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 September 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 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 November 14, 1996, was 7,605,428.
<PAGE>
ESMOR CORRECTIONAL SERVICES, INC.
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet - December 31, 1995
and September 30, 1996................................................3
Condensed Consolidated Statements
of Income - Nine and Three Months
Ended September 30, 1996 and 1995 ....................................4
Condensed Consolidated Statement
of Cash Flows - Nine and Three Months
Ended September 30, 1996 and 1995 ....................................5
Notes to Financial Statements .................................... 6-14
Item 2. Management's Discussion and Analysis
or Plan of Operation...................................... 15-22
Part II. Other Information ......................................... 23-26
Signature ................................................... 27
2
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<TABLE>
<CAPTION>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
ASSETS September 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $18,505,202 $ 3,756,748
Restricted cash 233,761 750,000
Accounts receivable 4,151,706 3,374,229
Receivable from sale of equipment
and leasehold improvements 1,107,000 --
Prepaid expenses and other current asset 960,678 1,415,306
----------- -----------
Total current assets 24,958,347 9,296,283
EQUIPMENT AND LEASEHOLD
IMPROVEMENTS AT COST, NET 11,785,456 7,226,323
RECEIVABLE FROM SALE OF EQUIPMENT AND
LEASEHOLD IMPROVEMENTS 2,400,882 3,207,882
OTHER ASSETS
Deferred development and start-up
costs, net 4,210,166 1,729,270
Deferred income taxes 1,120,000 1,120,000
Other 534,237 760,769
----------- -----------
$45,009,088 $23,340,527
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 4,087,152 $ 3,535,165
Current portion of long-term debt 4,545 1,221,022
----------- -----------
Total current liabilities 4,091,697 4,756,187
LONG-TERM LIABILITIES
Long-term debt, less current maturities 14,012 4,000,000
Subordinated promissory notes 3,894,123 5,362,295
----------- -----------
3,908,135 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,
7,237,928 and 4,911,688 shares
ssued and outstanding 72,379 49,117
Additional paid-in capital 37,149,716 9,479,436
Retained earnings (212,839) (306,508)
----------- -----------
Total stockholders' equity 37,009,256 9,222,045
----------- -----------
$45,009,088 $23,340,527
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
<TABLE>
<CAPTION>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Resident fees $22,666,605 $23,211,183 $7,952,751 $7,417,231
Other income 581,920 822,969 223,063 210,560
----------- ----------- ---------- ----------
23,248,525 24,034,152 8,175,814 7,627,791
----------- ----------- ---------- ----------
Expenses:
Operating 15,835,673 14,635,821 5,593,930 4,721,164
General and administrative 6,637,329 7,090,753 2,235,347 2,026,386
New Jersey facility closure -- 1,566,331 -- 78,331
Interest 707,854 453,287 255,343 238,379
----------- ----------- ---------- ----------
23,180,856 23,746,192 8,084,620 7,064,260
----------- ----------- ---------- ----------
Income before income taxes 67,669 287,960 91,194 563,531
Income tax expense (benefit) (26,000) 256,000 (16,000) 235,000
----------- ----------- ---------- ----------
Net Income $ 93,669 $ 31,960 $ 107,194 $ 328,531
=========== =========== ========== ==========
Net Income per share $ 0.02 $ 0.01 $ 0.02 $ 0.07
=========== =========== ========== ==========
Weighted average shares
outstanding 5,760,440 4,727,581 6,173,133 4,836,995
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
4
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<TABLE>
<CAPTION>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 93,669 $ 31,960 $ 107,194 $ 328,531
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 736,968 2,092,840 256,363 152,474
Amortization of subordinated promissory
note discount 72,586 9,700 22,692 9,700
Amortization of deferred loan costs 189,827 -- 62,709 --
Deferred income tax benefit -- (275,000) -- (3,000)
Changes in operating assets and liabilities:
