SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
September 30, 2000 0-23038
--------------------- ----------------------
CORRECTIONAL SERVICES CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3182580
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification Number)
1819 MAIN STREET, SUITE 1000, SARASOTA, FLORIDA 34236
------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code:
(941) 953-9199
--------------
Not Applicable
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(Former name, former address and former fiscal year
if changed since last report)
Number of shares of common stock outstanding on November 3, 2000: 11,373,064
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act
of 1934 during the preceding 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
---- ----
<PAGE>
CORRECTIONAL SERVICES CORPORATION
INDEX
PAGE NO.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(unaudited) (audited)
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 120 $ 7,070
Restricted cash 93 192
Accounts receivable, net 36,176 35,768
Deferred tax asset 3,227 3,227
Prepaid expenses and other current assets 3,178 2,987
-------- --------
Total current assets 42,794 49,244
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 46,888 47,972
OTHER ASSETS
Deferred tax asset 4,862 7,060
Goodwill, net 1,147 1,428
Other 5,463 5,494
-------- --------
$101,154 $111,198
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 16,740 $ 21,960
Current portion of subordinated debt 10 3,797
Current portion of senior debt 6,669 1,206
-------- --------
Total current liabilities 23,419 26,963
COMMITMENTS AND CONTINGENCIES - -
LONG-TERM SENIOR DEBT 22,296 22,551
SUBORDINATED DEBENTURES - 10,393
LONG-TERM PORTION OF FACILITY LOSS RESERVE - 553
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, 11,373,064 shares issued and
outstanding 114 114
Additional paid-in capital 82,797 82,807
Accumulated deficit (27,472) (32,183)
-------- --------
55,439 50,738
-------- --------
$101,154 $111,198
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 3
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<CAPTION>
Nine Months Ended
September 30,
-----------------
2000 1999
-------- --------
<S> <C> <C>
Revenues $158,275 $180,277
-------- --------
Facility expenses:
Operating 138,385 159,052
Startup costs 116 980
-------- --------
138,501 160,032
-------- --------
Contribution from operations 19,774 20,245
Other operating expenses:
General and administrative 9,556 9,993
Write-off of deferred financing costs - 1,622
Merger costs and related restructuring charges - 13,813
-------- --------
Operating income (loss) 10,218 (5,183)
Interest and other expense, net (2,431) (2,218)
-------- --------
Income (loss) before income taxes and extraordinary
gain on extinguishment of debt 7,787 (7,401)
Income tax (expense) benefit (3,076) 1,001
-------- --------
Net income (loss) before extraordinary gain on
extinguishment of debt 4,711 (6,400)
Extraordinary gain on extinguishment of debt,
net of tax of $643 - 985
-------- --------
Net income (loss) $4,711 $(5,415)
======== ========
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary gain on
extinguishment of debt $0.41 $(0.57)
Extraordinary gain on extinguishment of debt - 0.09
-------- --------
Net income (loss) per share $0.41 $(0.48)
======== ========
Number of shares used to compute EPS:
Basic 11,373 11,167
Diluted 11,377 11,167
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 4
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended
September 30,
------------------
2000 1999
------- -------
<S> <C> <C>
Revenues $52,209 $60,464
------- -------
Facility expenses:
Operating 45,409 52,994
Startup costs 100 222
------- -------
45,509 53,216
------- -------
Contribution from operations 6,700 7,248
Other operating expenses:
General and administrative 3,324 3,248
Write-off of deferred financing costs - 1,622
------- -------
Operating income 3,376 2,378
Interest and other expense, net (774) (736)
------- -------
Income before income taxes and extraordinary gain
on extinguishment of debt 2,602 1,642
Income tax expense (1,028) (648)
------- -------
Net income before extraordinary gain on
extinguishment of debt 1,574 994
Extraordinary gain on extinguishment of debt,
net of tax of $643 - 985
------- -------
Net income $1,574 $1,979
======= =======
Basic and diluted earnings per share:
Income before extraordinary gain on
extinguishment of debt $0.14 $0.09
Extraordinary gain on extinguishment of debt - 0.09
------- -------
Net income per share $0.14 $0.18
======= =======
Number of shares used to compute EPS:
Basic 11,373 11,302
Diluted 11,376 11,305
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 5
<TABLE>
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
-----------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,711 $(5,415)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,712 4,390
