SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
__X___ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended JUNE 30, 2000
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_____ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to ______________________
Commission file number __ 000-28295 __
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CORRECTIONAL SYSTEMS, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 33-0607766
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
6910 "A" MIRAMAR ROAD, SAN DIEGO, CA 92121
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(Address of Principal Executive Offices) (Zip Code)
(858) 566-9816
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Age after the distribution of
securities under a plan confirmed by a court.
Yes __________ No ____________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,644,400 SHARES
----------------------
Transitional Small Business Disclosure Format (check one):
Yes __________ No ______X________
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Correctional Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
Assets
JUNE 30, 2000 DECEMBER 31,1999
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Cash $ 268,698 $ 472,488
Accounts Receivable Net of Allowances 1,021,886 792,746
Other Assets 62,013 63,075
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Total Current Assets 1,352,597 1,328,309
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Property and Equipment:
Land 105,278 105,278
Building 1,328,218 1,314,336
Furniture and Equipment 355,485 348,824
Less: Accumulated Depreciation (149,550) (98,371)
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Total Property and Equipment 1,639,431 1,670,067
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Related Party Notes and Interest Receivable 109,333 109,333
Goodwill Net of Accumulated Amortization 1,198,818 1,231,971
Other Intangibles, net of accumulated amortization 572,437 582,849
Deposits and Other Assets 32,536 17,374
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$4,905,152 $4,939,903
========== ==========
Liabilities and Shareholders' Equity
Accounts Payable $158,133 $188,281
Accrued Liabilities 494,320 439,515
Current Portion of Long - Term Debt 137,990 132,170
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Total Current Liabilities 790,443 759,966
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Long - Term Debt Net of Current Portion 1,086,401 1,156,681
Deferred Income Taxes 2,621 2,621
Commitment and Contingencies
Shareholders' Equity
Convertible Preferred Stock,$.001 Par Value,
10,000,000 Shares
Authorized 3,363,636 Shares of Series A
Issued and Outstanding 3,364 3,364
Common Stock, $.001 Par Value, 40,000,000 Shares
Authorized,
3,644,400 Shares Issued and Outstanding 3,644 3,644
Additional Paid-In Capital 3,691,317 3,691,317
Accumulated Deficit (672,638) (677,690)
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3,025,687 3,020,635
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$4,905,152 $4,939,903
========== ==========
Correctional Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited June 30,
FOR THE 3 MONTHS ENDED FOR THE 6 MONTHS ENDED
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues $2,123,841 $1,490,006 $4,189,081 $3,007,743
Expenses:
Salaries and Wages 991,447 650,519 1,806,584 1,252,148
Depreciation and Amortization 47,308 33,200 94,743 67,917
Other Operating Expenses 694,029 427,647 1,528,822 959,500
General and Administrative Expenses 387,599 339,508 696,718 628,505
---------- ---------- --------- ---------
Total Expenses 2,120,383 1,450,874 4,126,867 2,908,070
---------- ---------- --------- ---------
Operating Income 3,458 39,132 62,214 99,673
Other Income (Expense)
Interest Income and (Expense), Net (26,167) (6,985) (52,057) (9,384)
Other Expenses (2,451) (1,910) (5,105) (1,910)
---------- ---------- --------- ---------
Total Other Income (Expense) (28,618) (8,895) (57,162) (11,294)
---------- ---------- --------- ---------
Income (Loss) Before Provision for Taxes (25,160) 30,237 5,052 88,379
---------- ---------- --------- ---------
Provision (Benefit) for Taxes (7,215) 7,257 ---0--- 21,211
---------- ---------- --------- ---------
Net Income (Loss) $ (17,945) $ 22,980 $5,052 $67,168
========== ========== ========= =========
Basic Income (Loss) Per Share $ (0.01) $ 0.01 $0.00 $0.02
