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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-14472
CORNELL CORRECTIONS, INC.
-----------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0433642
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS 77027
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790
SECURITIES REGISTERED PURSUANT TO SECTION 12(d) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value per share
(Title of Class)
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 Exchange 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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be not contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( ).
At February 29, 2000, Registrant had outstanding 9,582,528 shares of its
common stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $73,343,000 based on the
closing price of $8.13 per share as reported on the New York Stock Exchange. For
purposes of the foregoing calculation, all directors and officers of the
Registrant have been deemed to be affiliates, but the Registrant disclaims that
any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 2000 Annual Meeting of Stockholders. Part III
PART I
ITEM 1. BUSINESS
Cornell Corrections, Inc. (the "Company" or "Cornell Companies") is one of
the leading providers of privatized correctional, detention, pre-release, and
treatment services in the United States based on total service capacity. Service
capacity is comprised of the beds available for service in residential
facilities and the average program capacity of non-residential community-based
facilities. The Company is the successor to entities that began developing
secure institutional correctional and detention facilities in 1984, pre-release
correctional and treatment facilities in 1974 and juvenile facilities in 1973.
The Company has significantly expanded its operations through acquisitions and
internal growth and is currently operating facilities in 13 states and the
District of Columbia. As of December 31, 1999, the Company had contracts to
operate 72 facilities with a total service capacity of 14,845. The Company's
residential facilities have a total service capacity of 12,317 beds, with 49
facilities currently in operation.
Cornell Companies provides integrated facility development, design,
construction and operational services to governmental agencies within three
operating divisions: (i) secure institutional correctional and detention
services; (ii) juvenile treatment, educational and detention services and (iii)
pre-release correctional and treatment services. Secure institutional
correctional and detention services consist primarily of the operation of secure
adult incarceration facilities. Juvenile services consist of providing
residential treatment and educational programs and non-residential
community-based programs to juveniles between the ages of 10 and 17 who have
either been adjudicated or suffer from behavioral problems. Pre-release
correctional and treatment services primarily consist of providing pre-release
and halfway house programs for adults who are either on probation or serving the
last three to six months of their sentences on parole and preparing for re-entry
into society and other adult treatment programs. At the secure institutional
correctional and detention facilities, the Company generally provides maximum
and medium security incarceration and minimum security residential services,
institutional food services, certain transportation services, general education
programs (such as high school equivalency and English as a second language
programs), health care (including medical, dental and psychiatric services),
work and recreational programs and chemical dependency and substance abuse
programs. Juvenile services provided by the Company include counseling,
wilderness programs, medical services, substance abuse treatment and accredited
educational programs tailored to meet the special needs of juveniles. Additional
services provided by the Company's pre-release division typically include life
skills and employment training, job placement assistance and substance abuse
treatment in both residential and non-residential facilities. The Company
derives substantially all its revenues from operating correctional, detention,
pre-release and treatment facilities for federal, state and local governmental
agencies in the United States.
For the years ended December 31, 1999, 1998 and 1997, 19.8%, 20.1% and
31.4%, respectively, of the Company's consolidated revenues were derived from
contracts with the Federal Bureau of Prisons ("FBOP").
HISTORY OF ACQUISITIONS
Since 1994, Cornell Companies has completed eight acquisitions.
In November 1999, the Company acquired substantially all of the adult and
juvenile treatment, educational and correctional assets of Interventions, a
not-for-profit corporation headquartered in Chicago, Illinois, and certain
assets of BHS Consulting Corporation, a for-profit firm that provided management
services to Interventions (collectively, "Interventions-Illinois"). The Company
paid an aggregate purchase price of approximately $31.8 million including
transaction costs. The acquisition included more than 30 programs operated
within 13 facilities throughout Illinois serving a daily population of
approximately 1,880 adults and juveniles, and the real properties of seven
facilities.
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In August 1998, the Company acquired substantially all of the Alaskan
assets of Allvest, Inc. ("Allvest"), a privately held company based in
Anchorage, Alaska. The Allvest acquisition included the operations of five
pre-release facilities with an aggregate capacity of 540 beds in Anchorage,
Fairbanks and Bethel, Alaska, the real properties of three of the five
facilities and assignments of contracts with the Alaska Department of
Corrections. The aggregate purchase price for the acquisition was approximately
$21.3 million.
In January 1998, the Company purchased the Great Plains Correctional
Facility, an existing 812 bed medium security prison located in Hinton,
Oklahoma, for approximately $43.8 million. The purchase included an additional
20 adjacent acres of land for potential future expansion of the facility. In
December 1999, the Company transferred ownership of the Great Plains
Correctional Facility to the Hinton Economic Development Authority ("HEDA") and
retained a 75 year leasehold interest in the facility.
In September 1997, the Company acquired substantially all of the assets of
The Abraxas Group, Inc. and four related entities (collectively, "Abraxas"), a
not-for-profit juvenile operator of seven residential facilities and 11
non-residential community-based programs, serving an aggregate capacity of
approximately 1,400 juvenile offenders. The aggregate purchase price for the
acquisition was approximately $19.2 million.
In January 1997, the Company acquired substantially all of the assets of
Interventions Co. ("Interventions-Texas") for an aggregate purchase price of
$6.0 million. The acquisition included the operation of the Dallas County
Judicial Center, a 300 bed adult residential pre-release facility in Dallas,
Texas and the Griffin Juvenile Facility, a 150 bed capacity residential
transitional living center for juveniles in San Antonio, Texas.
In July 1996, the Company acquired substantially all the assets of MidTex
Detentions, Inc. ("MidTex"), the operator of secure institutional facilities in
Big Spring, Texas (the "Big Spring Complex"), for an aggregate purchase price of
approximately $23.2 million. The City of Big Spring has an Intergovernmental
Agreement (the "IGA") with the FBOP to house offenders at the Big Spring
Complex. As part of the acquisition, MidTex assigned to the Company its rights
under an operating agreement with the City of Big Spring (the "Big Spring
Operating Agreement") to manage the Big Spring Complex. The Big Spring Operating
Agreement has a lease term through 2047. The IGA has an indefinite term,
although it may be terminated or modified by the FBOP upon 90 days written
notice.
In May 1996, the Company acquired a 310 bed pre-release facility located in
Houston, Texas (the "Reid Community Correctional Center"), for approximately
$2.0 million. Included in the acquisition was the real and personal property and
the assignment of the Reid Community Correctional Center's contract with the
Texas Department of Criminal Justice ("TDCJ").
In March 1994, the Company acquired Eclectic Communications, Inc.
("Eclectic"), the operator of 11 privatized secure institutional and pre-release
facilities in California with an aggregate offender capacity of 979 beds.
Consideration for the acquisition of Eclectic was $10.0 million.
INDUSTRY AND MARKET
In the United States, there has been a growing trend toward privatization
of government services and functions, including correctional and detention
services, as governments of all types face continuing pressure to control costs
and improve the quality of services. Since December 1989, the service capacity
of privately managed adult secure institutional correctional and detention
facilities in operation or under construction has increased from 10,973 beds to
a capacity of 144,455 beds as of November 1999, representing a compound annual
growth rate in beds of 29%.
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The United States leads the world in private prison management contracts.
At December 31, 1998, there were private adult secure institutional correctional
and detention facilities in operation or under construction in 30 states, the
District of Columbia and Puerto Rico. According to reports issued by the United
States Department of Justice, Bureau of Justice Statistics (the "BJS"), the
number of adult offenders housed in United States federal and state prison
facilities and in local jails increased from 742,579 at December 31, 1985 to
1,825,400 at December 31, 1998. Management believes that the increase in the
demand for privatized adult secure institutional correctional and detention
facilities is also a result, in large part, of the general shortage of beds
available in United States adult secure institutional correctional and detention
facilities.
Prison population growth is driven by several factors including:
o INCREASES IN DRUG-RELATED CRIMES. While reported occurrences and
arrests for non-drug crimes have declined in recent years, the number
of annual arrests for drug-related offenses has increased from
approximately 1.1 million in 1990 to 1.6 million in 1998, representing
a compound annual growth rate of 4.6%. Furthermore, the number of jail
inmates held for drug-related offenses has grown substantially,
accounting for 72% of the increase in the total inmate population from
1986 to 1997.
o INCREASING PROSECUTION AND IMPRISONMENT RATES; STRICTER SENTENCING AND
LONGER INCARCERATION. Federal prosecution, conviction and incarceration
rates have been rising steadily. In addition, the Sentencing Reform Act
of 1984 took effect in 1987 and established federal sentencing
guidelines that (1) require a prison term for many offenses for which
probation had previously been imposed, (2) require longer sentences for
certain offenses, (3) eliminate parole in certain circumstances and (4)
reduce the amount of good conduct time federal offenders can earn.
Industry reports also indicate that adult offenders convicted of violent
crimes generally serve only one-third of their sentence, with the majority of
them being repeat offenders. Accordingly, there is a perceived public demand
for, among other things, longer prison sentences, as well as prison terms for
juvenile offenders, resulting in even more overcrowding in United States
correctional and detention facilities. Finally, numerous courts and other
government entities in the United States have mandated that additional services
offered to offenders be expanded and living conditions be improved. Many
governments do not have the readily available resources to make the changes
necessary to meet such mandates.
The juvenile corrections industry has also expanded rapidly in recent years
as the need for services for at-risk and adjudicated youth has risen.
The growth in the juvenile correction system population has been driven by
the following trends:
o INCREASING JUVENILE CRIME RATES. BJS studies demonstrate that juveniles
have represented a disproportionately high portion of crime and arrest
rates, particularly with regard to drug arrests.
o RAPID INCREASES IN JUVENILE POPULATION. In 1995, the National Center
for Policy Analysis projected that the 1995 population of 14-17 year
olds, which accounts for two-thirds of all juvenile crimes, would rise
by 23% by the year 2005.
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o INCREASE IN "AT-RISK" JUVENILE POPULATION. Numerous government and
academic studies have shown that certain socio-economic characteristics
increase the probability of a juvenile becoming delinquent. Current and
projected trends associated with these characteristics point to a
likely increase in juvenile delinquency.
- A Growing Number of Children Living in Single-Parent Families. In
1998, 28% of children lived in single parent families, compared to
23% in 1980 and only 10% in 1970.
- Growing Juvenile Poverty Rates. In 1997, 14.1 million juveniles
lived in poverty, representing an increase of 42% over the number
of juveniles living in poverty in 1978. In addition, in 1997, the
proportion of those under age 18 who lived below the poverty level
was almost double the poverty rate of adults.
The juvenile corrections industry is fragmented with several thousand
providers across the country, most of which are small and operate in a specific
geographic area.
Pre-release correctional and treatment programs have experienced
significant growth, driven by an increased focus on rehabilitation and
reintegration into society and by the recognition of the fact that preparation
of inmates returning to society reduces recidivism rates. The pre-release area
primarily comprises individuals who have been granted parole, sentenced to
probation or require substance abuse or mental health treatment.
Probationers (individuals sentenced for an offense without incarceration)
and parolees (individuals released prior to the completion of their sentence)
are typically placed in pre-release settings. These individuals typically spend
three to six months in halfway houses until they are prepared to re-enter
society.
A portion of the growth of the pre-release segment is driven by the overall
growth of the adult prison population, as well as the release rate. Despite the
decreasing trend in violent crimes across the nation and an increase in
incarceration rates, there are still significant numbers of prisoners released
from prison, either conditionally or unconditionally, each year. According to
the BJS studies, the number of individuals released from state and federal
prison facilities increased in excess of 20% from 1990 to 1997, from 431,753 to
521,808. Approximately 78%, or 369,808 prisoners, were conditionally released
(i.e., parole, probation, supervised mandatory release). Prisoners released
under a supervised mandatory release program comprised nearly 38% of all
prisoners released and 48% of all conditionally released prisoners. The
probation and parole populations represent approximately 71% of the total number
of adults under correctional supervision in the United States.
The demand for substance abuse and mental health treatment services is
based on the availability of services for alcohol and drug abusers. The federal
Substance Abuse and Mental Health Services Administration ("SAMHSA") estimates
that there are three to five million individuals who use and abuse alcohol and
other drugs and who significantly impact the utilization of and the cost to the
health care, adult and juvenile justice, welfare, child welfare and other
publicly funded systems. However, only 1.8 million individuals can currently be
served through the existing publicly funded treatment system. An August 1999
SAMHSA survey indicates increases in substance abuse for many of the client
populations served by the Company. Demand for private treatment services has
traditionally been, and continues to be, driven by governmental departments of
corrections, health, human services, and children and family services
recognition of the need to provide substance abuse treatment to individuals and
families in their care.