Merger related asset writedown - 5,192
Deferred loan costs - 1,622
Deferred income tax expense (benefit)
2,198 (2,878)
Gain on disposal of fixed assets, net (80) (1,628)
Changes in operating assets and liabilities:
Restricted cash 99 (138)
Accounts receivable (407) (4,889)
Prepaid expenses and other current assets (190) 1,325
Accounts payable, accrued liabilities and
facility loss reserve (5,130) 98
------- -------
Net cash provided by (used in)
operating activities: 4,913 (2,321)
------- -------
Cash flows from investing activities:
Capital expenditures (2,768) (2,822)
Proceeds from the sale of property, equipment and
improvements 116 -
Other assets (527) (19)
------- -------
Net cash used in investing
activities: (3,179) (2,841)
------- -------
Cash flows from financing activities:
Proceeds on senior debt, net 5,207 16,516
Payment of subordinated debt (14,180) (17,383)
Proceeds from sale of equipment of leasehold
improvements - 920
Proceeds from exercise of stock options and warrants - 3,278
Debt issuance costs - (2,363)
Long-term portion of prepaid lease 299 298
Adjustment to paid-in capital (10) -
------- -------
Net cash provided by(used in)
financing activities: (8,684) 1,266
------- -------
Net decrease in cash and cash equivalents (6,950) (3,896)
Cash and cash equivalents at beginning of period 7,070 7,639
------- -------
Cash and cash equivalents at end of period $120 $3,743
======= =======
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest $3,015 $2,627
======= =======
Income taxes $1,201 $146
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> 6
CORRECTIONAL SERVICES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts
of Correctional Services Corporation and its wholly owned subsidiaries (the
"Company"). Due to the pooling of interests business combination
consummated on March 31, 1999, described in Note 2, the condensed
consolidated financial statements also include the accounts of Youth
Services International, Inc. and its subsidiaries ("YSI") for the 1999
period presented.
In the opinion of the Company's management the accompanying unaudited
condensed consolidated financial statements as of September 30, 2000, and
for the three and nine months ended September 30, 2000 and 1999, include
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation. The statements herein are presented in accordance
with the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
financial statements on Form 10-K for the Company have been omitted from
these statements, as permitted under the applicable rules and regulations.
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-K for the year ended December 31, 1999.
The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
NOTE 2 - POOLING OF INTERESTS BUSINESS COMBINATION
On March 31, 1999, the Company issued 3,114,614 shares of the
Company's common stock in exchange for all of the common stock of YSI. YSI
operates juvenile justice facilities and also provides aftercare services
to adjudicated youth. The above transaction has been accounted for as a
pooling of interests and, accordingly the condensed consolidated financial
statements for the 1999 period presented, have been restated to include the
accounts of YSI.
In connection with the merger, during the first quarter of 1999, the
Company recorded a charge to operating expenses of approximately $13.8
million ($10.3 million after taxes) for direct costs related to the merger
and certain other costs resulting from the restructuring of the newly
combined operations.
Direct merger costs consisted primarily of fees paid to investment
bankers, attorneys, accountants and financial advisors as well as printing
and other direct costs. Restructuring charges included severance and
<PAGE> 7
change in control payments made to certain former officers and employees of
YSI and costs associated with the consolidation of administrative functions
and the expected closure of certain facilities. Exit costs include charges
resulting from the cancellation of lease agreements and other long-term
commitments, the write-down of underutilized assets or assets to be
disposed of and miscellaneous other costs.
Merger costs and related restructuring charges are comprised of the
following (in thousands):
Direct merger costs $ 6,111
Restructuring charges:
Employee severance and change in control payments 2,339
Exit costs 4,410
Other 953
-------
Total $13,813
=======
In addition, in connection with the merger, the Company assumed $32.2
million of 7% convertible subordinated Debentures (the "Debentures")
originally issued by YSI during the year ended June 30, 1996. Under the
terms of the indenture pursuant to which YSI issued the Debentures, the
acquisition of YSI by the Company constituted a "change of control" thereby
enabling the holders of the Debentures to demand redemption by the Company.