Diluted Income (Loss) Per Share $ (0.01) $ 0.00 $0.00 $0.01
Weighted Average Common Shares Outstanding - Basic 3,494,400 3,374,400 3,494,400 3,374,400
Weighted Average Common Shares Outstanding - Diluted 3,494,400 6,738,036 6,866,479 6,738,036
Correctional Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the 6 Months Ended:
Unaudited
JUNE 30,
--------
2000 1999
---- ----
Cash Flows From Operating Activities:
Net Income $ 5,052 $ 67,168
Adjustments to Reconcile Net Income to Net Cash:
Depreciation and Amortization 94,743 67,918
Increase in Accounts Receivable (229,140) (215,627)
(Increase) Decrease in Other Current Assets 1,062 (8,972)
(Increase) in Deposits and Other Assets (15,162) (41,342)
Increase (Decrease) in Accounts Payable (30,148) 13,246
Increase (Decrease) in Accrued Liabilities 54,805 3,304
--------- ---------
Net Cash Provided by (Used In) Operations (118,788) (114,305)
--------- ---------
Cash Flows from Investing Activities:
Purchase of Fixed Assets (20,542) (40,352)
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Net Cash Used in Investing Activities (20,542) (40,352)
--------- ---------
Cash Flows From Financing Activities:
Borrowing on Notes Payable - 778,400
Payments on Notes Payable (64,460) (136,396)
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Net Cash Provide by (Used In) Financing Activities (64,460) 642,004
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Increase (Decrease) in Cash (203,790) 487,347
Cash, Beginning of Year 472,488 489,096
Cash, End of Period $268,698 $976,443
========= =========
Correctional Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
June 30, 2000
1. Description of Business and Risk Factors
Description of Business
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for the interim financial information and the instructions
to the Form 10SB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all of the adjustments necessary for a fair presentation
have been included. For further information, refer to the audited
consolidated financial statements for the fiscal year ended December
31, 1999 and footnotes thereto, included in the Company's Annual Report
on Form 10 - KSB which was filed with the Securities and Exchange
Commission. Operating results for the 6 months ended June 30, 2000 are
not necessarily indicative of the results of operations that may be
expected for the year ending December 31, 2000
The Company was incorporated in the state of California on March 31,
1994. In October 1999, the Company reincorporated in the state of
Delaware. CSI operates correctional facilities on behalf of counties
under the terms of multi-year contracts with local government agencies.
The population of the correctional facilities typically consists of
arrestees, self-pay inmates, sentenced county work furlough inmates,
sentenced federal inmates serving short-term sentences and individuals
requiring detoxification. The Company also operates a community
correction facility known as Reality House, Inc. (RHI). RHI primarily
provides work furlough programs and counseling, funded by the Bureau of
Prisons. The Company's subsidiary, Sentencing Concepts, Inc. (SCI)
provides non-imprisonment alternatives to individuals who would have
otherwise been subject to standard judicial punishment. The services
include electronic home monitoring, drug, alcohol, and anger management
counseling; and drug use testing. The Company has contracted with
various municipal judicial systems to provide these services.
Risk Factors
Based on total assets and annual revenues, the Company is significantly
smaller than many of its competitors. These competitors include large
privately-held and publicly-held companies that have substantially
greater financial, marketing and other resources than the Company.
These companies offer services and operate in markets in which the
Company competes. The services offered by these companies, in some
cases, are similar to the services that the Company offers. The Company
expects that competition will increase substantially as a result of
industry consolidations and alliances, as well as the emergence of new
competitors. There can be no assurance that the Company will be able to
compete successfully with the existing or new competitors or that
competitive pressures faced by the Company will not materially and
adversely effect its business, operating results and financial
conditions.