Accounts receivable (777,476) 836,705 (366,555) 176,852
Prepaid expenses and other current assets 454,627 (1,003,599) 48,046 118,150
Accounts payable and accrued liabilities 551,987 1,818,022 656,043 73,232
Reserve for New Jersey facility carrying
costs (300,000) -- -- --
----------- ---------- ----------- ----------
Net cash provided by operating
activities 1,022,188 3,510,628 786,492 855,939
----------- ---------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (5,007,491) (5,646,759) (268,558) (2,994,301)
Development and start-up costs (2,767,503) (1,326,654) (1,512,828) (299,378)
Decrease in unexpended construction costs 516,239 -- -- --
----------- ---------- ----------- ----------
Net cash (used in) investing
activities (7,258,755) (6,973,413) (1,781,386) (3,293,679)
----------- ---------- ----------- ----------
Cash flows from financing activities:
Proceeds from long-term borrowing 21,966 -- -- --
Payment on long-term borrowings (4,003,408) -- (3,584,486) --
Proceeds (payments) on short-term debt (1,221,022) 494,131 (2,969,000) (526,846)
Issuance of subordinatedynotes and warrants -- 5,676,600 -- 5,676,600
Subordinated prommissory notes issuance cost -- (511,524) -- (506,524)
Proceeds from exercise of stock options
and warrants 218,267 33,320 6,019 33,320
Proceeds from issuance of common stock 26,582,112 3,850,254 26,582,112 3,850,254
Common stock issuance costs (647,598) (336,083) (647,598) (336,083)
Other assets 34,704 (62,106) 75,292 (1,122)
----------- ---------- ----------- ----------
Net cash provided by financing activities 20,985,021 9,144,592 19,462,339 8,189,599
----------- ---------- ----------- ----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 14,748,454 5,681,807 18,467,445 5,751,859
Cash and cash equivalents at beginning of period 3,756,748 308,446 37,757 238,394
----------- ---------- ----------- ----------
Cash and cash equivalents at end of period $18,505,202 $5,990,253 $18,505,202 $5,990,253
=========== ========== =========== ==========
Supplemental disclosures of cash flows information:
Cash paid during the period
for:
Interest $ 767,116 $ 440,658 $ 285,072 $ 319,308
=========== ========== ========== ==========
Income taxes (refunds) ($137,958) $ 790,314 ($219,868) $ 64,879
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
CORRECTIONAL SERVICES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1996 include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation. The statements
should be read in conjunction with the consolidated financial statements and the
related notes included in the Company's Annual Report on Form 10-KSB/A for the
year ended December 31,1995 and do not include all the information and footnote
disclosures required by generally accepted accounting principles for complete
financial statements.
NOTE 2 - The results of operations for the three and nine months ended
September 30, 1996 are not necessary indicative of the results to be expected
for the full year.
NOTE 3 - The computation of net income per common share is based upon the
weighted average number of common shares outstanding during the periods, plus
common stock equivalents representing shares issuable upon the assumed exercise
of stock options and warrants.
6
<PAGE>
Note 4 - On September 12, 1996 the Company completed a public offering of
2,450,000 shares of Common Stock at $13.625 per share. Of the 2,450,000 shares
of Common Stock offered, 2,070,000 shares were sold by the Company and 380,000
shares were sold by certain stockholders.
The net proceeds received by the Company after deducting applicable
issuance costs and expenses aggregated $25,934,514. The net proceeds were used
to repay short-term and long-term bank indebtedness in the amount of $7,198,468
and will be used to finance construction, start-up and related costs of the
Florence, Arizona and Eagle Lake, Texas facilities and for start-up costs of two
Florida facilities and for general corporate purposes, including the financing
of working capital needs. Also, in October, 1996 pursuant to the underwriters'
option, the Company sold an additional 367,500 shares of Common Stock, which
aggregated an additional $4,700,000 in net proceeds.