The applicable portion of the unamortized costs related to the issuance of
these Debentures have been appropriately written off and are included in
the direct merger costs.
NOTE 3-DEBT
On August 31, 1999, the Company finalized a new $95 million financing
arrangement with Summit Bank, N.A. This financing arrangement is subject
to compliance with various financial covenants and borrowing base criteria.
The Company is currently in compliance with all debt covenants. This
financing arrangement is secured by all of the assets of the Company and
consists of the following components:
- $30 million revolving line of credit to be used by the Company for
working capital and general corporate purposes and to finance the
acquisition of facilities, properties and other businesses. At
September 30, 2000 the Company had $12 million outstanding under the
revolving line of credit and had an available borrowing base of $15.3
million due to borrowing base limitations.
- $20 million delayed drawdown credit facility which provides the
Company with additional financing used to fund the redemption of the
outstanding Debentures. Principal payments of $1.7 million are due
quarterly beginning the earlier of August 31, 2000 or the date on
which the outstanding balance under the credit facility is equal to
$20 million. On September 30, 2000 the Company made its second
principal payment and the remaining balance outstanding was $16.7
million. As of September 30, 2000, the Company has classified $6.7
million of the outstanding balance as a current obligation.
<PAGE 8
- $45 million in financing which may be used to purchase land and
property and to finance the construction of new facilities through an
operating lease arrangement. The Company currently has approximately
$21 million available for additional property acquisition and
construction under this operating lease financing facility.
Upon maturity on March 31, 2000, the Company redeemed $13.7 million of
the Debentures at face value plus accrued but unpaid interest. The Company
used the balance available on its delayed drawdown credit facility of $5.6
million and an additional $8.0 million from the revolving line of credit to
redeem the Debentures. On April 5, 2000 the Company redeemed $465,000 of
the 7% Convertible Subordinated Debentures plus accrued but unpaid
interest. As of September 30, 2000, $10,000 remains outstanding, pending
receipt of the original Debentures from the Debenture holders.
NOTE 4 - INCOME TAXES
Deferred tax assets consisting of a current portion of $3.2 million
and a long-term portion of $4.9 million reflect the tax effected impact of
temporary differences between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. The Company, after considering its pattern of profitability
and its anticipated future taxable income, believes it is more likely than
not that the deferred tax assets will be realized.
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with SFAS No. 128 (in thousands):
Nine Months Ended September 30, 2000
Numerator:
Net Income $4,711
======
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,373
Effect of dilutive securities - stock options and
warrants 4
------
Denominator for diluted earnings per share 11,377
======
<PAGE> 9
Nine Months Ended September 30, 1999
The effect of dilutive securities is anti-dilutive and, therefore, the
reconciliation has not been presented.
Three Months Ended September 30, 2000
Numerator:
Net Income $1,574
======
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,373
Effect of dilutive securities - stock options and
warrants 3
------
Denominator for diluted earnings per share 11,376
======
Three Months Ended September 30, 1999
Numerator:
Net Income $1,979
======
Denominator:
Basic earnings per share:
Weighted average shares outstanding 11,302
Effect of dilutive securities - stock options and
warrants 3
------
Denominator for diluted earnings per share 11,305
======
NOTE 6 - DISPUTED RECEIVABLE
In April 1999, immediately following the merger with YSI, a non-profit
entity chose to exercise their right under the change in control clause of
their contract with YSI and elected to discontinue all contracted services.
Upon this determination, the non-profit entity claimed that it had been
billed incorrectly for years prior to 1997. The Company is currently
investigating this claim and based on currently available information has
reserved approximately $700,000 of the $2.1 million receivable at September
30, 2000.