The Company has grown internally, by procuring agreements to operate
correctional facilities, and externally, by acquiring existing
operators of correctional facilities. The Company intends to continue
its development and growth in this manner. Its ability to manage this
development and
intended growth will depend on the efforts of its key management and
employees. The Company plans to use incentives, including competitive
compensation and stock plans, to retain well-qualified employees and
attract new employees to accommodate any expansion., There can be no
assurance, however, that the Company will be able to retain and attract
personnel with the requisite capabilities and experience. The loss of
one or more current key management personnel could also materially
effect the Company
The Company anticipates that it will need to undertake private
placement or a public offering of its securities at a future date,
depending upon the market conditions, in order to obtain sufficient
capital to implement its intended growth plan. No assurance can be
given that it will be successful in raising additional investment
capital in the future, or that, if it is successful, the financial
resources obtained will be sufficient to successfully carry out the
Company's intended growth plan. The Company believes, based on its
intended business plan, that it has sufficient capital on both the
short and long-term to meet its business objectives, using both
available cash and the Company's positive working capital position.
However, there is no assurance that the Company will not need
additional capital in the future.
2. Summary of Significant Accounting Policies
Cash
Cash includes cash in readily available checking accounts and money
markets
Property and Equipment
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets using the straight - line method.
Goodwill and Intangibles
Goodwill is amortized on a straight - line basis over a period not to
exceed 20 years. Other intangibles, which represent certain operating
rights, are amortized on a straight - line basis over a period not to
exceed 40 years
Long - Lived Assets
The Company accounts for long - lived assets in accordance with
Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long - Lived Assets" ("SFAS No. 121"). SFAS 121 requires
that long - lived assets and certain identifiable intangibles to be
held by an entity be reviewed for possible impairment whenever events
of changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. The Company periodically
re-evaluates the carrying value and estimated lives of long - lived
assets based upon expected undiscounted cash flows and recognizes
impairment, if any.
Revenue Recognition
Revenue is generally recognized as services are provided under
provision of contracts entered into with governmental agencies, either
at a fixed monthly rate or at a net rate per inmate.
Under contracts entered into by SCI, the Company must provide services
to all clients referred by the judicial process, regardless of the
client's ability to pay. Further, the contracts allow SCI to charge its
clients fees based on a prearranged sliding fee schedule. SCI contracts
do not guarantee a specified level of revenue nor to they provide for
reimbursement for losses relating to servicing clients who are unable
to pay. As a result, portions of SCI's clients receive services for a
nominal or for no fees. Accordingly, losses for services provided are
recognized when identified. Fees received in advance of services are
recorded as deferred revenue.
Net Income Per Share
Basic and diluted net income per share for the 6 months ended June 30,
2000 and 1999 have been computed using a weighted average number of
shares of common stock outstanding during the period pursuant to
Statement of Financial Accounting Standards No. 128, "Earning Per
Share". For 1999 the reconciliation between the weighted average common
shares outstanding for basic earning per share compared to diluted
earnings per share includes the assumed conversion of preferred stock
3,363,636. Shares held in escrow until certain conditions are met are
excluded from the weighted average number of shares outstanding in 2000
and 1999
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting
for Income Taxes". Under SFAS 109, deferred assets and liabilities
reflect the future tax consequences of the temporary differences
between the financial reporting and tax basis of assets and liabilities
using current enacted tax rates.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock Based Compensation," requires that the Company
either recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on new fair
value accounting rules of using intrinsic value method and provide
proforma disclosure as if the fair value method had been applied. The
Company has elected to use the intrinsic value method with proforma
disclosure of fair value method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
form those estimates.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, other current assets,
accounts payable, and accrued liabilities approximate fair value
because of the short - term nature of those instruments. Based on
borrowing rates currently available to the Company for credit
arrangements with similar terms, the carrying amounts of balances under
capital lease and notes payable obligations approximate fair value.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes new accounting and reporting standards for companies to
report information about derivative instruments, including certain
derivatives instruments embedded in other contracts ( collectively
referred to as "derivatives") and hedging activities. In
June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, " Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133. This
statement amended the effective date of SFAS 133. SFAS 133 will now be
effective for financial statements issued for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not expect
SFAS 133 to have a material impact on the Company's results of
operations, financial position or liquidity.
In December 1999, the Security and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. On
June 26, 2000 SEC staff issued Staff Accounting Bulletin No. 101B.
This SAB further extended, for current registrants, the required
implementation date for SAB No. 101, Revenue Recognition,.