The pre-release correctional and treatment services industry is extremely
fragmented with several thousand providers across the country, most of which are
small and operate in a specific geographic area.
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OPERATING DIVISIONS
SECURE INSTITUTIONAL CORRECTIONAL AND DETENTION SERVICES. At December 31,
1999, the Company operated or had under development nine facilities with a total
service capacity of 7,940 beds that provide secure institutional correctional
and detention services for incarcerated adults. For a listing of facility
locations, see "Facilities."
The Company operates the Big Spring Complex pursuant to the Big Spring
Operating Agreement between the Company and the City of Big Spring. The City of
Big Spring in turn is a party to the IGA with the FBOP for an indefinite term
with respect to the facilities. The Immigration and Naturalization Service (the
"INS") and the United States Marshal Services ("USMS") also use the Big Spring
Complex. Offenders include detainees held by the INS, adjudicated offenders held
by the INS who will be deported after serving their sentences and adjudicated
offenders held for the FBOP. The Big Spring Complex is equipped with an
interactive satellite link to INS courtroom facilities and judges which allows
for processing of a high volume of INS detainees while reducing the time, effort
and expense incurred in transporting offenders to offsite courtrooms. The
Company completed a 560 bed expansion at the Big Spring Complex in the fourth
quarter of 1998 and additional expansions totaling 722 beds during the fourth
quarter of 1999 and the first quarter of 2000. Total service capacity, after
expansions, is 2,568 beds.
The Great Plains Correctional Facility is an 812 bed medium security prison
located in Hinton, Oklahoma. The prison is operated pursuant to a one-year
contract with nine one-year renewal options between the Oklahoma Department of
Corrections and HEDA; HEDA in turn subcontracts the daily operations of the
prison to the Company. The Company assumed complete operation of Great Plains
Correctional Facility in July 1998. The Company has a 30-year operating contract
with four five-year renewals with HEDA.
The D. Ray James Prison began operations with 550 beds during the fourth
quarter of 1998 and houses offenders from the State of Georgia. The Company
completed a 450 bed expansion in the first quarter of 1999 and a 550 bed
expansion during the fourth quarter of 1999.
The Santa Fe County Adult Detention Facility is a 661 bed adult detention
facility that houses offenders from Santa Fe County and various surrounding
counties. Construction of this facility was completed in July 1998. Prior to
construction of the new facility, the Company operated a 240 bed facility which
housed 200 adult and 40 juvenile offenders. The 240 bed facility was renovated
to house 129 juveniles exclusively.
The Wyatt Detention Facility in Central Falls opened in 1993 and primarily
houses federal offenders awaiting adjudication under federal criminal charges.
The Leo Chesney Community Correctional Facility (for females) and the Baker
Community Correctional Facility (for males) are both in California and house
offenders sentenced by the State of California, most of whom are non-violent
offenders with sentences of up to two years.
In April 1999, the Company was awarded a contract to design, build and
operate a 1,095 bed prison for the FBOP in Moshannon Valley, Pennsylvania
("Moshannon Valley Correctional Center") and immediately commenced construction
and activation activities. In June 1999, the FBOP issued a Stop-Work Order
pending a re-evaluation of their environmental documentation supporting the
decision to award the contract. The environmental study was completed with a
finding of no significant impact. While the Stop-Work Order is still in effect,
management believes it will be lifted and construction will be resumed in the
near-term. In September 1999 the Company received correspondence from the Office
of the Attorney General of the Commonwealth of Pennsylvania indicating its
belief that the operation of a private prison in Pennsylvania is unlawful. The
Company has had, and continues to have, discussions with the Attorney General's
staff regarding these issues.
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In June 1999, the Company was selected by the State of Utah to design,
build and operate a 490 bed prison ("Timpie Valley Correctional Facility"). The
Company is currently involved in contract negotiations for the project.
Under its contracts, the Company provides a variety of programs and
services at its secure institutional facilities, including secure incarceration
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), work and recreational programs and chemical dependency and
substance abuse programs.
JUVENILE TREATMENT, EDUCATIONAL AND DETENTION SERVICES. Under the names
"Cornell Abraxas" and "Cornell Interventions," the Company offers programs to
meet the multiple needs of troubled juveniles. At December 31, 1999, the Company
operated or had contracts to operate 19 residential facilities and 18
non-residential community-based programs serving an aggregate capacity of
approximately 3,209 youths. For a listing of facility locations, see
"Facilities." Juvenile correctional and detention services consist primarily of
treatment programs for offenders that are designed to lead to rehabilitation
while providing public safety and holding offenders accountable for their
decisions and behavior. The Company operates primarily within a restorative
justice model. The basic philosophy is that merely serving time in an
institution does not relieve juvenile offenders of the obligation to repay their
victims and that incarceration alone does not compensate for the societal impact
of crimes. The use of a balanced approach gives equal emphasis to
accountability, competency development and community protection.
The 160 bed Salt Lake Valley Juvenile Detention Facility in Salt Lake City,
Utah includes an interactive satellite link to juvenile courtroom facilities and
judges, which allows for processing of a high number of juvenile detainees while
reducing the time, effort and expense incurred in transporting detainees to
offsite courtrooms.
The Santa Fe County Juvenile Detention Facility in Santa Fe, New Mexico is
a 129 bed facility that houses juvenile offenders for Santa Fe County and
various surrounding counties. The facility, which was previously a 240 bed
facility that housed 200 adults and 40 juveniles, was renovated in 1999 to house
juveniles exclusively.
The Griffin Juvenile Facility is a 170 bed capacity transitional living
center for juveniles located in San Antonio, Texas. The Company currently has
contracts for the housing of adjudicated and certain homeless non-adjudicated
juveniles.
Generally, Cornell Abraxas and Cornell Interventions programs include
education, individual and group counseling, social skills training, physical
training, community service and substance abuse treatment. The educational
schools within Cornell Abraxas are accredited, whereby graduating juveniles are
eligible to receive a full high school diploma as an alternative to the
traditional General Educational Development ("G.E.D.") certificate.
The three largest facilities operated by Cornell Abraxas include: (i) the
Cornell Abraxas I program ("A-1"); (ii) the Leadership Development Program (the
"LDP") and (iii) Cornell Abraxas of Ohio. A-1's campus is situated on
approximately 100 acres with an aggregate service capacity of 248 beds. Located
in the Allegheny National Forest, A-1 operates as an open residential facility
for the treatment of delinquent and/or dependent males who have substance abuse
problems and/or were involved in the sale of a controlled substance. A-1 also
operates a licensed school which offers a full range of educational services and
interscholastic sports programs. While at A-1, juvenile offenders may earn a
high school diploma, pursue vocational tracks or receive G.E.D. instruction and
testing. The LDP is conducted on property leased by the Company, located on
approximately 3.5 acres in South Mountain, Pennsylvania. The LDP is a 15-week
residential treatment program with a wilderness component. The program includes
group counseling,
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substance abuse treatment and licensed educational programs. Cornell Abraxas of
Ohio's facility is located on approximately 80 acres in north central Ohio and
has a service capacity of 108 beds. This residential program offers a
comprehensive substance abuse treatment and education program for males.
Individuals participate in intensive group curriculum which includes a wide
variety of topics such as: stages of denial, self-help tools for recovery, goal
setting, values, beliefs and morals, relapse process and prevention and sex
education. Individuals may earn a high school diploma, pursue vocational tracks
or receive G.E.D. instruction and testing.
The Company is in the process of constructing the 214 bed New Morgan
Academy in southeastern Pennsylvania. The New Morgan Academy, located in New
Morgan, Pennsylvania, is expected to open in the fourth quarter of 2000 and is
designed to address the need for juvenile secure residential programs with a
particular emphasis on specialized treatment services and special needs
populations.
Cornell Interventions operates various therapeutic community substance
abuse treatment programs for juveniles. The DuPage Adolescent Center is one such
program and was the first Cornell Interventions program to be accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") in 1994.
Cornell Interventions also operates the Residential School and Maple Creek Home,
both treatment facilities for youth with severe emotional and behavioral
problems. Key features of both programs include a strong educational program and
24-hour care, including availability of nursing staff and psychiatric
consultation. The non-residential community-based programs transition juvenile
offenders from residential placement back to their home communities. The Company
provides in-home counseling and intensive case management services while
integrating an array of community resources into a comprehensive plan. This dual
role of service provider and intermediary serves to bridge the gap between
residential facilities and the community. The Company utilizes therapists and
consulting psychologists in its multi-level treatment programs.
PRE-RELEASE CORRECTIONAL AND TREATMENT SERVICES. At December 31, 1999, the
Company operated or had contracts to operate 21 residential facilities and 5
non-residential community based programs with an aggregate service capacity of
3,696 that provide pre-release correctional and treatment services. For a
listing of facility locations, see "Facilities."
At its pre-release facilities, the Company typically provides minimum
security residential services, institutional food services, general education
programs, life skills and employment training, job placement assistance and
chemical dependency and substance abuse counseling.
Cornell Interventions' Southwood facility is primarily an
inpatient/residential substance abuse treatment facility. The variety of
programs at Southwood are based on behavior modification and a team approach to
treatment and case management. The Southwood facility is also accredited by
JCAHO. At its Northside Clinic, Cornell Interventions provides outpatient
methadone maintenance treatment to adults addicted to opioids such as heroin.
This method of treatment has been shown in recent studies to improve life
functioning and decrease criminal behavior and drug use practices.