NOTE 7 - SUBSEQUENT EVENT
On August 23, 2000, Dominion Management Group exercised their option
to take over the contracts at the 1,200 bed Crowley County, Colorado and
the 850 bed McLoud, Oklahoma facilities. The Company, which expects to
turn over the facilities to Dominion on December 20, 2000, will receive a
lump sum payment of approximately $4 million. Pending the resolution of
this matter, the Company has not recognized any gain associated with this
transaction.
<PAGE> 10
On October 20, 2000, the Company announced that its Board of Directors
had authorized a share repurchase program of up to $10 million. The
repurchase is expected to begin during the fourth quarter of 2000 and
continue over the next 12 months.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
---------------------------------------------------------------------------
This document contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and 21E of the Securities
Exchange Act of 1934 which are not historical facts and involve risks and
uncertainties. These include statements regarding the expectations,
beliefs, intentions or strategies regarding the future. The Company intends
that all forward-looking statements be subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements reflect the Company's views as of the date they
are made with respect to future events and financial performance, but are
subject to many uncertainties and risks which could cause the actual
results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Examples of such
uncertainties and risks include, but are not limited to: occupancy levels;
the renewal of contracts; the ability to secure new contracts; and public
resistance to privatization. These forward-looking statements may be
affected by a number of factors, including the risk factors contained in
the Company's Annual Report on Form 10K for the year ended December 31,
1999. The Company does not undertake any obligation to update any forward-
looking statements.
GENERAL
Correctional Services Corporation and its wholly owned subsidiaries
(the "Company") is one of the largest and most comprehensive providers of
juvenile rehabilitative services with 34 facilities and approximately 4,300
juveniles in its care. In addition, the Company is a leading developer and
operator of adult correctional facilities operating 16 facilities
representing approximately 6,900 beds. On a combined basis, as of September
30, 2000, the Company provided services in 20 states and Puerto Rico,
representing approximately 11,200 beds including aftercare services.
The Company's primary source of revenue is generated from the
operation of its facilities pursuant to contracts with federal, state and
local governmental agencies, and management agreements with third parties
that contract directly with governmental agencies. Generally, the Company's
contracts are based on a daily rate per resident, some of which have
guaranteed minimum payments; others provide for fixed monthly payments
irrespective of the number of residents. In addition, the Company receives
revenue for educational and aftercare services. The Company recognizes
revenue at the time the Company performs the services pursuant to its
contracts.
<PAGE> 11
The Company typically pays all facility operating expenses, except for
rent or lease payments in the case of certain government-provided
facilities or for facilities for which the Company has only a management
contract. Operating expenses are principally comprised of costs directly
attributable to the management of the facility which include salaries and
benefits of administrative and direct supervision personnel and costs
associated with the care of the residents, which include food, clothing,
medical services and personal hygiene supplies. Other operating expenses
are comprised of fixed costs, which consist of rent and lease payments,
utilities, insurance, depreciation and professional fees.
The Company also incurs costs relating to the start-up of new
facilities. Such costs are principally comprised of expenses associated
with the recruitment, hiring and training of staff, travel of personnel,
certain legal expenses and other costs incurred after a contract has been
awarded.
Contribution from operations consists of revenues minus operating
expenses and start-up costs. Contribution from operations, in general, is
lower in the initial stages of a facility's operations. This is due to the
need to incur a significant portion of the facility's operating expenses
while the facility is in the process of attaining full occupancy.
General and administrative costs primarily consist of salaries and
benefits of non-facility based personnel, insurance, professional fees,
rent and utilities associated with the operation of the Company's corporate
offices. In addition, general and administrative costs consist of
development costs principally comprised of travel, proposal development,
legal fees, and various consulting and other fees incurred prior to the
award of a contract.
Recent Developments
On May 15, 2000 the Company received a notice of re-award from the
Federal Bureau of Prisons for the Community Corrections Center services in
the Borough of Manhattan, New York for a two-year 60 bed contract effective
September 1, 2000.
On May 31, 2000 the Company closed its 64 bed La Salle County Juvenile
Justice Center in Cotulla, Texas and relocated the majority of its
residents to the Company's Colorado County Boot Camp in Eagle Lake, Texas.