Implementation of SAB 101 is required in the fourth quarter of fiscal
years beginning after December 15, 1999. All registrants are expected
to apply the accounting and disclosure requirements described in
SAB 101. Adoption of this interpretation in not expected to have a
significant effect on the Company's consolidated financial statements.
Certain reclassifications have been made to the June 30, 1999 financial
statements to conform to the June 30,2000 presentation.
4. Acquisition of McCabe Center
In July 1999, the Company entered into an asset purchase agreement with
Austin Recovery Center, Inc. ("ARC"), under which certain assets of an
operating subdivision of ARC known as the McCabe Center were acquired
and certain contract rights were assumed by the Company. The
consideration paid under the agreement was $1,050,000, of which
$550,000 was paid in cash and $500,000 is payable under a secured
promissory note with monthly payments due though 2011 (see note). This
transaction was accounted for as an asset purchase.
5. Long-Term Obligations.
During 1999, the Company entered into 2 significant debt agreements,
The first agreement is a promissory note payable to ABN Amro for
$788,400, under which the real property used in the operations of RHI
is secured as collateral. The second agreement is promissory note
payable to Austin Recovery Center, Inc. for $500,000 under which the
real property used in the operations of the McCabe Center is secured as
collateral.
The Company's long-term debt as of June 30, 2000 and December 31, 1999
consists of the following:
2000 1999
------- -------
ABN Amro, secured by real property with interest
at 9.288% and monthly principal and interest
payments of $12,800, maturing in July 2006 $689,764 $733,343
Austin Recovery Center, Inc., secured by real property
with interest at 8% and monthly principal and interest
payments of $5,412, maturing July 2011 476,354 489,466
Other notes payable, secured by equipment, with interest
rates ranging from 6%to 26% and due at various dates
through September 2004 58,273 66,042
Total $1,224,391 $1,288,851
Less current portion 137,990 132,170
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Total long-term debt $1,086,401 $1,156,681
========== ==========
A schedule of maturities on long-term debt follows for the years ended June 30,
NOTES PAYABLE CAPITAL LEASES TOTAL
------------- -------------- ----------
2001 $229,001 $15,630 $244,631
2002 225,525 14,238 239,763
2003 222,202 14,238 236,440
2004 219,409 7,117 226,526
2005 192,944 - 192,944
Thereafter 395,076 - 395,076
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Total 1,484,157 51,223 1,535,380
Less - amount representing interest 295,208 15,781 310,989
------- ------ -------
Present value of payments 1,188,949 35,442 1,224,391
Less current portion 130,388 7,602 137,990
------- ----- -------
Long-term obligation, net $1,058,561 $27,840 $1,086,401
========== ======= ==========
6. Subsequent Event
In July 2000, SCI terminated its electronic monitoring subcontract with
Electronic Monitoring, Inc. During the 6 months it was in effect, the
subcontract generated $61,089 of electronic monitoring revenue with a
pre-tax loss of $80,797.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
OR PLAN OF OPERATIONS.
The following financial analysis should be read in conjunction with the
Company's financial statements and notes thereto for the year ended December 31,
1999, included in the Company's Annual Report on Form 10K-SB and for the 6
months ended June 30, 2000, included in form 10Q-SB. Interim results are not
necessarily indicative o the operating results for the entire year.
Statements in this section regarding anticipated capital expenditures and
anticipated performance in future periods constitutes forward looking statements
within the meaning of the Securities Exchange Act of 1934. These statements are
subject to certain risks and uncertainties that could cause actual amounts to
differ materially form those projected. We believe these forward-looking
statements are reasonable: however, undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
With respect to anticipated capital expenditures, we have made certain
assumptions regarding, among other things, maintenance of existing facilities
and equipment, availability and desirability of new technologically advanced
equipment, installation and start up times, cost estimates and continued
availability of financial resources, The estimates amount of capital
expenditures is subject to certain risks, including other things, the risk that
unexpected capital expenditures will be required and unexpected costs and
expenses will be incurred.