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FACILITIES
As of December 31, 1999, the Company operated 69 facilities and had 3
facilities under development or construction. The facilities currently under
development or construction are the Timpie Valley Correctional Center, the
Moshannon Valley Correctional Center and the New Morgan Academy. In addition to
providing management services, the Company has been involved in the development,
design and/or construction of many of these facilities. The following table
summarizes certain additional information with respect to facilities under
operation or development by the Company as of December 31, 1999:
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------------------------- ----------- ------- ----------
SECURE INSTITUTIONAL CORRECTIONAL
AND DETENTION FACILITIES:
Baker Community Correctional Facility............. 262 1987 Leased
Baker, California
Big Spring Complex................................ 2,568 (4) Owned/Leased(5)
Big Spring, Texas
D. Ray James Prison............................... 1,550 1998 Owned
Charlton County, Georgia
Great Plains Correctional Facility................ 812 (6) Leased (7)
Hinton, Oklahoma
Leo Chesney Community Correctional
Facility....................................... 200 1988 Leased
Live Oak, California
Moshannon Valley Correctional Center.............. 1,095 1999 Leased
Philipsburg, Pennsylvania
Santa Fe County Adult Detention Facility.......... 661 1997 Managed
Santa Fe, New Mexico (8)
Timpie Valley Correctional Facility............... 490 (9) (9)
Grantsville, Utah
Wyatt Detention Facility.......................... 302 1992 Managed
Central Falls, Rhode Island
JUVENILE TREATMENT, EDUCATIONAL AND DETENTION FACILITIES:
RESIDENTIAL FACILITIES:
City Girls Program................................ 16 (10) Leased
Ashland, Illinois
Contact........................................... 47 (10) Owned
Wauconda, Illinois
Cornell Abraxas I................................. 248 1973 Owned
Marienville, Pennsylvania
Cornell Abraxas II................................ 23 1974 Owned
Erie, Pennsylvania
Cornell Abraxas III............................... 22 1975 Owned
Pittsburgh, Pennsylvania
Cornell Abraxas Center for Adolescent
Females........................................ 46 1989 Owned
Pittsburgh, Pennsylvania
(TABLE CONTINUED ON FOLLOWING PAGE)
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COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------------------------- ----------- ------- ----------
JUVENILE RESIDENTIAL FACILITIES: (CONTINUED)
Cornell Abraxas of Ohio........................... 108 1993 Owned
Shelby, Ohio
Cornell Abraxas Youth Center...................... 92 1999 Leased
South Mountain, Pennsylvania
Danville Center for Adolescent Females............ 64 1998 Managed
Danville, Pennsylvania
DuPage Adolescent Center.......................... 34 (10) Owned
Hinsdale, Illinois
Erie Residential Behavioral Health................ 16 1999 Leased
Erie, Pennsylvania
Griffin Juvenile Facility......................... 170 1996 Owned
San Antonio, Texas
Leadership Development Program.................... 120 1994 Leased
South Mountain, Pennsylvania
New Morgan Academy................................ 214 (11) Leased
New Morgan, Pennsylvania
Psychosocial Rehabilitation Unit.................. 13 1994 Owned
Erie, Pennsylvania
Residential School................................ 30 (10) Owned
Matteson, Illinois
Salt Lake Valley Juvenile Detention Facility...... 160 1996 Managed
Salt Lake City, Utah
Santa Fe County Juvenile Detention Facility....... 129 1997 Managed
Santa Fe, New Mexico (8)
South Mountain Secure Residential
Treatment Unit................................. 52 1997 Managed
South Mountain, Pennsylvania
JUVENILE NON-RESIDENTIAL COMMUNITY-BASED CENTERS:
Adams County Mental Health........................ 34 1998 Leased
Oxford, Pennsylvania
Cornell Abraxas Parenting Academy................. 36 1999 Leased
Harrisburg, Pennsylvania
Cornell Abraxas Student Academy................... 110 1996 Leased
Harrisburg, Pennsylvania
Day Treatment Program............................. 58 1996 Leased
Harrisburg, Pennsylvania
Delaware Community Programs....................... 33 1994 Leased
Milford, Delaware
Erie Behavioral Health Services................... 36 1997 Leased
Erie, Pennsylvania
Illinois Youth Center - St. Charles............... 3 (10) Managed
St. Charles, Illinois
(TABLE CONTINUED ON FOLLOWING PAGE)
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COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------------------------- ----------- ------- ----------
JUVENILE NON-RESIDENTIAL COMMUNITY-BASED CENTERS: (CONTINUED)
Juvenile Field Services........................... 110 (10) Managed
Chicago, Illinois
Kline Plaza....................................... 251 1996 Leased
Harrisburg, Pennsylvania
Lehigh Valley Community Programs.................. 31 1992 Leased
Lehigh Valley, Pennsylvania
Lycoming/Clinton County Behavioral
Health Services................................ 30 1998 Leased
Williamsport, Pennsylvania
Maple Creek Home.................................. 8 (10) Owned
Matteson, Illinois
Non-Residential Care - West....................... 25 (10) Leased
Pittsburgh, Pennsylvania
Harrisburg........................................ 91 1999 Leased
Harrisburg, Pennsylvania
Philadelphia Community Programs................... 60 1992 Owned
Philadelphia, Pennsylvania
Supervised Home Services/Home Detention........... 64 1993 Leased
District of Columbia
Workbridge Allegheny.............................. 475 1994 Leased
Pittsburgh, Pennsylvania
Workbridge Philadelphia........................... 150 1998 Leased
Philadelphia, Pennsylvania
PRE-RELEASE RESIDENTIAL CORRECTIONAL AND
TREATMENT FACILITIES:
Bolingbrook....................................... 111 (10) Leased
Bolingbrook, Illinois
Cordova Center.................................... 192 1985 Owned
Anchorage, Alaska
Dallas County Judicial Center..................... 300 1991 Leased
Wilmer, Texas
Durham Center..................................... 75 1996 Leased
Durham, North Carolina
El Monte Center................................... 55 1993 Leased
El Monte, California
Inglewood Men's Center............................ 50 1982 Leased
Inglewood, California
Leidel Community Correctional Center.............. 150 1996 Owned
Houston, Texas
Marvin Gardens Center............................. 42 1981 Leased
Los Angeles, California
Midtown Center.................................... 32 1998 Owned
Anchorage, Alaska
(TABLE CONTINUED ON FOLLOWING PAGE)
- 11 -
COMPANY
TOTAL INITIAL OWNED/
SERVICE CONTRACT LEASED OR
FACILITY NAME AND LOCATION CAPACITY(1) DATE(2) MANAGED(3)
- -------------------------------------------- ----------- ------- ----------
PRE-RELEASE RESIDENTIAL CORRECTIONAL AND
TREATMENT FACILITIES: (CONTINUED)
Northstar Center.................................. 105 1990 Leased
Fairbanks, Alaska
Oakland Center.................................... 61 1981 Leased
Oakland, California
Parkview Center................................... 112 1993 Owned
Anchorage, Alaska
Reid Community Correctional Center................ 310 1996 Owned
Houston, Texas
Salt Lake City Center............................. 58 1995 Leased
Salt Lake City, Utah
San Diego Center.................................. 131 1984 Leased
San Diego, California
Santa Barbara Center.............................. 25 1996 Leased
Santa Barbara, California
Seaside Center.................................... 40 1999 Leased
Nome, Alaska
Southwood......................................... 329 (10) Owned
Chicago, Illinois
Taylor Street Center.............................. 177 1984 Leased
San Francisco, California
Tundra Center..................................... 99 1986 Owned
Bethel, Alaska
Woodridge......................................... 139 (10) Owned
Woodridge, Illinois
PRE-RELEASE NON-RESIDENTIAL COMMUNITY-BASED
TREATMENT CENTERS:
East St. Louis................................... 80 (10) Leased
East St. Louis, Illinois
Joliet............................................ 100 (10) Leased
Joliet, Illinois
Northside Clinic.................................. 202 (10) Owned
Chicago, Illinois
Santa Fe Electronic Monitoring.................... 50 1999 Leased
Santa Fe, New Mexico
Southwestern Illinois Correctional Center (12).... 671 (10) Managed
East St. Louis, Illinois
- ------------------
(1) Total service capacity is comprised of the beds available for service in
residential facilities and the average program capacity of the
non-residential community-based facilities. In certain cases, the
management contract for a facility provides for a lower number of beds.
(2) Date from which the Company, or its predecessor, has had a contract for
services on an uninterrupted basis.
(3) The Company does not incur any facility use costs for facilities which the
Company only has a management contract.
(FOOTNOTES CONTINUED ON THE FOLLOWING PAGE)
- 12 -
(4) The City of Big Spring entered into the IGA with the FBOP for an indefinite
term (until modified or terminated) with respect to the Big Spring Complex,
which began operations during 1989. The Big Spring Operating Agreement, as
amended, has a term through 2047 including renewal options at the Company's
discretion, pursuant to which the Company manages the Big Spring Complex
for the City of Big Spring. With respect to the 560 bed expansion of the
Big Spring Complex, the portion of the Big Spring Operating Agreement
relating to the expansion has a term of 30 years with four five-year
renewal options at the Company's discretion.
(5) In connection with the acquisition of MidTex, and as part of the purchase
price, the Company prepaid a majority of the facility costs related to
three of the Big Spring Complex units. The Company owns the 560 bed
expansion unit constructed in 1998.
(6) The prison is operated pursuant to a one-year contract with nine one-year
renewal options between the Oklahoma Department of Corrections and HEDA.
HEDA in turn has subcontracted the operations to the Company under a
30-year operating contract with four five-year renewals.
(7) In December 1999, the Company transferred ownership of the Great Plains
Correctional Facility to HEDA and retained a leasehold interest in the
property for a term of 75 years plus renewal options.
(8) The Company took over the operation of an existing 240 bed adult and
juvenile facility on July 1, 1997, while beginning construction of a new
661 bed adult detention facility, which was completed in the second quarter
of 1998. The offenders housed in the 240 bed facility were transferred to
the new 661 bed detention facility and the 240 bed facility was converted
into a 129 bed juvenile detention facility.
(9) The Utah Department of Corrections selected the Company's bid in June 1999
subject to final negotiations which are pending.
(10) The Cornell Interventions programs/facilities contract with numerous
agencies throughout Illinois. Initial contract dates vary by agency and
range from 1974 to 1997.
(11) The facility is currently under development and construction. The Company
anticipates obtaining contracts with various counties once construction is
completed in 2000.
(12) The Company manages a therapeutic community drug and alcohol program
operated within the state operated Southwestern Illinois Correctional
Center.
FACILITY MANAGEMENT CONTRACTS
The Company is compensated on the basis of the number of offenders held or
supervised under each of its facilities' management contracts. The Company's
existing facility management contracts generally provide that the Company will
be compensated at an occupant per diem rate. Such compensation is invoiced in
accordance with applicable law and is typically paid on a monthly basis. Under a
per diem rate structure, a decrease in occupancy rates would cause a decrease in
revenues and profitability. The Company is, therefore, dependent upon
governmental agencies to supply the Company's facilities with a sufficient
number of offenders to meet the contract capacities, and in most cases such
governmental agencies are under no obligation to do so. Moreover, because
certain of the Company's facilities have offenders serving relatively short
sentences or only the last three to six months of their sentences, the high
turnover rate of offenders requires a constant influx of new offenders from the
relevant governmental agencies to provide sufficient occupancies to achieve
profitability. Occupancy rates during the start-up phase when facilities are
first opened typically result in capacity underutilization for 30 to 90 days.
After a management contract has been awarded, the Company incurs facility
start-up costs consisting principally of initial employee training, travel and
other direct expenses incurred in connection with the contract. These costs vary
by contract. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
All the Company's contracts are subject to legislative appropriations. A
failure by a governmental agency to receive appropriations could result in the
termination of the contract by such agency or a reduction of the management fee
payable to the Company. To date, the Company has not lost a material contract
due to a governmental agency not receiving appropriations, although no assurance
can be given that the governmental agencies will continue to receive
appropriations in all cases.
- 13 -
The Company's contracts generally require the Company to operate each
facility in accordance with all applicable laws and regulations. The Company is
required by its contracts to maintain certain levels of insurance coverage for
general liability, workers' compensation, vehicle liability and property loss or
damage. The Company is also required to indemnify the contracting agency for
claims and costs arising out of the Company's operations, and in certain cases,
to maintain performance bonds.
The Company's facility management contracts typically have terms ranging
from one to five years and many have one or more renewal options for terms
ranging from one to five years. Only the contracting governmental agency may
exercise a renewal option. To date, all but one renewal option under the
Company's management contracts have been exercised. In connection with the
exercise of the renewal option, the contracting governmental agency or the
Company typically has requested changes or adjustments to the contract terms.
Additionally, the Company's facility management contracts typically allow a
contracting governmental agency to terminate a contract without cause by giving
the Company written notice ranging from 30 to 180 days. To date, no contracts
have been terminated before expiration.
MARKETING AND DEVELOPMENT
The Company's principal customers are federal, state and local governmental
agencies responsible for adult and juvenile correctional, detention and
pre-release correctional and treatment services. These governmental agencies
generally procure services from the private sector by issuing a Request for
Proposal ("RFP") to which a number of companies may respond. Most of the
Company's efforts in securing new business are expected to be in the form of
responding to RFPs. As part of the Company's process of responding to RFPs,
management of the Company meets with appropriate personnel from the requesting
agency to best determine the agency's distinct needs. If the Company believes
that the project complies with its business strategy, the Company will submit a
written response to the RFP. When responding to RFPs, the Company incurs costs,
typically ranging from $10,000 to $75,000 per proposal, to determine the
prospective client's distinct needs and prepare a detailed response to the RFP.
In addition, the Company may incur substantial costs to acquire options to lease
or purchase land for a proposed facility and engage outside consulting and legal
expertise related to a particular RFP. The preparation of a response to an RFP
typically takes from five to ten weeks.
A typical RFP requires bidders to provide detailed information, including,
but not limited to, descriptions of the following: the services to be provided
by the bidder, the bidder's experience and qualifications and the price at which
the bidder is willing to provide the services requested by the agency (which
services may include the renovation, improvement or expansion of an existing
facility or the planning, design and construction of a new facility). Based on
proposals received in response to an RFP, the governmental agency will award a
contract; however, the governmental agency does not necessarily award a contract
to the lowest bidder. In addition to costs, governmental agencies also consider
experience and qualifications of bidders in awarding contracts.
The development process for obtaining facility management contracts
consists of several steps. These include issuance of an RFP by a governmental
agency, submission of a response to the RFP by the Company, the award of the
contract by a governmental agency and the commencement of construction or
operation of the facility. The Company's experience has been that a substantial
period of time may elapse from the initial inquiry to receipt of a new contract,
although, as the concept of privatization has gained wider acceptance, the
length of time from inquiry to the award of contract has shortened. The length
of time required to award a contract is also affected, in some cases, by the
need to introduce enabling legislation. The bidding and award process for an RFP
typically takes from three to nine months. Generally, if the facility for which
an award has been made must be constructed, the Company's experience has been
that a newly constructed facility typically commences operations between 12 and
24 months after the governmental agency's award.
- 14 -
The Company also at times receives inquiries from or on behalf of
governmental agencies that are considering privatization of certain facilities
or that have already decided to contract with private providers. When such an
inquiry is received, the Company determines whether there is a need for the
Company's services and whether the legal and political climate in which the
governmental agency operates is conducive to serious consideration of
privatization. The Company then conducts an initial cost analysis to further
determine project feasibility.