On May 31, 2000 the Company discontinued operations at the 102 bed
Everglades Academy located in Florida City, Florida.
<PAGE> 12
On June 1, 2000 the Company commenced operations at the 100 bed Summit
View Youth Correctional Center located in Las Vegas, Nevada.
In July 2000, the Company began renovating the new Washington Heights,
NY facility, expected to commence operations in early 2001, which will
house the residents currently at the Manhattan, New York facility.
On August 1, 2000 the Company discontinued operations at the 70 bed
Parkside Community Correctional facility located in New York City.
On August 17, 2000 the Company discontinued operations at the 288 bed
South Fulton Municipal Regional Jail in Union City, Georgia
On August 23, 2000, Dominion Management Group exercised their option
to take over the contracts at the 1,200 bed Crowley County, Colorado and
the 850 bed McLoud, Oklahoma facilities. The Company, which expects to
turn over the facilities to Dominion on December 20, 2000, will receive a
lump sum payment of approximately $4 million. Pending the resolution of
this matter, the Company has not recognized any gain associated with this
transaction.
On October 20, 2000, the Company announced that its Board of Directors
had authorized a share repurchase program of up to $10 million. The
repurchase is expected to begin during the fourth quarter of 2000 and
continue over the next 12 months.
<PAGE> 13
Results of Operations
The following table sets forth certain operating data as a
percentage of total revenues:
Nine Months Ended
September 30,
-----------------
2000 1999
------- -------
Revenues 100.0 % 100.0 %
Expenses:
Operating 87.4 % 88.2 %
Startup costs 0.1 % 0.6 %
------- --------
87.5 % 88.8 %
------- --------
Contribution from operations 12.5 % 11.2 %
------- --------
Other operating expenses:
General and administrative 6.0 % 5.5 %
Merger costs and related restructuring charges 0.0 % 7.7 %
Write-off of deferred financing costs 0.0 % 0.9 %
------- -------
6.0 % 14.1 %
------- -------
Operating income (loss) 6.5 % (2.9)%
Interest expense, net (1.5)% (1.2)%
------- -------
Income (loss) before income taxes and
gain on extinguishment of debt 5.0 % (4.1)%
Income tax (provision) benefit (2.0)% 0.6 %
------- -------
Income (loss) before gain on extinguishment
of debt, net of tax 3.0 % (3.5)%
Gain on extinguishment of debt - 1.5 %
------- -------
Net income (loss) 3.0 % (2.0)%
======= =======
<PAGE> 14
The following tables sets forth certain operating data as a
percentage of total revenues:
Three Months Ended
September 30,
-----------------
2000 1999
------- -------
Revenues 100.0 % 100.0 %
Expenses:
Operating 87.0 % 87.6 %
Startup costs 0.2 % 0.4 %
------- -------
87.2 % 88.0 %
------- -------
Contribution from operations 12.8 % 12.0 %
------- -------
Other operating expenses:
General and administrative 6.3 % 5.4 %
Write-off of deferred financing costs 0.0 % 2.7 %
------- -------
6.3 % 8.1 %
------- -------
Operating income 6.5 % 3.9 %
Interest expense, net (1.5)% (1.2)%
------- -------
Income before income taxes and gain
on extinguishment of debt 5.0 % 2.7 %
Income tax provision (2.0)% (1.1)%
------- -------
Income before gain on extinguishment
of debt, net of tax 3.0 % 1.6 %
Gain on extinguishment of debt - 1.7 %
------- -------
Net income 3.0 % 3.3 %
======= =======
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Revenue decreased by $22.0 million or 12.2% for the nine months ended
September 30, 2000 to $158.3 million compared to the same period in 1999
due primarily to:
- A decrease of $29.6 million generated from the discontinuance of
operations at 11 facilities (2,103 beds), offset by:
- An increase of $2.2 million generated from a full nine months of
revenues from the 300-bed expansion of the Crowley County, Colorado
facility;
- A net increase of $4.5 million generated from per diem rate and
occupancy level increases in existing facilities; and
- An increase of $900,000 representing monthly installment payments of
$123,000 received by the Company related to a contract novation in
December 1995, at its Elizabeth, New Jersey facility.