General
At present, the Company has contracts to manage 9 city jails and 1 county jail,
3 community pre-release centers and an alternative sentencing division.
The Company's largest customer is the Federal Bureau of Prisons. If the Company
were to experience difficulty in continuing to provide services to this
customer, or collecting these accounts receivable, it could have a material
adverse effect on the Company's financial conditions and results of operations,
In addition, a loss of this customer could materially and adversely affect the
Company's net revenue.
City / County Jail Operations.
With the exception of the Seal Beach facility, each of the contracts provides
that the Company will be reimbursed for all of its direct operating costs and
certain overhead expenses in addition to a management fee that is either fixed
or a percentage of operating expenses. These contracts require the Company to
operate within certain annual budget restrictions. In the event that the jail's
operating costs exceed the budget amounts , the city is no longer obligated to
pay the management fee. In contrast to the other jails, the Seal Beach facility
primarily houses Bureau of Prison and self-pay inmates on a per diem basis. The
Seal Beach agreement provides for payment to the Company of an amount based on
operating income; in the event there is no operating income, the Company is
responsible for one-half of the operating expenses.
The population of these jails are arrestees, self-pay inmates, sentenced county
work furlough inmates and federal inmates serving short-term sentences.
All the jails are in Los Angeles / Orange County California, with the exception
of the Lincoln County New Mexico operation.
Community Pre-Release Centers
At present, the Company has 3 community pre-release centers. Reality House
("RHI"), a wholly owned subsidiary, is located in Brownsville, Texas and has the
capacity to house 65 inmates. As its primary source of revenue, the facility has
a current contract with the Bureau of Prisons that runs through the year 2000.
The Company has been successful in renewing this contract for an additional 5
years.
Mid-Valley House, a leased facility, is located in McAllen, Texas and has the
capacity to house 60 inmates. As its primary source of revenue, the facility has
a contract with the Bureau of Prisons that runs though the year 2003.
McCabe Center, a Company owned facility, is located in Austin, Texas and has the
capacity to house 55 inmates. In addition to the contract with the Bureau of
Prisons, that runs thorough the year 2000, the facility also has a contract with
the US Courts to house inmates during pre-trail arraignment in addition to group
and individual counseling. The Company's management has submitted a bid to renew
the Bureau of Prisons contract and management believes that the contract will be
re-awarded to the Company.
As part of the Bureau of Prisons contracts, the community pre-release centers
monitor low risk offenders that are on home confinement.
Alternative Sentencing Division
The Company's wholly-owned subsidiary, Sentencing Concepts, Inc., ( "SCI" ),
provides alternatives to imprisonment for low risk offenders. SCI's programs
provide punishment options, i.e. home confinement via electronic monitoring,
rehabilitative counseling, educational programs and substance abuse testing. SCI
has contracts with various judicial agencies to provide the services. Currently
SCI provides services to more than 1,000 offenders with California offices in
Anaheim, Lake Forest, Stockton, San Luis Obispo and Santa Barbara. SCI provides
monitoring programs in the following California counties: San Luis Obispo, Santa
Barbara, Orange County, San Joaquin and Placer County.
Results of Operations
CSI's revenues are recognized as services are provided either as a fixed fee
arrangement, percentage of expenses, per diem rate or fee for service.
The Company's largest operating expenses are salaries and related payroll taxes.
Substantially all other operating expenses consist of food, subsistence items,
medical services related items, insurance, equipment rental, cost associated
with the sale of drug testing patches and other general operating expenses. The
Company believes that as the inmate population increases at the pre-release
centers and the Seal Beach facility and the clientele increases at SCI, the
operating profits will improve. However, since a portion of the Company's
operations consist of effectively fixed fee contracts with cities/counties to
manage jails, increases in the inmate population at these facilities, will have
little or no impact on the Company's operating margins.
The Company's general and administrative expenses consist of officers and
administrative personnel salaries as well as legal, accounting, other
professional fees and travel.