When a contract requires construction of a new facility, the Company's
success depends, in part, upon its ability to acquire real property for its
facilities on desirable terms and at satisfactory locations. Management of the
Company expects that many such locations will be in or near populous areas and
therefore anticipates legal action and other forms of opposition from residents
in areas surrounding certain proposed sites. The Company may incur significant
expenses in responding to such opposition and there can be no assurance of
success. In addition, the Company may choose not to bid in response to an RFP or
may determine to withdraw a bid if legal action or other forms of opposition are
anticipated.
OPERATIONS
Pursuant to the terms of its management contracts, the Company is
responsible for the overall operation of its facilities, including staff
recruitment, general administration of the facilities, security and supervision
of the offenders and facility maintenance. The Company also provides a variety
of rehabilitative and educational programs at many of its facilities. Offenders
at most adult facilities managed by the Company may receive basic education
through academic programs designed to improve offender literacy levels
(including English as a second language programs) and the opportunity to acquire
G.E.D. certificates. Programs for offenders at the Company's juvenile facilities
typically have an increased emphasis on education and counseling. At many
facilities, the Company also offers vocational training to offenders who lack
marketable job skills. In addition, the Company offers life skills, transition
planning programs that provide offenders job search training and employment
skills, health education, financial responsibility training and other skills
associated with becoming productive citizens. At several of its facilities, the
Company also offers counseling, education and/or treatment to offenders with
chemical dependency or substance abuse problems.
The Company operates each facility in accordance with Company-wide policies
and procedures generally based on the standards and guidelines established by
the American Correctional Association ("ACA") Commission on Accreditation and/or
the appropriate licensing agencies (collectively "Accreditation Standards"). The
ACA is an independent organization comprised of professionals in the corrections
industry which establishes guidelines and standards by which a correctional
institution may gain accreditation. The Accreditation Standards describe
specific objectives to be accomplished and cover such areas as administration,
personnel and staff training, security, medical and health care, food service,
offender supervision and physical plant requirements.
Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programming and
fiscal audits; facility inspections; regular review of logs, reports and files;
and strict maintenance of personnel standards, including an active training
program. Each of the Company's facilities develops its own training plan that is
reviewed, evaluated and updated annually. Dedicated space and equipment for
training is provided and outside resources such as community colleges are
utilized in the training process. All adult correctional officers undergo a
minimum 40-hour orientation upon their hiring and receive academy-level training
amounting to 120 hours and on-the-job training of up to 80 hours. Each
correctional officer also receives up to 40 hours of training and education
annually. All juvenile treatment employees undergo a minimum 80-hour orientation
upon their hiring and also receive up to 40 hours of training and education
annually.
- 15 -
FACILITY DESIGN, CONSTRUCTION AND FINANCE
In addition to operating correctional facilities, the Company also provides
consultation and management services to governmental agencies with respect to
the development, design and construction of new correctional and detention
facilities and the redesign and renovation of older facilities. The Company or
its predecessors have consulted on and/or managed the development, design and/or
construction of a number of facilities in each of its operating divisions.
During 1999, the Company completed the development, design and construction
of: (i) a majority of the 722 bed expansions of the Big Spring Complex; (ii) the
1,000 bed expansions of the D. Ray James Prison and (iii) various other
expansions.
The Company utilizes an experienced team of outside professional
architectural consultants as part of the group that participates from conceptual
design through final construction of a project. When designing a facility, the
Company's outside architects utilize, with appropriate modifications, prototype
designs the Company has previously used in developing projects. Management of
the Company believes that the use of such proven designs allows the Company to
reduce cost overruns and avoid construction delays. Additionally, the Company
designs its facilities with the intention to improve security and minimize the
personnel needed to properly staff the facility by enabling enhanced visual and
electronic surveillance of the facility.
The Company may propose various construction financing structures to the
contracting governmental agencies. The governmental agency may finance, or the
Company may arrange for the financing of, the construction of such facilities
through various methods including, but not limited to, the following: (i) a
one-time general revenue appropriation by the governmental agency for the cost
of the new facility; (ii) general obligation bonds that are secured by either a
limited or unlimited tax levy by the issuing governmental entity or (iii) lease
revenue bonds or certificates of participation secured by an annual lease
payment that is subject to annual or bi-annual legislative appropriations. If
the project is financed using project-specific tax-exempt bonds or other
obligations, the construction contract is generally subject to the sale of such
bonds or obligations. Substantial expenditures for construction will not be made
on such a project until the tax-exempt bonds or other obligations are sold. If
such bonds or obligations are not sold, construction and management of the
facility will be delayed until alternate financing is procured or development of
the project will be entirely suspended. When the Company is awarded a facility
management contract, appropriations for the first annual or bi-annual period of
the contract's term have generally already been approved, and the contract is
subject to governmental appropriations for subsequent annual or bi-annual
periods.
The Company has in the past worked with governmental agencies and placement
agents to obtain and structure financing for construction of facilities. In some
cases, an unrelated special purpose corporation is established to incur
borrowings to finance construction and own the facilities and, in other cases,
the Company directly incurs borrowings for construction financing. A growing
trend in the privatization industry is the requirement by governmental agencies
that private operators make capital investments in new facilities and enter into
direct financing arrangements in connection with the development of such
facilities. There can be no assurance that the Company will have available
capital if and when required to make such an investment to secure a contract for
developing a facility.
- 16 -
COMPETITION
The Company competes with a number of companies, including, but not limited
to, Corrections Corporation of America, Wackenhut Corrections Corporation and
Correctional Services Corporation. The Company also competes in some markets
with small local companies that may have better knowledge of local conditions
and may be better able to gain political and public acceptance. In addition, the
Company may compete in some markets with governmental agencies that operate
correctional and detention facilities.
EMPLOYEES
At December 31, 1999, the Company had approximately 3,347 full-time
employees and 264 part-time employees. The Company employs management,
administrative and clerical, security, educational and counseling services,
health services and general maintenance personnel. Approximately 282 employees
at three of the Company's facilities are represented by unions. The Company
believes its relations with its employees are good.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations administered by a variety of regulatory authorities.
Generally, prospective providers of correctional, detention and pre-release
services must comply with a variety of applicable state and local regulations,
including education, healthcare and safety regulations. The Company's contracts
frequently include extensive reporting requirements and require supervision with
on-site monitoring by representatives of contracting governmental agencies.
In addition to regulations requiring certain contracting governmental
agencies to enter into a competitive bidding procedure before awarding
contracts, the laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
INSURANCE
The Company maintains a $10 million per occurrence per facility general
liability insurance policy for all its operations. The Company also maintains
insurance in amounts it deems adequate to cover property and casualty risks,
workers' compensation and directors' and officers' liability.
The Company's contracts and the statutes of certain states in which the
Company operates typically require the maintenance of insurance by the Company.
The Company's contracts provide that, in the event the Company does not maintain
such insurance, the contracting agency may terminate its agreement with the
Company. The Company believes that it is in compliance in all material respects
with these requirements.
ITEM 2. PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas
and divisional administrative offices in Ventura, California and Pittsburgh,
Pennsylvania. The Company also leases various facilities it is currently
operating or developing. For a listing of owned and leased facilities, see
"Business - Facilities."
- 17 -
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, offender
privileges and employment matters. In the opinion of management of the Company,
the outcome of the proceedings to which the Company is currently a party will
not have a material adverse effect upon the Company's operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR CORNELL CORRECTIONS, INC. COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is currently listed on the New York Stock
Exchange ("NYSE") under the symbol "CRN." As of February 29, 2000, there were
approximately 38 record holders of common stock. The quarterly high and low
closing sales prices for the common stock from January 1, 1998 through February
29, 2000 are shown below:
HIGH LOW
------- -------
1998:
First Quarter..................................... 24 1/2 19 7/16
Second Quarter.................................... 25 7/16 18 1/2
Third Quarter..................................... 21 1/16 8
Fourth Quarter.................................... 19 11
1999:
First Quarter..................................... 19 5/8 13 1/4
Second Quarter.................................... 22 5/8 15 1/2
Third Quarter..................................... 17 1/8 13 15/16
Fourth Quarter.................................... 16 3/8 8 1/8
2000:
First Quarter (through February 29, 2000)......... 11 7 9/16
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain excess cash flow, if any, for use in the
operation and expansion of its business and does not anticipate paying cash
dividends on the common stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other factors, the Company's results of operations;
financial condition; capital requirements; restrictions, if any, imposed by
financing commitments and legal requirements. The Third Amended and Restated
Credit Agreement, dated as of December 3, 1998 ("1998 Credit Facility") and the
Company's Subordinated Bridge Loan Agreement currently prohibits the payment of
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
- 18 -
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999(1) 1998 (2) 1997 (3) 1996 (4) 1995
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ........................................... $ 176,967 $123,119 $ 70,302 $ 32,327 $ 20,692
Income (loss) from operations ...................... 22,249 12,589 5,630 339 (10)
Income (loss) before income taxes and
cumulative effect of change in
accounting principle ............................. 13,844 10,104 5,553 (2,304) (989)
Income (loss) before cumulative effect
of change in accounting principle ................ 8,306 6,062 3,554 (2,379) (989)
Cumulative effect of change in accounting
principle, net of related income tax
benefit of $1,969 in 1999 ....................... 2,954 -- -- -- --
Net income (loss) .................................. $ 5,352 $ 6,062 $ 3,554 $ (2,379) $ (989)
Earnings (loss) per share:
- Basic
Income before cumulative effect of
change in accounting principle ................. $ .88 $ .64 $ .48 $ (.65) $ (.32)
Net income (loss) ................................ $ .57 $ .64 $ .48 $ (.65) $ (.32)
- Diluted
Income before cumulative effect of
change in accounting principle ................. $ .86 $ .62 $ .46 $ (.65) $ (.32)
Net income (loss) ................................ $ .55 $ .62 $ .46 $ (.65) $ (.32)
Number of shares used to compute EPS (in thousands):
- Basic ........................................ 9,432 9,442 7,350 3,673 3,095
- Diluted ...................................... 9,660 9,772 7,740 3,673 3,095
OPERATING DATA:
Total service capacity:
Residential ...................................... 12,137 9,135 6,172 3,577 1,640
Non-residential community-based .................. 2,708 1,390 900 -- --
Total .......................................... 14,845 10,525 7,072 3,577 1,640
Service capacity in operation
(end of period) .................................. 12,240 8,700 5,061 2,899 1,135
Contracted beds in operation
(end of period)(5) ............................... 9,029 7,310 4,161 2,899 1,135
Average occupancy based on contracted
beds in operation (5)(6) ......................... 95.8% 93.8% 97.6% 97.0% 98.9%
Average occupancy excluding start-up
operations (5)(6) ................................ 97.0% 98.3% 97.6% 97.0% 98.9%
BALANCE SHEET DATA:
Working capital (deficit) .......................... $ (12,636) $ 16,828 $ 26,220 $ 7,747 $ 1,525
Total assets ....................................... 273,991 212,695 104,109 46,824 14,184
Long-term debt ..................................... 101,500 98,480 432 745 7,649
Stockholders' equity ............................... 97,208 91,500 86,730 41,051 3,053
- 19 -
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes the operations of Interventions-Illinois acquired in November
1999.
(2) Includes the operations of the Great Plains Correctional Facility acquired
in January 1998 and the Alaska facilities purchased from Allvest in August
1998.
(3) Includes the operations of Interventions-Texas and Abraxas acquired in
January 1997 and September 1997, respectively.
(4) Includes the operations of the Reid Community Correctional Center and the
Big Spring Complex acquired in May 1996 and July 1996, respectively.
(5) Occupancy percentages are based on contracted service capacity of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(6) Occupancy percentages reflect less than normalized occupancy during the
start-up phase of any applicable facility, resulting in a lower average
occupancy in periods when the Company has substantial start-up activities.
- 20 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three operating
divisions: (i) secure institutional correctional and detention services; (ii)
juvenile treatment, educational and detention services and (iii) pre-release
correctional and treatment services. The following table sets forth for the
periods indicated total service capacity, the service capacity and contracted
beds in operation at the end of the periods shown and the average occupancy
percentages.
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------ ------ -----
Total service capacity:
Residential........................................................... 12,137 9,135 6,172
Non-residential community-based....................................... 2,708 1,390 900
Total............................................................... 14,845 10,525 7,072
Service capacity in operation (end of period).............................. 12,240 8,700 5,061
Contracted beds in operation (end of period) (1)........................... 9,029 7,310 4,161
Average occupancy based on contracted beds in operation (1)(2)............. 95.8% 93.8% 97.6%
Average occupancy excluding start-up operations (1)(2)..................... 97.0% 98.3% 97.6%
- -----------
(1) Occupancy percentages are based on contracted service capacity of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(2) Occupancy percentages reflect less than normalized occupancy during the
start-up phase of any applicable facility, resulting in a lower average
occupancy in periods when the Company has substantial start-up activities.