<PAGE> 15
Operating expenses decreased $20.6 million or 13.0% for the nine
months ended September 30, 2000 to $138.4 million compared to the same
period in 1999 due primarily to the closing of the eleven facilities,
partially offset by costs associated with new or expanding facilities, as
mentioned above.
As a percentage of revenues, operating expenses decreased to 87.4% for
the nine months ended September 30, 2000 from 88.2% for the nine months
ended September 30, 1999. The decrease was primarily due to the number of
facilities that were in their early stages of operations during 1999 and
were experiencing less than optimal utilization rates. In addition,
operating costs as a percentage of revenue were reduced due to the
implementation of enhanced financial controls and oversight of the
facilities acquired in the merger with YSI.
Startup costs were $116,000 for the nine months ended September 30,
2000 compared to $980,000 for the nine months ended September 30 1999.
Start up costs during the nine months ended September 30, 2000 relate to
the Washington Heights, NY facility and the Summit View, Nevada facility,
both previously mentioned. The majority of the start up costs for the
Summit View facility were funded by the contracting agency. Startup costs
for the nine months ended September 30, 1999, related to the startup of the
South Fulton, Georgia facility and 300-bed expansion of the Crowley,
Colorado facility.
General and administrative expenses decreased from $10.0 million for
the period ended September 30, 1999 to $9.6 million for the nine months
ended September 30, 2000. The decrease was primarily attributable to:
- The reduction of the administrative staff of YSI;
- The reduction of YSI corporate overhead expenses; and
- The synergies realized from the merger resulting in the reduction
of insurance, office and travel expenses.
As a percentage of revenues, general and administrative expenses
increased to 6.0% for the nine months ended September 30, 2000 from 5.5%
for the nine months ended September 30, 1999. The increase in general and
administrative expenses as a percentage of revenue is a result of the
decrease in revenues from the closure of the eleven facilities mentioned
above.
For the nine months ended September 30, 2000 the Company incurred no
merger or related restructuring charges, compared to $13.8 million incurred
during the nine months ended September 30, 1999. The costs incurred during
1999 were associated with the YSI merger, which was completed on March 31,
1999.
Interest expense, net of interest income, was $2.4 million for the
nine months ended September 30, 2000 compared to interest expense, net of
interest income of $2.2 million, for the nine months ended September 30,
1999. This increase resulted from borrowings on the Company's credit
facility to redeem the Debentures which became due on March 31, 2000 and
the general overall increase in interest rates.
<PAGE> 16
For the nine months ended September 30, 2000 the Company recognized an
income tax expense of $3.1 million representing an effective tax rate of
39.5%. For the nine months ended September 30, 1999 the Company recognized
a benefit from income taxes of $358,000 (net of a $643,000 charge from the
extraordinary gain on the extinguishment of debt) representing an effective
tax rate of 6.2%. The increase in the effective tax rate was a result of
expensing certain merger costs during 1999 that are non-deductible for tax
purposes.
As a result of the foregoing factors, for the nine months ended
September 30, 2000 the Company had net income of $4.7 million or $0.41 per
share. For the nine months ended September 30, 1999 the Company had a net
loss of $5.4 million or ($0.48) per share.
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Revenue decreased by $8.3 million or 13.7% for the three months ended
September 30, 2000 to $52.2 million compared to the same period in 1999 due
primarily due to:
- A decrease of $10.0 million from the discontinuance of operations at
eleven facilities (2,103 beds), offset by;
- A net increase of $1.8 million from per diem rate and occupancy
level increases in existing facilities.
Operating expenses decreased $7.6 million or 14.3% for the three
months ended September 30, 2000 to $45.4 million compared to the same
period in 1999 due primarily to the closing of the eleven facilities,
partially offset by costs associated with new or expanding facilities, as
mentioned above.
As a percentage of revenues, operating expenses decreased to 87.0% for
the three months ended September 30, 2000 compared to 87.6% for the three
months ended September 30, 1999 due primarily to the closing of the eleven
facilities mentioned above.