NOTE 5 - 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
7
<PAGE>
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 these revolving credit loans is computed at the Company's
option, at 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 at an interest rate of 8.92% to the Company in the principal amount of
$5,000,000, which was applied to repay the Company's prior indebtedness of
$5,002,689 to another bank on December 31, 1995. The short-term and long-term
loans were repaid in September 1996 with a portion of the proceeds received from
the public offering. The Loan Agreement terminates on January 15, 1998 and any
remaining unpaid balances are due and payable. After September 30, 1996, the
interest rates 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 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
8
<PAGE>
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 redemptions 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 6 - 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 the
equipment, inventory and supplies, contract rights and records, and leasehold
and land improvements of the Company's New Jersey facility, for $6,223,000. The
purchase price is payable in monthly non-interest bearing installments of
$123,000 through August 1999, beginning in the month that the buyer commences
operations of the facility. If the INS re-awards its contract to the buyer, the
unpaid balance is payable in monthly non-interest bearing installments of
$123,000 beginning in the first month of the re-award term, and the Company will
record as income the unpaid balance.
9
<PAGE>
On June 13, 1996 the Company, the Buyer and 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 for the New
Jersey facility was assigned to the Buyer. The Company has no continuing
obligation with respect to the Elizabeth, New Jersey facility.
The receivable from sale of the equipment and leasehold improvements
reflected in the balance sheet at December 31, 1995 and September 30, 1996
represents the present value of the consideration to be received through August
1999, of $3,207,882 and $3,507,882 (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 $3,493,499 resulting from the adjustment of the carrying value
of the related assets discussed above. The reserve for carrying and closing
costs has been reduced by $300,000 of cash payments for rent and other carrying
and closing costs.
NOTE 7 - 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 others similarly situated, personal
injuries
10
<PAGE>
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.
NOTE 8 - In January 1996, the Company entered into three-year employment
agreements with the Chief Operating Officer and the Executive Vice President-
11
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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 9 - The provision for income taxes includes a current provision of
$28,000 and $38,000 respectively for income taxes for three and nine months
ended September 30, 1996 and a credit provision of $54,000 representing a refund
from the carry-back of a net operating loss for the year ended December 31,1995.
NOTE 10 - 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 December 1996 and
January 1997. In July 1996, the Company entered into an agreement with Colorado
County, Texas 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.
12
<PAGE>
In August 1996, the Company was advised it had been selected through a
competitive RFP process, 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 signed contracts for a 50 bed facility in the Bronx, New York and a
96 bed facility in Bell County, Texas with operations in each beginning in the
fourth quarter of 1996, and the Company has also signed a contract to operate a
200 bed jail in Gallop, New Mexico with operations anticipated to commence in
the third quarter of 1997.
NOTE 11 - In August, 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 12 - 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
13
<PAGE>
managing the construction process. Once completed, operations at these
facilities will be managed by the Company. The Company has no legal rights to
the funds and accordingly, such funds do not appear in the accompanying
financial statements.
14
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Nine Months ended September 30,1996 Compared to Nine Months ended September
30,1995
Revenue decreased 3.3% from $24,034,152 for the nine months ended September
30, 1995 to $23,248,525 for the nine months ended September 30, 1996. The net
decrease in revenues for the 1996 period as compared to the 1995 period 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 8.2% from $14,635,821 for the nine months
ended September 30, 1995 to $15,835,673 for the nine months ended September 30,
1996 primarily due to increases in payroll which increased $1,098,411, or 12.1%.
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
15
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at the Company's Elizabeth, New Jersey INS facility. As a percentage of
revenues, operating expenses increased from 60.9% for the nine months ended
September 30, 1995 to 68.1% for the nine months ended September 30, 1996.
General and administrative expenses decreased 6.4% from $7,090,753 for the
nine months ended September 30, 1995 to $6,637,329 for the nine months ended
September 30, 1996. The decline in general and administrative expenses was
primarily attributable to the closure of the Elizabeth, New Jersey INS facility
in June, 1995. As a percentage of revenues, general and administrative expenses
were 26.6% and 27.3% for the nine months ended September 30,1995 and 1996,
respectively. In addition, at September 30, 1995 the Company wrote-off
$1,566,331 of development and other costs associated with the closure of the
Elizabeth, New Jersey INS facility.