The Company derives substantially all its revenues from operating
correctional, detention, pre-release and treatment facilities for federal, state
and local governmental agencies in the United States. Revenues for operation of
correctional, detention, pre-release and treatment facilities are generally
recognized on a per diem rate based upon the number of occupant days or hours
served for the period or cost-plus reimbursement.
Factors which the Company considers in determining the per diem rate to
charge include: (i) the programs specified by the contract and the related
staffing levels; (ii) wage levels customary in the respective geographic areas;
(iii) whether the proposed facility is to be leased or purchased and (iv) the
anticipated average occupancy levels which the Company believes could reasonably
be maintained.
The Company's operating margins generally vary from facility to facility
(regardless of whether the facility is secure institutional, juvenile or
pre-release) based on the level of competition for the contract award, the
proposed length of the contract, the occupancy levels for a facility, the level
of capital commitment required with respect to a facility and the anticipated
changes in operating costs, if any, over the term of the contract.
The Company is responsible for all facility operating expenses, except for
certain debt service and lease payments with respect to facilities for which the
Company has only a management contract (nine facilities in operation at December
31, 1999).
- 21 -
A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company's variable operating expenses, including food, medical services,
supplies and clothing, depend on occupancy levels at the facilities operated by
the Company. The Company's largest single operating expense, facility payroll
expense and related employment taxes and costs, has both a fixed and a variable
component. The Company can adjust the staffing and payroll to a certain extent
based on occupancy at a facility, but a minimum fixed number of employees is
required to operate and maintain any facility regardless of occupancy levels.
Pre-opening and start-up expenses consist primarily of payroll, benefits,
training and other operating costs prior to opening a new or expanded facility
and during a period of approximately three months of operation while occupancy
is ramping up.
In January 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," or SOP 98-5, and recorded a net-of-tax
charge of approximately $3.0 million for the cumulative effect of a change in
accounting principle. As a result of the Company's adoption of SOP 98-5, the
Company began to expense pre-opening and start-up costs as incurred.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
finance, accounting, human resources, payroll, information systems and other
services and costs of business development.
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving offenders. Offenders are typically assigned to a
newly opened facility on a phased-in basis over a one- to three-month period.
The Company may incur start-up operating losses at new facilities until
break-even occupancy levels are reached. Quarterly results can be substantially
affected by the timing of the commencement of operations as well as development
and construction of new facilities.
Working capital requirements generally increase immediately prior to the
Company's commencing management of a new facility as the Company incurs start-up
costs and purchases necessary equipment and supplies before facility management
revenue is realized.
RESULTS OF OPERATIONS
The Company's historical operating results reflect a significant expansion
of the Company's business since 1996. Material fluctuations in the Company's
results of operations are principally the result of the timing and effect of
acquisitions, the level of development activity conducted by the Company, and
occupancy rates at Company-operated facilities. The Company's acquisitions to
date have been accounted for using the purchase method of accounting, whereby
the operating results of the acquired businesses have been reported in the
Company's operating results since the date of acquisition.
The Company's income from operations as a percentage of revenues fluctuates
depending on the relative mix of operating contracts among the Company's three
operating divisions.
- 22 -
The following table sets forth for the periods indicated the percentages of
revenues represented by certain items in the Company's historical consolidated
statements of operations.
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------ ------ -------
Revenues..................................................................... 100.0% 100.0% 100.0%
Operating expenses........................................................... 76.8 80.2 81.1
Pre-opening and start-up expenses............................................ 1.7 -- --
Depreciation and amortization................................................ 3.3 3.4 3.2
General and administrative expenses.......................................... 5.6 6.2 7.7
------ ------ -------
Income from operations....................................................... 12.6 10.2 8.0
Interest expense, net........................................................ 4.8 2.0 0.1
------ ------ -------
Income before income taxes and cumulative effect of change
in accounting principle................................................. 7.8 8.2 7.9
Provision for income taxes................................................... 3.1 3.3 2.8
------ ------ -------
Income before cumulative effect of change in accounting principle ........... 4.7% 4.9% 5.1%
====== ====== =======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues increased 43.7% to $177.0 million for the year ended
December 31, 1999 from $123.1 million for the year ended December 31, 1998.
Secure institutional division revenues increased 44.4% to $76.0 million for
the year ended December 31, 1999 from $52.6 million for the year ended December
31, 1998 due principally to (a) the opening of the 560 bed expansion unit at the
Big Spring Complex in the fourth quarter of 1998 and additional Big Spring
Complex expansions during the fourth quarter of 1999, (b) the opening of the 550
initial beds in the D. Ray James Prison in the fourth quarter of 1998 and an
additional 450 beds in the first quarter of 1999 and (c) the opening of the 661
bed Santa Fe County Adult Detention Facility in the third quarter of 1998.
Revenues attributable to start-up operations for the Big Spring Complex and D.
Ray James Prison expansions were approximately $866,000 for the year ended
December 31, 1999.
Juvenile division revenues increased 42.7% to $67.1 million for the year
ended December 31, 1999 from $47.0 million for the year ended December 31, 1998
due to (a) the opening of the Santa Fe County Juvenile Detention Facility in the
third quarter of 1998, (b) increased occupancy at the Cornell Abraxas I and
Cornell Abraxas of Ohio facilities due to facility expansions completed in the
third quarter of 1998, (c) the opening of the Danville Center for Adolescent
Females in the second quarter of 1998 and the Cornell Abraxas Youth Center late
in the first quarter of 1999, (d) the acquisition of Interventions-Illinois
during the fourth quarter of 1999, (e) increased occupancy at the Campbell
Griffin Facility in San Antonio, Texas and (f) the addition of various new
programs including two new non-residential mental health programs in
Pennsylvania. Revenues attributable to start-up operations were approximately
$432,000 for the year ended December 31, 1999.
Pre-release division revenues increased 44.2% to $33.8 million for the year
ended December 31, 1999 from $23.5 million for the year ended December 31, 1998
due principally to a full year of operations of five pre-release centers in
Alaska acquired in August 1998 and the acquisition of Interventions-Illinois
during the fourth quarter of 1999. Revenues attributable to start-up operations
were approximately $122,000 for the year ended December 31, 1999 and related to
a new facility in Alaska.
OPERATING EXPENSES. Operating expenses increased 37.6% to $135.9 million
for the year ended December 31, 1999 from $98.7 million for the year ended
December 31, 1998.
- 23 -
Secure institutional division operating expenses increased 45.8% to $55.1
million for the year ended December 31, 1999 from $37.8 million for the year
ended December 31, 1998 due principally to (a) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during the fourth quarter of 1999, (b)
the opening of the 550 initial beds at the D. Ray James Prison in the fourth
quarter of 1998 and an additional 450 beds in the first quarter of 1999 and (c)
the opening of the 661 bed Santa Fe County Adult Detention Facility in the third
quarter of 1998. As a percentage of revenues, excluding start-up operations,
secure institutional division operating expenses were 70.1% for the year ended
December 31, 1999 compared to 71.9% for the year ended December 31, 1998. The
improved operating margin was due principally to a greater mix of owned versus
leased facilities and a reduction to operating expenses of $1.0 million at the
Santa Fe County Adult Detention Facility resulting from a cost-sharing agreement
with the Company's construction contractor (See Note 3 to the Consolidated
Financial Statements).
Juvenile division operating expenses increased 39.8% to $57.6 million for
the year ended December 31, 1999 from $41.2 million for the year ended December
31, 1998. The increase in operating expenses was due to (a) the Santa Fe County
Juvenile Detention Facility which began operations late in the third quarter of
1998, (b) increased occupancy at the Cornell Abraxas I and Cornell Abraxas of
Ohio facilities due to facility expansions completed in the third quarter of
1998, (c) the Cornell Abraxas Youth Center which began operations late in the
first quarter of 1999 and the Danville Center for Adolescent Females which began
operations in the second quarter of 1998, (d) the acquisition of
Interventions-Illinois during the fourth quarter of 1999, (e) increased
occupancy at the Campbell Griffin Facility in San Antonio, Texas and (f) the
addition of new programs including two new non-residential mental health
programs in Pennsylvania. As a percentage of revenues excluding start-up
operations, operating expenses were 85.3% for the year ended December 31, 1999
compared to 87.7% for the year ended December 31, 1998. The improved operating
margin was due principally to improved results from certain expanded residential
facilities.
Pre-release division operating expenses increased 38.5% to $25.9 million
for the year ended December 31, 1999 from $18.7 million for the year ended
December 31, 1998 due principally to the acquisition of five pre-release centers
in Alaska in August 1998 and the acquisition of Interventions-Illinois during
the fourth quarter of 1999. As a percentage of revenues, excluding start up
operations, operating expenses were 75.4% for the year ended December 31, 1999
compared to 79.8% for the year ended December 31, 1998. The improved operating
margin was due principally to a greater mix of owned versus leased facilities,
including four owned facilities in Alaska.
PRE-OPENING AND START-UP EXPENSES. Pre-opening and start-up expenses were
$2.9 million for the year ended December 31, 1999 and were primarily
attributable to the pre-opening and start-up activities of the additional 450
beds during the first and second quarters of 1999 at the D. Ray James Prison,
the Cornell Abraxas Youth Center during the first quarter of 1999 and other new
juvenile programs in Pennsylvania and a new pre-release facility in Alaska.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
42.1% to $6.0 million for the year ended December 31, 1999 from $4.2 million for
the year ended December 31, 1998 due to (a) depreciation of buildings and
equipment acquired in Alaska in August 1998, (b) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during 1999, (c) the phase in of 1,550
beds in the D. Ray James Prison from the fourth quarter of 1998 through the
fourth quarter of 1999 and (d) various facility expansions and related
equipment. Effective July 1, 1999, the lease term for the three original Big
Spring Complex units was extended from an average of 35 years to 50 years. At
this date, management revised its estimated useful lives of the Big Spring
Complex and two other secure institutions to 50 years. The effect of this change
reduced building depreciation and prepaid facility use amortization by
approximately $300,000 for the year ended December 31, 1999.
- 24 -
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 31.0% to $9.9 million for the year ended December 31, 1999 from $7.6
million for the year ended December 31, 1998. The increase in general and
administrative expenses resulted principally from additional corporate
executive, business development and administrative personnel, overhead and
travel to manage the increased business of the Company and for the development
of new contracts.
INTEREST. Interest expense, net of interest income, increased to $8.4
million for the year ended December 31, 1999 from $2.5 million for the year
ended December 31, 1998 due principally to increased borrowings to finance (a)
the acquisition of the Alaskan assets in August 1998, (b) construction costs of
new facilities and expansions including the 560 bed Big Spring Complex expansion
unit in 1998, additional Big Spring Complex expansions in 1999 and the 1,550 bed
D. Ray James Prison and (c) the acquisition of Interventions- Illinois in the
fourth quarter of 1999. For the year ended December 31, 1999, the Company
capitalized interest totaling $1.2 million related principally to costs for
construction of the D. Ray James Prison expansions and other facility
expansions.
INCOME TAXES. For the years ended December 31, 1999 and 1998, the Company
recognized a provision for income taxes at an estimated effective rate of 40%.
ACCOUNTING CHANGE. The Company adopted SOP 98-5 in January 1999 and
recorded a net-of-tax charge of approximately $3.0 million for the cumulative
effect of a change in accounting principle.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased by 75.1% to $123.1 million for the year ended
December 31, 1998, from $70.3 million for the year ended December 31, 1997.
Secure institutional division revenues increased 63.0% to $52.6 million in
1998 from $32.3 million in 1997, due principally to the purchase of the Great
Plains Correctional Facility in January 1998; a full year of operations at the
Santa Fe County Adult Detention Facility, which commenced in July 1997; and the
560 bed expansion unit at the Big Spring Complex and the opening of the first
550 beds at the D. Ray James Prison, both of which began operations in the
fourth quarter of 1998.
Juvenile division revenues increased 153.7 % to $47.0 million in 1998 from
$18.5 million in 1997, due principally to a full year of results from the
Abraxas acquisition in September 1997, additional programs which began in 1998
and expansions of various facilities.
Pre-release division revenues increased 20.4% to $23.5 million in 1998 from
$19.5 million in 1997, due principally to the acquisition of Allvest in August
1998.