Startup costs were $100,000 for the three months ended September 30,
2000 compared to $222,000 for the three months ended September 30, 1999.
Start up costs during the three months ended September 30, 2000 relate to
the Summit View, Nevada facility. During the three months ended September
30, 1999, the Bayamon Puerto Rico facility incurred start up costs related
to a 45 bed expansion.
General and administrative expenses remained consistent at $3.3
million for the period ended September 30, 2000 compared to $3.2 million
for the three months ended September 30, 1999.
<PAGE> 17
As a percentage of revenues, general and administrative expenses
increased to 6.3% for the three months ended September 30, 2000 from 5.4%
for the three months ended September 30, 1999. The increase in general and
administrative expenses as a percentage of revenue resulted from decreased
revenues from the closure of the eleven facilities mentioned above.
Interest expense, net of interest income, was $774,000 for the three
months ended September 30, 2000 compared to interest expense, net of
interest income of $736,000 for the three months ended September 30, 1999,
a net increase in interest expense of $38,000. This increase resulted from
borrowings on the Company's credit facility to redeem the Debentures that
became due on March 31, 2000 and the general overall increase in interest
rates.
For the three months ended September 30, 2000 the Company recognized
an income tax provision of $1.0 million representing an effective tax rate
of 39.5%. For the three months ended September 30, 1999 the Company
recognized an income tax expense of $1.3 million (including $643,000 from
the extraordinary gain on the extinguishment of debt) representing an
effective tax rate of 39.5%
As a result of the foregoing factors, for the three months ended
September 30, 2000 the Company had net income of $1.6 million or $0.14 per
share. For the three months ended September 30, 1999 the Company had net
income of $2.0 million or $0.18 per share.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had $120,000 of cash and working
capital of $19.4 million compared to December 31, 1999 when the Company had
$7.1 million in cash and working capital of $22.3 million. The decrease in
cash was primarily a result of paying down the Company's subordinated debt.
Net cash provided by operating activities was $4.9 million for the
nine months ended September 30, 2000 compared to net cash used in operating
activities of $2.3 million for the nine months ended September 30, 1999.
The change was attributed primarily to:
- An increase in net income due to the absence of certain expenses
related to the merger with YSI for the nine months ended September
30, 1999; and
- A decrease in accounts payable and accrued liabilities resulting
from the closing of the eleven facilities and the timing of
payments.
Net cash of $3.2 million was used in investing activities during the
nine months ended September 30, 2000 as compared to $2.8 million used in
investing activities in the nine months ended September 30, 1999. In the
2000 period such cash was used principally for:
- The purchase of property and equipment and expenditures for
leasehold improvements at existing facilities.
<PAGE> 18
- Deposits on land purchases for future development.
In the comparable period for 1999, the principal investing activities
of the Company were:
- Capital expenditures related to the opening of new facilities.
- Leasehold improvements on existing facilities.
- Merger related computer technology and upgrades.
- Land improvement for future development.
Net cash of $8.7 million was used in financing activities for the nine
months ended September 30, 2000 as compared to $1.3 million provided by
financing activities for the nine months ended September 30, 1999. During
the 2000 period the Company's primary uses of funds were:
- Repayment of subordinated debt of $14.2 million offset by;
- Net proceeds of $5.2 million from the Company's revolving line of
credit and delayed drawdown credit facilities.
In the comparable period for 1999, the primary uses of funds were net
repayments of $867,000 on senior and subordinated debt, and debt issuance
costs of $2.4 million offset by proceeds of $3.3 million from the exercise
of stock options and warrants.
Upon maturity on March 31, 2000, the Company redeemed $13.7 million of
the Debentures at face value plus accrued but unpaid interest. The Company
used the balance available on its delayed drawdown credit facility of $5.6
million and an additional $8.0 million from the revolving credit agreement
to redeem these Debentures. On April 5, 2000 the Company redeemed $465,000
of the Debentures plus accrued but unpaid interest. As of September 30,
2000, $10,000 remains outstanding pending receipt of the original
Debentures from the Debenture holders.