Interest expense increased 56.2% from $453,287 for the nine months ended
September 30, 1995 to $707,854 for the nine months ended September 30, 1996.
This increase resulted primarily from indebtedness attributable to the placement
of $5.6 million of 10% subordinated debt in the third quarter, 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 net income of $93,669
or $0.02 per share for the nine months ended September 30, 1996 compared to net
income of $31,960 or $.01 per share for the nine months ended September 30,
1995.
16
<PAGE>
Three Months ended September 30, 1996 Compared to Three Months ended September
30, 1995.
Revenues increased 7.2% from $7,627,791 for the three months ended
September 30,1995 to $8,175,814 for the three months ended September 30, 1996.
The net increase in revenues for the 1996 period as compared to the 1995 period
resulted principally from revenues generated by the Phoenix, Arizona facility
which began operations in April 1996, which was offset in part by lower
occupancy rates at the Company's Fort Worth and Houston, Texas facilities.
Operating expenses increased 18.5% from $4,721,164 for the three months
ended September 30, 1995 to $5,593,930 for the three months ended September 30,
1996 primarily due to increases in payroll, which increased $614,503 or 20.7%.
Resident expenses increased by $199,702 or 15.6% in the 1996 period versus the
1995 period. These changes resulted primarily from the opening of the Phoenix,
Arizona facility and the addition of management personnel in the corporate
office. As a percentage of revenues, operating expenses increased from 61.9% for
the three months ended September 30, 1995 to 68.4% for the three months ended
September 30, 1996.
General and administrative expenses increased 10.3% from $2,026,386 for the
three months ended September 30, 1995 to $2,235,347 for the three months ended
September 30, 1996. The increase in general and administrative expenses was
17
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attributable primarily to the opening of the Phoenix, Arizona facility in
the second quarter of 1996. As a percentage of revenues, general and
administrative expenses were 26.6% and 27.3% for the three months ended
September 30,1995 and 1996, respectively. In addition, at September 30, 1995 the
Company wrote-off $1,566,331 of development and other costs associated with the
closure of the Elizabeth, New Jersey INS facility,of which $78,331 was provided
in 1995's third quarter.
Interest expense increased 7.1% from $238,379 for the three months ended
September 30, 1995 to $255,343 for the three months ended September 30, 1996.
This increase resulted primarily from indebtedness attributable to the placement
of $5.6 million of 10% subordinated debt 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 net income $107,194
or $0.02 per share for the three months ended September 30, 1996 as compared to
net income of $328,531 or $.07 per share for the three months ended September
30, 1995.
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.
18
<PAGE>
The Company had working capital at September 30, 1996 of $20,866,650, an
increase of $16,326,554 from the Company's working capital at December 31, 1995,
which is principally attributable to funds received from the September 1996
public offering of it common stock noted below in the financing section. The
Company's current ratio increased to 6.1 to 1 at September 30, 1996 from 1.95 to
1 at December 31, 1995. At September 30, 1996, the projected start-up cost for
two 350-bed detention facilities in Florida, scheduled to become operational in
December 1996 and January 1997 were estimated at $3.0 million.
Thereafter, the Company has 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 the public offering have been allocated to
fund construction, start-up and related costs with respect to these facilities.