OPERATING EXPENSES. Operating expenses increased 73.1% to $98.7 million for
the year ended December 31, 1998, from $57.0 million for the year ended December
31, 1997.
Secure institutional division operating expenses increased 51.0% to $37.8
million in 1998 from $25.1 million in 1997, due principally to the purchase of
the Great Plains Correctional Facility in January 1998; a full year of
operations at the Santa Fe County Adult Detention Facility, which commenced in
July 1997; and the 560 bed expansion unit at the Big Spring Complex and the
opening of the first 550 beds at the D. Ray James Prison, both of which began
operations in the fourth quarter of 1998. As a percentage of revenues, secure
institutional division operating expenses were 71.9% in 1998 and 77.6% in 1997.
The higher operating margin in 1998 versus 1997 was due principally to a greater
mix of owned versus leased facilities, including the Great Plains Correctional
Facility, offset in part by lower operating margins at start-up facilities such
as the expansion unit at the Big Spring Complex, the D. Ray James Prison and the
Santa Fe County Adult Detention Facility.
- 25 -
Juvenile division operating expenses increased 159.1% to $41.2 million in
1998 from $15.9 million in 1997, due principally to a full year of results from
the Abraxas acquisition in September 1997, additional programs which began in
1998 and expansions of various facilities. As a percentage of revenues, juvenile
division operating expenses were 87.7% in 1998 and 85.9% in 1997. The lower
operating margin in 1998 versus 1997 was due principally to an increase in
juvenile programs which are funded on a cost-plus basis and the results of the
Griffin Juvenile Facility, which has experienced lower occupancy in 1998.
Pre-release division operating expenses increased 17.5% to $18.7 million in
1998 from $15.9 million in 1997, due principally to the acquisition of Allvest
in August 1998. As a percentage of revenues, pre- release division operating
expenses were 79.8% in 1998 and 81.8% in 1997. The higher operating margin in
1998 versus 1997 was due principally to a greater mix of owned versus leased
facilities, including those acquired as part of the Allvest acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
89.5% to $4.2 million for the year ended December 31, 1998, from $2.2 million
for the year ended December 31, 1997, due principally to (a) depreciation of
buildings and equipment acquired from Abraxas in September 1997, (b) the Great
Plains Correctional Facility purchased in January 1998, (c) the 560 bed
expansion unit at the Big Spring Complex, (d) the opening of the first 550 beds
at the D. Ray James Prison and (e) various facility expansions and related
equipment.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 40.5% to $7.6 million for the year ended December 31, 1998, from $5.4
million for the year ended December 31, 1997. The increase in general and
administrative expenses resulted from additional corporate, business development
and administrative personnel needed to manage the increased business of the
Company and for development of new contracts. As a percentage of revenues,
general and administrative expenses decreased to 6.2% from 7.7%, due principally
to spreading the costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $2.5
million for the year ended December 31, 1998, from $77,000 for the year ended
December 31, 1997. The increase in net interest expense was principally due to
borrowings under the Company's 1997 Credit Facility for the purchase of the
Great Plains Correctional Facility in January 1998, for the acquisition of
Allvest in August 1998 and for working capital for various new programs and
facility expansions. For the year ended December 31, 1998, the Company
capitalized interest totaling $2.3 million related to costs of facilities under
construction and development, including the 560 bed Big Spring Complex expansion
and the 1,550 bed D. Ray James Prison.
INCOME TAXES. For the year ended December 31, 1998, the Company recognized
a provision for income taxes at an estimated effective annual rate of 40%,
compared to 36% for the year ended December 31, 1997. The effective income tax
rate applied in 1997 included a benefit for the reversal of previously reserved
deferred tax assets resulting from prior net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements are for (a)
construction of new facilities, (b) acquisitions, (c) expansions of existing
facilities, (d) working capital, (e) start-up costs related to new operating
contracts and (f) furniture, fixtures and equipment. Working capital
requirements generally increase immediately prior to the Company commencing
management of a new facility as the Company incurs start-up costs and purchases
necessary equipment and supplies before facility management revenue (typically
through per diem occupancy fees) is realized.
NEW FACILITIES AND PROJECTS UNDER CONSTRUCTION. The New Morgan Academy is
currently under construction and is expected to be completed and operational
during the fourth quarter of 2000. In April 1999, the Company was awarded a
contract to design, build and operate a 1,095 bed prison for the FBOP in
- 26 -
Moshannon Valley, Pennsylvania ("Moshannon Valley Correctional Center") and
immediately commenced construction and activation activities. In June 1999, the
FBOP issued a Stop-Work Order pending a re-evaluation of their environmental
documentation supporting the decision to award the contract. The environmental
study was completed with a finding of no significant impact. While the Stop-Work
Order is still in effect, management of the Company believes it will be lifted
and construction will be resumed in the near-term. Development and construction
costs for the New Morgan Academy and the Moshannon Valley Correctional Center
are being financed with the Company's lease financing arrangement discussed
below under "Long-Term Credit Facilities".
In June 1999, the Company was selected by the State of Utah to design,
build, finance and operate a 490 bed prison. The Company is currently involved
in contract negotiations for the project. Based on these contract negotiations,
management believes that this contract will ultimately be for management
services only and the Company will not be financing the facility's construction
costs.
As of March 24, 2000, there were approximately $61.5 million in anticipated
unfunded capital requirements for the completion of the New Morgan Academy and
the Moshannon Valley Correctional Center. The funds for these new facilities and
related furnishings are expected to be expended during the next 12 to 18 months.
The Company's lease financing arrangement is available to fund up to
approximately $7.2 million of these construction costs. Management believes that
the remaining facility construction costs will be funded with an increase in the
Company's lease financing arrangement.
WORKING CAPITAL DEFICIT. At December 31, 1999, the Company reported a
working capital deficit of $12.6 million. Excluding the $40.0 million of
borrowings outstanding under the Company's Subordinated Bridge Loan Agreement
("Bridge Facility"), which matures in October 2000, the Company had working
capital of $27.4 million.
SHORT-TERM CREDIT FACILITIES. As of December 31, 1999, $40.0 million of
borrowings were outstanding under the Company's $50.0 million Bridge Facility
which has a 363 day term and matures in October 2000. The Bridge Facility
currently bears interest at LIBOR plus a margin of 6.5% and increases by 0.5%
each quarter until repaid. At maturity, the lenders have an option to convert
the borrowings outstanding under the Bridge Facility into longer term exchange
notes. On October 15, 1999, the Company used proceeds from the Bridge Facility
to repay its $10.0 million subordinated line of credit. The Company believes
that the Bridge Facility will be refinanced prior to maturity with the issuance
of longer term subordinated debt and an expansion of its existing revolving line
of credit.
LONG-TERM CREDIT FACILITIES. In December 1998, the Company entered into the
1998 Credit Facility with a banking syndicate. The 1998 Credit Facility provides
for borrowings of up to $60.0 million under a revolving line of credit, the
availability of which is determined by the Company's projected pro forma cash
flow. The $60.0 million borrowing capacity is reduced by $3.0 million per
quarter beginning September 30, 2000. The 1998 Credit Facility matures in March
2003 and bears interest, at the election of the Company, at either the prime
rate plus a margin of up to 0.5% or a rate which is 1.75% to 2.50% above the
applicable LIBOR rate. The 1998 Credit Facility is secured by all of the
Company's assets, including the stock of all of the Company's subsidiaries, does
not permit the payment of cash dividends and requires the Company to comply with
certain leverage, net worth and debt service covenants. At March 24, 2000, the
Company had $53.0 million outstanding under the 1998 Credit Facility. The
Company is currently in the process of negotiating an expansion of its revolving
line of credit under the 1998 Credit Facility.
The Company has entered into operating lease arrangements for the
acquisition or development of operating facilities. The leases under this
arrangement each have a term of five years, include purchase and renewal options
and provide for a substantial residual value guarantee (approximately 85% of the
total cost) by the Company which could, under certain circumstances, be due upon
termination of the leases. Upon termination of a lease, the Company could either
exercise a purchase option, or the facilities could be sold to a third party.
The Company expects the fair market value of the leased facilities to
substantially reduce
- 27 -
or eliminate the Company's potential obligation under the residual value
guarantee. At March 24, 2000 there was approximately $7.2 million available
under this arrangement.
The Company has outstanding $50.0 million of Senior Secured Notes ("Senior
Notes"). The Senior Notes bear interest at a fixed rate of 7.74% and mature on
July 15, 2010. Under the Senior Notes purchase agreements, the Company is
required to make eight annual principal payments of $6.25 million beginning on
July 15, 2003 and comply with certain financial covenants. Earlier payments of
principal are allowed subject to prepayment provisions. Interest is payable
semi-annually. The holders of the Senior Notes and the lenders under the 1998
Credit Facility have a collateral-sharing agreement whereby both sets of
creditors have an equal security interest in all of the assets of the Company.
As discussed above, current credit facilities do not provide sufficient
financing to fund the repayment of borrowings outstanding under the Bridge
Facility. Management believes that repayment of the Bridge Facility will be
funded from potential proceeds of one, or a combination, of the efforts the
Company is currently pursuing or negotiating to raise long term financing
including: (a) the issuance of longer term subordinated debt, (b) an expansion
of the existing revolving line of credit under the 1998 Credit Facility, (c) a
sale and leaseback of certain owned facilities and leasehold interests, or (d)
other debt or equity financing arrangements. Should the Company not be
successful in raising longer term financing pursuant to its efforts as described
above before maturity of the Bridge Facility, the lender has an option to
convert the borrowings outstanding under the Bridge Facility into eight year
exchange notes, and to purchase up to five percent of the Company's outstanding
common stock at an exercise price of 110% of the market price of the Company's
common stock as of the date of the exchange. If these contemplated financing
transactions are not consummated, the Company would be required to seek
alternative and potentially dilutive capital funding sources to repay the Bridge
Facility when due. No assurance can be made that the Company will be
able to obtain the various financings described above.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1999 were $29.1 million and related principally to (a) construction of the 1,000
bed D. Ray James Prison expansions, (b) construction for the 722 bed expansions
at the Big Spring Complex, (c) various hardware and software for information
systems upgrades, (d) the purchase of the Parkview Center and an additional
building in Anchorage, Alaska for future development, (e) leasehold improvements
at the Cornell Abraxas Youth Center and (f) normal replacements of worn
furniture and equipment.
FURNITURE AND EQUIPMENT SALE AND LEASEBACK. In November 1999, the Company
entered into an agreement for the sale and leaseback of certain of its furniture
and equipment. The Company has purchase and lease renewal options at projected
future fair market values under the agreements. The leases are classified as
operating leases. As of December 31, 1999, furniture and equipment with carrying
values totaling $11,834,000 were sold and the gains realized on the sale
totaling $7,261,000 were deferred and are being credited to income as rent
expense adjustments over the lease term.
YEAR 2000 ISSUES
During 1999, the Company implemented a broad information systems upgrade.
In connection with that upgrade, the Company upgraded certain hardware and
software systems to ensure Year 2000 compliance. The Company currently is not
aware of any Year 2000 compliance problems relating to its systems. The Company
is also not aware of any material Year 2000 problems with its third-party
suppliers or contracting governmental agencies. Accordingly, the Company does
not anticipate incurring material expenses or experiencing any material
operational disruptions as a result of any Year 2000 problems.
- 28 -
INFLATION
Management believes that inflation has not had a material effect on the
Company's results of operations during the past three years. However, most of
the Company's facility management contracts provide for payments to the Company
of either fixed per diem fees or per diem fees that increase by only small
amounts during the terms of the contracts. Inflation could substantially
increase the Company's personnel costs (the largest component of facility
management expense) or other operating expenses at rates faster than any
increases in occupancy fees.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
The Company is not exposed to any other significant market risks, including
commodity price risk, foreign currency exchange risk or interest rate risks from
the use of derivative financial instruments. Management does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or commodity prices.
INTEREST RATE EXPOSURE
The Company's exposure to changes in interest rates primarily results from
its long-term debt with both fixed and floating interest rates. The Company's
long-term debt with fixed interest rates consists of the Senior Notes. The
Company's debt with variable interest is its revolving line of credit. At
December 31, 1999, approximately 50.7% ($51.5 million) of the long-term debt was
subject to variable interest rates. The detrimental effect of a hypothetical 100
basis point increase in interest rates would be to reduce income before
provision for income taxes by approximately $640,000 for the year ended December
31, 1999. At December 31, 1999, the fair value of the Company's fixed rate debt
approximated carrying value based upon discounted future cash flows using
current market prices.