As a result of the above note redemption, the balance outstanding on
the Company's credit agreement at September 30, 2000 was $28.7 million of
which $16.7 million was on the delayed drawdown line and $12 million on the
revolving line of credit. The Company is required to pay the outstanding
principal balance on the delayed drawdown line in twelve equal quarterly
installments beginning on June 30, 2000. Consequently, $6.7 million has
been classified as current portion. At September 30, 2000 approximately
$15.3 million is available under the revolving credit agreement.
<PAGE> 19
At September 30, 2000 the Company had $24.0 million outstanding on its
available credit under the lease credit facility. As a result, the Company
currently has approximately $21.0 million available for additional property
acquisition and construction under this operating lease financing facility.
At September 30, 2000 the Company had construction commitments of
approximately $1.8 million.
The Company continues to make cash investments in the acquisition and
construction of new facilities and the expansion of existing facilities.
On October 20, 2000, the Company announced that its Board of Directors had
authorized a share repurchase program of up to $10 million. The repurchase
is expected to begin during the fourth quarter of 2000 and continue over
the next 12 months. In order to utilize excess cash flows and proceeds
from the sale of certain assets to repurchase the stock, the Company is
in negotiations to amend their Credit Agreement as follows:
- The $30 million revolving credit facility borrowing limit is
expected to be reduced to $25 million.
- The $45 million lease credit facility borrowing limit is expected
to be reduced to $35 million.
In addition, the Company expects to continue to have cash needs as it
relates to financing start-up costs in connection with new contracts. If
such opportunities are pursued, the Company would require additional
financing resources. Management believes these additional resources may be
available through other financing sources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's current financing is subject to variable rates of
interest and is therefore exposed to fluctuations in interest rates. The
Company's subordinated debt and mortgage on property accrues interest at
fixed rates of interest.
The table below presents the principal amounts, weighted average
interest rates, fair value and other terms, by year of expected maturity,
required to evaluate the expected cash flows and sensitivity to interest
rate changes. Actual maturities may differ because of prepayment rights.
<TABLE>
<CAPTION>
Expected Maturity Dates
-----------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt 1,676,667 6,669,191 6,669,450 1,669,438 3,383 287,507 16,975,636 16,975,636
========= ========= ========= ========= ===== ======= ========== ==========
Weighted average interest
rate at September 30, 2000 12.40%
======
Variable rate LIBOR debt - - 12,000,000 - - - 12,000,000 12,000,000
========= ========= ========== ========= ===== ======= ========== ==========
Weighted average interest
rate at September 30, 2000 8.87%
======
</TABLE>
<PAGE> 20
PART II - - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any legal proceedings, other than ordinary
and routine litigation incidental to its business, which in the opinion of
the Company are material to the Company, either individually or in the
aggregate.
Item 2. Changes in Securities and User Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Stockholders of Correctional Services
Corporation was held on October 3, 2000.
At the meeting, two (2) proposals were considered and voted upon with
the following results:
(1) To elect seven (7) directors to serve until the next annual
meeting of stockholders;
Results:
VOTES CAST VOTES CAST
NAME IN FAVOR AGAINST
---- ---------- ----------
Stuart M. Gerson 9,166,977 561,963
Shimmie Horn 9,167,014 561,926
Bobbie L. Huskey 9,226,605 502,335
James F. Slattery 9,166,977 561,963
Aaron Speisman 9,166,014 561,926
Richard P. Staley 9,167,014 561,926
Melvin T. Stith 9,226,605 502,335
<PAGE> 21
(2) To ratify the reappointment of Grant Thornton, LLP as independent
auditors of the Company for the year ending December 31, 2000;
Results:
VOTES CAST VOTES CAST
IN FAVOR AGAINST
---------- ----------
9,511,284 135,732
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.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORRECTIONAL SERVICES CORPORATION
Registrant
By: /s/ Ira M. Cotler
________________________________
Ira M. Cotler, Executive Vice President
Chief Financial Officer
Dated: November 13, 2000
<PAGE> 23
Exhibit Index
Exhibit Number Exhibit Description Page Number
------------- ------------------- -----------
27 Financial Data Schedule -