6 MONTHS ENDED JUNE 30, 2000 COMPARED TO 6 MONTHS ENDED JUNE 30 1999.
The following table sets forth the Company's revenues and expenses for the 6
months ended June 30,
% of % of
2000 REVENUE 1999 REVENUE
---- ------- ---- -------
Revenues $4,189,081 100% $3,007,743 100%
Salaries and Wages 1,806,584 43% 1,252,148 42%
Depreciation and Amortization 94,743 2% 67,917 2%
Other Operating Expenses 1,528,822 38% 959,500 32%
General and Administrative Expenses 696,718 17% 628,505 21%
Operating Income (Loss) 62,214 1% 99,673 3%
Interest Income (Expense) Net (52,057) (1)% (9,384) -
Other Expenses (5,105) - (1,910) -
Pre-Tax Income (Loss) 5,052 - 88,379 3%
Provision for Taxes (Benefit) --0-- - 21,211 1%
Net Income (Loss) $5,052 - $67,168 2%
Basic Income (Loss) Per Share $0.00 - $0.02 -
Diluted Income (Loss) Per Share $0.00 - $0.01 -
For the 6 months ended June 30, 2000 the increase in revenues of 39% over the
same period in 1999 was primarily due to the addition of the McCabe pre-release
center (13%of revenue), the Whittier city jail (4% of revenue) and SCI's
increased revenue in electronic monitoring and drug patch sales.
For the 6 months ended June 30, 2000, the increase in salaries and wages of 44%
over the same period in 1999 was primarily due to the Company's expansion
mentioned above, i.e. the addition of the McCabe pre-release center and the
Whittier jail, in addition to SCI's increase in salaries and wages.
For the 6 months ended June 30, 2000, the increase in depreciation and
amortization of 28% over the same period in 1999 was primarily due to
depreciation associated with the McCabe pre-release center and certain capital
leases.
For the 6 months ended June 30, 2000, the increase in other operating expenses
of 59% over the same period in 1999 was primarily due to the addition of the
McCabe pre-release center, the Whittier city jail and additional expenses
associated with SCI's growth.
For the 6 months ended June 30, 2000, the increase in general and administrative
expenses of 11% over the same period in 1999, was primarily due to the
additional staff and expenses required to keep pace with the Company's
expansion, in addition to a $40,000 payment to the prior owners of SCI in
connection with the settlement of their earn-out agreement.
In July, SCI terminated its subcontracting electronic monitoring agreement with
Electronic Monitoring, Inc. During the 6 months the agreement was in effect, it
generated $61,089 of revenue, $65,906 of salaries and wages, $42,006 of other
operating expenses and $34,156 of general and administrative expenses, for a
pre-tax loss of $80,979.
For the 6 months ended June 30, 2000, the increase in interest expense of 454%
over the same period in 1999, was due primarily to the long-term financing on
the RHI facility, completed in May 1999 of approximately $778,400 and the note
payable issued in connection with the acquisition of the McCabe facility, in
July 1999, of approximately $483,000
For the 6 months ended June 30, 2000, the decrease in the provision for income
taxes over the same period in 1999 is due to the reduction in pre-tax profits.
3 MONTHS ENDED JUNE 30, 2000 COMPARED TO 6 MONTHS ENDED JUNE 30 1999.
The following table sets forth the Company's revenues and expenses for the 3
months ended June 30,
% of % of
2000 REVENUES 1999 REVENUES
---- -------- ---- --------
Revenues $2,123,841 100% $1,490,006 100%
Salaries and Wages 991,447 47% 650,519 44%
Depreciation and Amortization 47,308 2% 33,200 2%
Other Operating Expenses 694,029 33% 427,647 29%
General Administrative Expenses 387,599 18% 339,208 23%
Operating Income 3,458 - 39,432 3%
Interest Income (Expense) Net (26,167) (1%) (6,985) -
Other (Expenses) (2,451) - (1,910) -
Pre Tax Income (Loss) (25,160) (1%) 30,537 2%
Provision (Benefit) for Taxes (7,215) - 7,557 -
Net Income (Loss) $ (17,945) (1%) $ 22,980 2%
Basic Income (Loss) Per Share $ (0.01) - $ 0.01 -
Diluted Income (Loss) Per Share $ (0.01) - $ 0.00 -
For the 3 months ended June 30, 2000 the increase in revenues of 43% over the
same period in 1999 was primarily due to the addition of the McCabe pre-release
center, the Whittier city jail and SCI's increased revenue in electronic
monitoring and drug patch sales.