FORWARD LOOKING STATEMENT DISCLAIMER
This annual report on Form 10-K may contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on current plans and expectations of Cornell
Corrections, Inc. and involve risks and uncertainties that could cause actual
future activities and results of operations to be materially different from
those set forth in the forward-looking statements. Important factors that could
cause actual results to differ include, among others, (i) risks associated with
acquisitions and the integration thereof (including the ability to achieve
administrative and operating cost savings and anticipated synergies), (ii) the
timing and costs of expansions of existing facilities, (iii) changes in
governmental policy to eliminate or discourage the privatization of
correctional, detention and pre-release services in the United States, (iv)
availability of debt and equity financing on terms that are favorable to the
Company, and (v) fluctuations in operating results because of occupancy,
competition (including competition from two competitors that are substantially
larger than the Company), and risks of operations.
- 29 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Corrections, Inc.:
We have audited the accompanying consolidated balance sheets of Cornell
Corrections, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cornell Corrections, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
/S/ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 2000
- 30 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 1,763 $ 2,519
Accounts receivable (net of allowance for doubtful accounts
of $3,002 and $3,141, respectively)........................................... 48,092 27,564
Deferred tax asset.............................................................. 1,206 1,209
Prepaids and other.............................................................. 1,356 2,203
Restricted assets............................................................... 2,339 2,613
---------- ----------
Total current assets........................................................ 54,756 36,108
PROPERTY AND EQUIPMENT, net.......................................................... 194,498 159,219
OTHER ASSETS:
Intangible assets, net.......................................................... 18,270 9,935
Deferred costs and other........................................................ 6,467 7,433
---------- ----------
Total assets................................................................ $ 273,991 $ 212,695
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................................ $ 27,392 $ 17,838
Deferred revenues............................................................... -- 1,369
Note payable.................................................................... 40,000 --
Current portion of long-term debt............................................... -- 73
---------- ----------
Total current liabilities................................................... 67,392 19,280
LONG-TERM DEBT, net of current portion............................................... 101,500 98,407
DEFERRED TAX LIABILITIES............................................................. -- 2,769
OTHER LONG-TERM LIABILITIES.......................................................... 7,891 739
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none outstanding............................................................. -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
10,137,528 and 10,105,916 shares issued and outstanding, respectively......... 10 10
Additional paid-in capital...................................................... 90,394 90,038
Stock option loans.............................................................. (455) (455)
Retained earnings............................................................... 11,258 5,906
Treasury stock (697,100 shares at cost)......................................... (3,999) (3,999)
---------- ----------
Total stockholders' equity.................................................. 97,208 91,500
---------- ----------
Total liabilities and stockholders' equity.................................. $ 273,991 $ 212,695
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
- 31 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- --------- ---------
REVENUES.................................................................. $ 176,967 $ 123,119 $ 70,302
OPERATING EXPENSES........................................................ 135,850 98,721 57,047
PRE-OPENING AND START-UP EXPENSES......................................... 2,929 -- --
DEPRECIATION AND AMORTIZATION............................................. 6,007 4,228 2,231
GENERAL AND ADMINISTRATIVE EXPENSES....................................... 9,932 7,581 5,394
---------- --------- ---------
INCOME FROM OPERATIONS.................................................... 22,249 12,589 5,630
INTEREST EXPENSE.......................................................... 8,522 2,601 491
INTEREST INCOME........................................................... (117) (116) (414)
---------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................... 13,844 10,104 5,553
PROVISION FOR INCOME TAXES................................................ 5,538 4,042 1,999
---------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE......................................... 8,306 6,062 3,554
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF RELATED INCOME TAX
BENEFIT OF $1,969 IN 1999.............................................. 2,954 -- --
---------- --------- ---------
NET INCOME................................................................ $ 5,352 $ 6,062 $ 3,554
========== ========= =========
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of change
in accounting principle......................................... $ .88 $ .64 $ .48
Cumulative effect of change in accounting principle................ (.31) -- --
---------- --------- ---------
Net income......................................................... $ .57 $ .64 $ .48
========== ========= =========
DILUTED
Income before cumulative effect of change
in accounting principle......................................... $ .86 $ .62 $ .46
Cumulative effect of change in accounting principle................ (.31) -- --
---------- --------- ---------
Net income......................................................... $ .55 $ .62 $ .46
========== ========= =========
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC................................................................ 9,432 9,442 7,350
DILUTED.............................................................. 9,660 9,772 7,740
The accompanying notes are an integral part of these
consolidated financial statements.
- 32 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
----------------------- ADDITIONAL STOCK RETAINED
PAR PAID-IN OPTION EARNINGS TREASURY
SHARES VALUE CAPITAL LOANS (DEFICIT) STOCK
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1996 ..................... 7,320,398 $ 7 $ 47,562 $ (455) $ (3,710) $ (2,353)
ISSUANCE OF COMMON STOCK .......................... 2,250,000 2 41,098 -- -- --
EXERCISE OF STOCK OPTIONS ......................... 375,506 1 948 -- -- --
STOCK-BASED COMPENSATION .......................... -- -- 76 -- -- --
NET INCOME ........................................ -- -- -- -- 3,554 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1997 ..................... 9,945,904 10 89,684 (455) (156) (2,353)
EXERCISE OF STOCK OPTIONS ......................... 160,012 -- 176 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED .............................. -- -- 178 -- -- --
PURCHASE OF TREASURY STOCK
(142,100 SHARES, AT COST) ...................... -- -- -- -- -- (1,646)
NET INCOME ........................................ -- -- -- -- 6,062 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1998 ..................... 10,105,916 10 90,038 (455) 5,906 (3,999)
EXERCISE OF STOCK OPTIONS ......................... 31,612 -- 217 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED .............................. -- -- 139 -- -- --
NET INCOME ....................................... -- -- -- -- 5,352 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 1999 ..................... 10,137,528 $ 10 $ 90,394 $ (455) $ 11,258 $ (3,999)
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
- 33 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 5,352 $ 6,062 $ 3,554
Adjustments to reconcile net income to net cash provided by
operating activities --
Cumulative effect of change in account principle...................... 2,954 -- --
Depreciation.......................................................... 4,601 2,880 928
Amortization.......................................................... 1,406 1,348 1,303
Provision for bad debts............................................... 976 609 176
Gain on sale of property and equipment................................ (305) -- --
Deferred income taxes................................................. (1,741) 2,106 62
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable............................................... (21,504) (8,036) (5,056)
Restricted assets................................................. (319) (1,049) (440)
Other assets...................................................... (2,505) (5,590) (1,291)
Accounts payable and accrued liabilities.......................... 10,006 4,249 4,332
Deferred revenues and other liabilities........................... (1,478) (1,205) 2,051
--------- --------- ---------
Net cash provided by (used in) operating activities................... (2,557) 1,374 5,619
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment........................... 19,278 -- --
Capital expenditures.................................................... (29,067) (49,483) (9,640)
Acquisition of businesses, less cash acquired........................... (31,786) (65,096) (23,621)
--------- --------- ---------
Net cash used in investing activities................................. (41,575) (114,579) (33,261)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................................. 69,335 -- --
Payments on notes payable............................................... (29,335) -- --
Proceeds from long-term debt............................................ 53,194 176,379 29,500
Payments on long-term debt.............................................. (50,174) (78,331) (29,813)
Proceeds from issuance of common stock.................................. -- -- 41,100
Proceeds from exercise of stock options................................. 356 354 949
Purchases of treasury stock............................................. -- (1,646) --
--------- --------- ---------
Net cash provided by financing activities............................. 43,376 96,756 41,736
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (756) (16,449) 14,094
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 2,519 18,968 4,874
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 1,763 $ 2,519 $ 18,968
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized............................... $ 7,956 $ 765 $ 720
========= ========= =========
Income taxes paid....................................................... $ 3,964 $ 3,341 $ 1,000
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
- 34 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cornell Corrections, Inc. (collectively with its subsidiaries, the
"Company"), a Delaware corporation, provides to governmental agencies the
integrated development, design, construction and management of facilities within
three operating divisions: (i) secure institutional correctional and detention
services, (ii) juvenile treatment, educational and detention services and (iii)
pre-release correctional and treatment services.
WORKING CAPITAL DEFICIT AND FINANCING ARRANGEMENTS
At December 31, 1999, the Company reported a working capital deficit of
$12.6 million. Excluding the $40.0 million of borrowings outstanding under the
Company's Bridge Facility, which matures in October 2000, the Company had
working capital of $27.4 million. Management believes that the repayment of
borrowings outstanding under the Bridge Facility will be funded from potential
proceeds of one, or a combination, of the efforts the Company is currently
pursuing or negotiating to raise long term financing including: (a) the issuance
of longer term subordinated debt, (b) an expansion of the existing revolving
line of credit under the 1998 Credit Facility, (c) a sale and leaseback of
certain owned facilities and leasehold interests, or (d) other debt or equity
financing arrangements. Should the Company not be successful in raising longer
term financing pursuant to its efforts as described above before maturity of the
Bridge Facility, the lender has an option to convert the borrowings outstanding
under the Bridge Facility into eight year exchange notes, and to purchase up to
five percent of the Company's outstanding common stock at an exercise price of
110% of the market price of the Company's common stock as of the date of the
exchange. If these contemplated financing transactions are not consummated, the
Company would be required to seek alternative and potentially dilutive capital
funding sources to repay the Bridge Facility when due. No assurance can be made
that the Company will be able to obtain the various financings described above.
The Company's lease financing arrangement (see Note 7) does not provide
sufficient financing to fund the remaining construction costs for the New Morgan
Academy, which is currently under construction, and the Moshannon Valley
Correctional Center for which construction commenced in 1999 but as of February
2000 was still under a Stop-Work Order issued by the Federal Bureau of Prisons
in June 1999. As of February 2000, there were approximately $61.5 million in
anticipated unfunded capital requirements for the completion of these two
projects. The funds for these new facilities are expected to be expended during
the next twelve to eighteen months. The Company's lease financing arrangement is
available to fund up to approximately $7.2 million of these construction costs.
Management believes that the remaining facility construction costs will be
funded with an increase of the Company's lease financing arrangement.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements contained herein to conform to the current year presentation.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
- 35 -
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Cornell increased its allowance for doubtful accounts during the years
ended December 31, 1997, 1998 and 1999 by $255,000, $509,000 and $1,025,000,
respectively. Write-offs totaling $432,000, $12,000 and $1,164,000 were charged
against the allowance during the periods ended December 31, 1997, 1998 and 1999,
respectively. Cornell acquired approximately $2,821,000 of allowance through its
acquisition of Abraxas in 1997.
RESTRICTED ASSETS
For certain facilities, the Company maintains bank accounts for restricted
cash belonging to offenders or residents, commissary operations, an equipment
replacement fund used in state programs and a restoration fund for certain
facilities. These bank accounts and commissary inventories are collectively
referred to as restricted assets and the corresponding obligations are included
in accrued expenses in the accompanying financial statements.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and
repair costs are expensed, while renewal and betterment costs are capitalized.
Prepaid facility use cost, which resulted from the July 1996 acquisition of the
Big Spring Complex and the December 1999 transfer of ownership of the Great
Plains Correctional Facility to a leasehold interest, is being amortized over 50
years using the straight-line method. Buildings and improvements are depreciated
over their estimated useful lives of 30 to 50 years using the straight-line
method. Furniture and equipment are depreciated over their estimated useful
lives of 3 to 10 years using the straight-line method. Amortization of leasehold
improvements is computed on the straight-line method based upon the shorter of
the life of the asset or the term of the respective lease.
Effective July 1, 1999, the lease term for the three original Big Spring
Complex units was extended from an average of 35 years to 50 years. At this
date, management revised its estimated useful lives of the Big Spring Complex
and two other secure institutions to 50 years which management believes more
closely reflects the useful life of the specific facilities. The effect of this
change reduced building depreciation and prepaid facility use amortization by
approximately $300,000 for the year ended December 31, 1999.
CAPITALIZED INTEREST
The Company capitalizes interest on facilities under development and
construction. Interest capitalized during 1999, 1998 and 1997 was $1,171,000,
$2,293,000 and $151,000, respectively.
INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is being amortized on a straight-line basis over 20 years, which
represents management's estimation of the related benefit to be derived from the
acquired businesses. The carrying value of goodwill is reviewed periodically if
events and circumstances suggest that it may be permanently impaired. If the
review indicates that goodwill will not be recoverable, as determined by the
undiscounted cash flow method, the asset will be reduced to its estimated
recoverable value. Accumulated amortization of goodwill was $3,004,000 and
$1,694,000 as of December 31, 1999 and 1998, respectively.
