995,
respectively, offset, in part, the decline in revenues resulting from the New
Jersey facility closure. Other increases in revenues resulted from contractual
increases in per diem rates
Operating expenses decreased from $4,920,017 for the three months ended
March 31,1995 to $4,897,231 for the three month ended March 31, 1996, a decrease
of $22,786 or 5%. Operating expenses remained constant for the first quarter of
1996 compared to the first quarter of 1995. As a percentage of revenues,
operating expenses increased from 60.6% for the three months ended March 31,
1995 to 68.3% for the three months ended March 31, 1996. A decrease in operating
expenses resulting from the discontinuance of operations at the Company's New
Jersey facility was offset by an increase in operating expenses at the Company's
Canadian, Texas and Bartow, Florida facilities, which became operational in
April and July 1995 and by additional operating expenses incurred at the
Company's home office.
General and administrative expenses for the three months ended March 31,
1996 and 1995 were $2,038,660 and $2,315,030 respectively, a decrease of
$276,370 or 11.9%. The decline in general and administrative expenses was
attributable primarily to the closure of the New Jersey facility in June 1995.
As a percentage of revenues general and administrative expenses were 28.4% and
28.5% for the three months ended March 31, 1996 and 1995, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital at December 31, 1995 was $4,540,096. It was
$187,436 at March 31, 1996. The Company's current ratio was 1.95 to 1 at
December 31, 1995 as compared to 1.04 to 1 at March 31,1996. The decline in
working capital is principally attributable to funds used for the construction
of the Company's Phoenix, Arizona facility.
9
<PAGE>
During the first three months of fiscal 1996, the Company incurred fixed
asset acquisition costs of $3,763,144, the majority of which related to the
Company's Phoenix, Arizona facility, which opened April 11, 1996. During the
three months ended March 31, 1996, the Company expended $584,889 in deferred
development and start-up cost additions during the three month period ended
March 31, 1996. Such costs principally related to the opening of the Company's
Arizona facility.
Financing
- ---------
Effective December 31,1995, the Company entered into an $11,000,000
Revolving credit and Term Loan Agreement ( the "Loan Agreement ") with
NationsBank. Pursuant to the terms of the Loan Agreement, 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 prime 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 prior bank ($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 any remaining unpaid balances are due and payable. 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 in all of its assets,
including a first real estate mortgage on the land and building being used for
its 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 and
a senior liabilities to tangible net worth and subordinated debt ratio. The
Company was not in compliance with its debt service coverage ratio as of March
31, 1996. NationsBank has agreed to waive this covenant for March 31, 1996. 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.
During the third quarter of the year ended December 31,1995, the Company
completed a private placement of 5,676.6 units at $1,000 per unit, each unit
consisting of (i) a 10% percent Subordinated promissory note due July 1, 1998 in
the principal amount of $1000 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 included herein. Also during the same quarter the Company
completed the private placement of 496,807 shares of common stock at $7.75 per
share, receiving gross proceeds of $3,850,254.
A substantial portion of the gross proceeds of $9,526,854 from the unit and
the common stock offerings were used to purchase the land and building in
Phoenix, Arizona and to fund the associated renovation of the building and the
start-up costs of the facility, the total cost of which is projected to be
approximately $8,500,000.
10
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27. Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None.
11
<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.
ESMOR CORRECTIONAL SERVICES, INC.
Registrant
By: \s\ Aaron Speisman
--------------------------
Aaron Speisman, Secretary
By: \s\ Lee Levinson
--------------------------
Lee Levinson, Chief Financial Officer
Dated: May 15, 1996
12
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedule, Unaudited
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000914670
<NAME> Esmor Correctional Services, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,151,080
<SECURITIES> 0
<RECEIVABLES> 3,058,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,957,114
<PP&E> 11,644,846
<DEPRECIATION> 757,653
<TOTAL-ASSETS> 24,087,570
<CURRENT-LIABILITIES> 4,769,678
<BONDS> 0
0
0
<COMMON> 49,224
<OTHER-SE> 10,029,290
<TOTAL-LIABILITY-AND-EQUITY> 24,087,570
<SALES> 6,948,544
<TOTAL-REVENUES> 7,167,752
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,935,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213,139
<INCOME-PRETAX> 18,722
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 10,722
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,722
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