Net cash provided by operating activities was $1,022,188 for the nine
months ended September 30,1996 as compared to $3,510,628 for the nine months
ended September 30,1995. The decrease was attributable primarily to the
reduction in depreciation and amortization resulting from the closure of the
Elizabeth, New Jersey INS facility and changes in working capital. Net cash of
$7,258,755 was used in investing activities for the nine months ended September
30, 1996 as a result of fixed asset acquisition costs of $5,007,491, the
majority of which related to the Company's Phoenix,
19
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Arizona facility and $2,767,503 in additional deferred development and
start-up costs, as compared to net cash of $6,973,413 used in investing
activities for the nine months ended September 30,1995. Net cash of $20,985,021
was provided by financing activities in the nine months ended September 30, 1996
as compared to $9,144,592 in the nine months ended September 30, 1995. The
principal source of such funds for the nine months ended September 30, 1996 was
the public offering of Common Stock and for the nine months ended September 30,
1995 the private placement of subordinated debt, warrants and Common Stock (see
below).
Financing
On September 12, 1996 the Company completed a public offering of 2,450,000
shares of Common Stock at $13.625 per share. Of the 2,450,000 shares of Common
Stock offered, 2,070,000 shares were sold by the Company and 380,000 shares by
certain stockholders. The Company did not receive any proceeds from the shares
sold by the stockholders. The net proceeds received by the Company after
deducting applicable issuance costs and expenses aggregated $25,934,514. The net
proceeds were used to repay short-term and long-term bank indebtedness in the
amount of $7,198,468 and will be used to finance construction, start-up and
related costs of two Florida facilities and other facilities and for general
corporate purposes, including the financing of working capital needs. Also, in
October, 1996 pursuant to the underwriters' over-
20
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allotment option, the Company sold an additional 367,500 shares of Common
Stock, which aggregated an additional $4,700,000 in net proceeds.
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 at an interest rate of 8.92% 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 short-term and long-term loans were repaid in September 1996 with a
portion of the proceeds received from the public offering. After September 30,
1996, the interest rate payable under the revolving credit loan will be based on
the Company's financial performance set forth in the Loan Agreement. The Company
may prepay any borrowings without interest or penalty. The Company has granted
NationsBank the 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
21
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required to pay NationsBank 0.25% of the average unused portion of the
revolving credit loan.
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
percent (10.0%) subordinated 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 costs associated with the Company's Phoenix, Arizona facility
and the balance for expenses related to the private placements and for working
capital.
22
<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
23
<PAGE>
time, and accordingly, no adjustment has been made to the consolidated
financial statements.
On July 30, 1996, a lawsuit was filed in the United States District Court
for the Southern District of New York by International Union and District 6
Realty Corporation alleging fire and safety violations by residents of the
LeMarquis facility. No specific damage amounts are set forth in the complaint.
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.
On September 23, 1996, an inmate at the Fort Worth facility instituted an
action in the Judicial District Court of Tarrant County, Texas alleging civil
rights violations arising out of a denial of access to a law library. No
specific damage amounts are set forth in the complaint. 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
24
<PAGE>
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.
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. 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
25
<PAGE>
costs, including design, development, construction and start-up expenses,
currently estimated at approximately $15 million.
The Company consummated an offering of 2,070,000 shares of common stock,
together with an over-allotment of 367,500 shares of common stock in September,
1996. Of the 2,437,500 shares of common stock offered, 2,057,500 shares were
sold by the Company and 380,000 shares by certain selling stockholders. The
Company did not receive any proceeds from the shares being sold by the selling
stockholders. The Company intends to retire bank indebtedness with a portion of
the net proceeds of the proposed offering.
The Company has also filed a registration statement for a proposed sale of
an aggregate of 169,054 common stock purchase warrants, together with the
169,054 shares of common stock underlying such warrants. All of such securities
are being sold by certain stockholders of the Company and the Company will not
receive any proceeds from such sales. 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: November 14, 1996
27
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<CIK> 0000914670
<NAME> Correctional Services Corporation
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Sep-30-1996
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<PP&E> 12,889,365
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0
0
<COMMON> 72,379
<OTHER-SE> 36,936,877
<TOTAL-LIABILITY-AND-EQUITY> 45,009,088
<SALES> 22,666,605
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<INCOME-PRETAX> 67,669
<INCOME-TAX> (26,000)
<INCOME-CONTINUING> 93,669
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