SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[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.
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CORRECTIONAL SERVICES CORPORATION
Part I. Financial Information
Item 2. Management's Discussion and Analysis
or Plan of Operation
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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
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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.
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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.
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General and administrative expenses decreased 13.9% from $2,749,337 for the
three months ended June 30, 1995 to $2,363,322 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.
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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
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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:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
------------ -------------
<S> <C> <C>
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)
</TABLE>
If the INS contract is re-awarded to the Buyer in August 1999, the Company
will record as income the unpaid balance.
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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
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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
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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
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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.
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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
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Lee Levinson, Chief Financial Officer
Dated: August 23, 1996
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