For the 3 months ended June 30, 2000, the increase in salaries and wages of 52%
over the same period in 1999 was primarily due to the Company's expansion
mentioned above, i.e. the addition of the McCabe pre-release center and the
Whittier jail, in addition to SCI's increase in salaries and wages.
For the 3 months ended June 30, 2000, the increase in depreciation and
amortization of 42% over the same period in 1999 was primarily due to
depreciation associated with the McCabe pre-release center and certain capital
leases.
For the 3 months ended June 30, 2000, the increase in other operating expenses
of 63% over the same period in 1999 was primarily due to the addition of the
McCabe pre-release center, the Whittier city jail and additional expenses
associated with SCI's growth.
For the 3 months ended June 30, 2000, the increase in general and administrative
expenses of 14% over the same period in 1999, was primarily due to the
additional staff and expenses required to keep pace with the Company's
expansion, in addition to a $40,000 payment to the prior owners of SCI in
connection with the settlement of their earn-out agreement.
In July, SCI terminated its subcontracting electronic monitoring agreement with
Electronic Monitoring, Inc. During the 3 months ended June 30, 2000, the
agreement generated $40,725 of revenue, $40,233 of salaries and wages, $17,517
of other operating expenses and $12,081 of general and administrative expenses,
for a pre-tax loss of $29,106.
For the 3 months ended June 30, 2000, the increase in interest expense of 275%
over the same period in 1999, was due primarily to the long-term financing on
the RHI facility, completed in May 1999 of approximately $778,400 and the note
payable issued in connection with the acquisition of the McCabe facility, in
July 1999, of approximately $483,000
For the 3 months ended June 30, 2000, the decrease in the provision for income
taxes over the same period in 1999 is due to the reduction in pre-tax profits.
Liquidity and Capital Resources:
For the 6 months ended June 30, 2000, cash used in operations was $(118,788) as
compared to cash used in operations of $(114,305) for the same period in
1999.This was due primarily to a net increase in accounts payable and accrued
expenses and additional depreciation and amortization, offset by a reduction in
net income, an increase in accounts receivable and net decrease in deposits and
other assets.
For the 6 months ended June 30, 2000, the decrease in cash of $(203,790) from
the $487,347 generated in cash during the same period in 1999, was primarily due
to the financing of the RHI facility in May of 1999.
Due to the capital-intensive nature of the Company's business, it is
continuously looking for new sources of funds to finance growth.
The Company's working capital requirements have increase due to growth.
Management believes cash flows from operations will be sufficient to enable the
Company to meet working capital needs for the next 12 months. However, in order
to implement future growth plans, addition equity financing will be required.
Based on total assets and annual revenues, the Company is significantly smaller
than many of its competitors, These competitors include large privately-held and
publicly-held companies that have substantially greater financial, marketing and
other resources than the Company. These companies offer services and operate in
markets in which the Company competes. The services offered by these companies,
in some case, are similar to the services that the Company offers. The Company
expects that competition will increase substantially as a result of industry
consolidations and alliances, as well as the emergence of new competitors. There
can be no assurance that the Company will be able to compete successfully with
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely effect its business, operating results and
financial condition.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is involved in routine litigation and proceedings in the ordinary
course of business. The Company is not curently involved in any other perding
litigation matters, which the Compnay believes would have a material adverse
effect on the Company.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS IN SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
27 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exhcange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CORRECTIONAL SYSTEMS, INC.
a California Corporation
Date: August 14, 2000
/s/ JOHN R. FORREN
----------------------------
By: John R. Forren
Its: President, Chief Executive Officer
and Director