10-Q 1 0001.txt 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 -------------------------------------------------- (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 ---- ---- 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 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPTEMBER 30, DECEMBER 31, 2000 1999 (unaudited) (audited) --------------- ------------ 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.
3 CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Nine Months Ended September 30, ----------------- 2000 1999 -------- -------- 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.
4 CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Three Months Ended September 30, ------------------ 2000 1999 ------- ------- 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.
5 CORRECTIONAL SERVICES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Nine Months Ended September 30, ----------------- 2000 1999 ------- ------- 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.
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 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. 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. 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. 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. 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. 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)% ======= ======= 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. 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. 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. 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. 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. 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.
Expected Maturity Dates ----------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- 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% ======
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 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. 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 23 Exhibit Index Exhibit Number Exhibit Description Page Number ------------- ------------------- ----------- 27 Financial Data Schedule -