- 36 -
Non-compete agreements have been obtained principally through the
acquisition of businesses and are amortized over periods of 9 to 10 years on a
straight-line basis. Accumulated amortization of non-compete agreements was
$324,000 and $80,000 at December 31, 1999 and 1998, respectively.
Intangible assets at December 31, 1999 and 1998, were as follows (in
thousands):
1999 1998
--------- ---------
Goodwill........................ $ 13,658 $ 11,109
Non-compete agreements.......... 7,940 600
--------- ---------
21,598 11,709
Accumulated amortization........ (3,328) (1,774)
--------- ---------
$ 18,270 $ 9,935
========= =========
DEFERRED COSTS
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires
entities to expense start-up costs as incurred and to expense previously
capitalized start-up costs as a cumulative effect of a change in accounting
principle in the year adopted. In January 1999, the Company adopted SOP 98-5 and
recorded a net of tax charge of $2,954,000 for the cumulative effect of a change
in accounting principle.
Costs incurred related to obtaining credit financing are capitalized and
amortized over the term of the related indebtedness. At December 31, 1999, the
Company had recorded net deferred debt issuance costs of approximately
$2,634,000 related to obtaining the 1998 Credit Facility, the Senior Secured
Notes and the Bridge Facility. See Note 6 to the Consolidated Financial
Statements.
REALIZATION OF LONG-LIVED ASSETS
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,
" requires that long-lived assets be probable of future recovery in their
respective carrying amounts as of each balance sheet date. Management believes
its long-lived assets are realizable and that no impairment allowance is
necessary pursuant to the provisions of SFAS No. 121 as of December 31, 1999.
REVENUE RECOGNITION
Substantially all revenues are derived from contracts with federal, state
and local government agencies, which pay either per diem rates based upon the
number of occupant days or hours served for the period or cost-plus
reimbursement. Revenues are recognized as services are provided. Deferred
revenues result from advances or prepayments from agencies for future services
to be provided.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying values of existing assets and liabilities and their respective tax
bases based on enacted tax rates.
- 37 -
USE OF ESTIMATES
The Company's financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). Financial statements prepared
in accordance with GAAP require the use of management 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.
Additionally, management estimates affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The significant estimates made by management in the accompanying
financial statements include the allowance for doubtful accounts.
BUSINESS CONCENTRATION
Contracts with federal, state and local governmental agencies account for
nearly all of the Company's revenues. The loss of or a significant decrease in
business from one or more of these governmental agencies could have a material
adverse effect on the Company's financial condition and results of operations.
For the years ended December 31, 1999, 1998 and 1997, 19.8%, 20.1% and
31.4%, respectively, of the Company's consolidated revenues were derived from
contracts with the Federal Bureau of Prisons.
FINANCIAL INSTRUMENTS
The Company considers the fair value of all financial instruments not to be
materially different from their carrying values at the end of each fiscal year
based on management's estimate of the Company's ability to borrow funds under
terms and conditions similar to those of the Company's existing debt.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," certain pro forma
disclosures are provided in Note 8 to the Consolidated Financial Statements.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS reflects the potential dilution from the exercise or conversion of
securities, such as stock options, into common stock.
2. ACQUISITIONS
1999 ACQUISITION
In November 1999, the Company acquired certain of the adult and juvenile
behavioral health and correctional assets of Interventions, a not-for-profit
corporation headquartered in Chicago, Illinois, and BHS Consulting Corporation
("BHS"), a for-profit firm that provides management services to Interventions.
The assets acquired included more than 30 programs provided throughout Illinois
and the real properties of seven facilities. The aggregate purchase price for
the transactions was approximately $31.8 million including transaction costs.
The Company financed the transactions with borrowings under the Company's $50
million Bridge Facility. See Note 6 to the Consolidated Financial Statements.
- 38 -
The acquisition costs and the estimated fair market value of the aggregate
assets acquired and liabilities assumed associated with the Interventions and
BHS acquisitions were as follows (in thousands):
Cash paid............................................ $ 30,889
Transaction costs.................................... 897
---------
Total purchase price............................. $ 31,786
=========
Net assets acquired --
Prepaids and other current assets.................. $ 69
Property and equipment............................. 23,121
Intangible assets.................................. 8,735
Accrued liabilities................................ (139)
---------
$ 31,786
=========
1998 ACQUISITIONS
In January 1998, the Company purchased the Great Plains Correctional
Facility, a secure institutional facility in Hinton, Oklahoma, with a capacity
of 812 beds. In August 1998, the Company acquired substantially all of the
Alaskan assets of Allvest, Inc. ("Allvest"), a privately held company based in
Anchorage, Alaska. The Allvest acquisition included the operations of five
pre-release facilities with an aggregate capacity of 540 beds in Anchorage,
Fairbanks and Bethel, Alaska, and the real properties of three of the five
facilities. Total consideration for these acquisitions was approximately $65.1
million.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions were as follows (in thousands):
GREAT
PLAINS ALLVEST
-------- --------
Cash paid........................................ $ 43,000 $ 20,399
Transaction costs................................ 750 947
-------- --------
Total purchase price......................... $ 43,750 $ 21,346
======== ========
Net assets acquired --
Current assets................................. $ -- $ 39
Property and equipment......................... 43,750 17,014
Goodwill....................................... -- 4,306
Accounts payable and accrued liabilities....... -- (13)
-------- --------
$ 43,750 $ 21,346
======== ========
The 1999 and 1998 acquisitions have been accounted for as purchases;
therefore, the accompanying statements of operations reflect the results of
operations since their respective acquisition dates.
The unaudited consolidated results of operations on a pro forma basis as
though the 1999 and 1998 acquisitions had occurred as of the beginning of the
Company's fiscal year 1998 were as follows (amounts in thousands, except per
share data):
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
Total revenues................... $ 195,945 $ 151,797
Net income....................... 3,237 4,533
Net earnings per share
- Basic........................ .34 .48
- Diluted...................... .34 .46
- 39 -
3. PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
DECEMBER 31,
----------------------
1999 1998
--------- ---------
Land....................................... $ 19,929 $ 14,030
Prepaid facility use....................... 66,894 21,637
Buildings and improvements................. 108,605 101,549
Furniture and equipment.................... 2,378 7,880
Construction in progress................... 5,838 20,457
--------- ---------
203,644 165,553
Accumulated depreciation and amortization.. (9,146) (6,334)
--------- ---------
$ 194,498 $ 159,219
========= =========
In December 1999, the Company transferred ownership of its Great Plains
Correctional Facility to the Hinton Economic Development Authority and retained
a 75 year leasehold interest in the property plus a renewal option. Building
cost was reduced and prepaid facility use cost was increased by approximately
$43.0 million at the date of the transfer.
In November 1999, the Company entered into an agreement for the sale and
leaseback of certain of its furniture and equipment including information
systems hardware and software. See Note 7 to the Consolidated Financial
Statements.
Construction in progress at December 31, 1999, consists primarily of
construction costs attributable to expansions of the Big Spring Complex and the
Cornell Abraxas I facility.
The Company utilizes an unrelated privately owned construction company
("Construction Contractor") as its preferred contractor for construction
projects. The Construction Contractor has received contracts to construct
facilities which the Company owns and/or operates totaling approximately $68.5
million, $20.4 million, and $71.0 million during the years ended December 31,
1999, 1998 and 1997, respectively. Management believes the Company is a
substantial customer of the Construction Contractor. During the year ended
December 31, 1999, this Construction Contractor paid the Company $1.0 million
related to a cost-sharing agreement in connection with the operations of the
Santa Fe County Adult Detention Facility because the operating margins had not
reached certain levels until June 1999. These cost-sharing payments were
reported by the Company as a reduction of operating expenses. The Construction
Contractor has no obligation to make any further cost-sharing payments.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following (in
thousands):
DECEMBER 31,
---------------------
1999 1998
-------- --------
Accounts payable....................... $ 8,974 $ 5,780
Accrued compensation expense........... 4,764 3,969
Accrued interest payable............... 2,418 1,852
Other.................................. 11,236 6,237
-------- --------
$ 27,392 $ 17,838
======== ========
- 40 -
5. INCOME TAXES
The following is an analysis of the Company's deferred tax assets
(liabilities) (in thousands):
DECEMBER 31,
---------------------
1999 1998
-------- --------
Deferred tax assets:
Depreciation and amortization....... $ 2,045 $ 147
Accrued expenses.................... 1,935 1,511
Deferred compensation............... 339 331
Other............................... 303 165
-------- --------
4,622 2,154
-------- --------
Deferred tax liabilities:
Start-up costs amortization......... 89 1,877
Prepaid facility use amortization... 931 682
Prepaid expenses.................... 341 328
Other............................... 1,112 827
-------- --------
2,473 3,714
-------- --------
Net deferred tax asset (liability).. $ 2,149 $ (1,560)
======== ========
The components of the Company's income tax provision were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- --------
Current provision............. $ 7,279 $ 1,936 $ 1,937
Deferred provision (benefit).. (1,741) 2,106 62
--------- -------- --------
Tax provision............... $ 5,538 $ 4,042 $ 1,999
========= ======== ========
A reconciliation of taxes at the federal statutory rate with the income
taxes recorded by the Company is presented below (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
Computed taxes at statutory rate............. $ 4,846 $ 3,536 $ 1,888
Amortization of non-deductible intangibles... 119 119 116
State income taxes, net of federal benefit... 369 399 229
Changes in valuation allowance............... -- (420) (484)
Other........................................ 204 408 250
--------- -------- --------
$ 5,538 $ 4,042 $ 1,999
========= ======== ========
6. CREDIT FACILITIES
As of December 31, 1999, $40.0 million of borrowings were outstanding under
the Company's $50.0 million Bridge Facility which is unsecured and matures in
October 2000. At December 31, 1999, interest on the Bridge Facility was LIBOR
plus a margin of 6.0%. The margin increases by 0.5% each quarter until repaid.
At maturity, the lenders have an option to convert the borrowings outstanding
under the Bridge Facility into longer term exchange notes and to purchase up to
5% of the Company's outstanding common stock at an exercise price of 110% of the
market price of the Company's common stock on the date of the exchange.
- 41 -
The Company's long-term debt consisted of the following (in thousands):
DECEMBER 31,
---------------------
1999 1998
--------- --------
Revolving Line of Credit due March
2003 with an interest rate of
prime plus 0% to 0.5% or
LIBOR plus 1.75% to 2.50%................. $ 51,500 $ 48,400
Senior Secured Notes due July 2010
with an interest rate of 7.74%............ 50,000 50,000
Notes Payable, interest at 4.8% to 7.15%.... -- 80
--------- --------
Total debt.................................. 101,500 98,480
Less: current maturities.................... -- (73)
--------- --------
Long-term debt.............................. $ 101,500 $ 98,407
========= ========
In December 1998, the Company formalized terms under an amended and
restated credit agreement with a financial institution (the "1998 Credit
Facility"). The 1998 Credit Facility provides for borrowings up to $60.0 million
under a revolving line of credit, the availability of which is determined by the
Company's projected pro forma cash flow. The $60.0 million borrowing capacity is
reduced by $3.0 million per quarter beginning September 30, 2000. The 1998
Credit Facility matures in March 2003 and bears interest, at the election of the
Company, at either the prime rate plus a margin of 0% to 0.5% or a rate which is
1.75% to 2.50% above the applicable LIBOR rate. Interest is payable monthly with
respect to prime rate loans and at the expiration of the applicable LIBOR period
for LIBOR based loans. Commitment fees equal to 0.375% per annum are payable on
the unused portion of the facility. The 1998 Credit Facility is secured by
substantially all of the Company's assets, including the stock of all the
Company's subsidiaries, does not permit the payment of cash dividends and
requires the Company to comply with certain earnings, net worth and debt service
covenants. Additionally, the 1998 Credit Facility provides the Company with the
ability to enter into future operating lease agreements that provide for
residual value guarantees. See Note 7 to the Consolidated Financial Statements.
In July 1998, the Company completed a private placement of $50.0 million of
Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in July
1998 and $25.0 million in August 1998. The Senior Notes, which bear interest at
a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior Notes purchase
agreements, the Company is required to make eight annual principal payments of
$6.25 million beginning on July 15, 2003 and comply with certain financial
covenants. Earlier payments of principal are allowed subject to certain
prepayment provisions. Interest is payable semi-annually. The holders of the
Senior Notes and the lenders under the 1998 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in substantially all the assets of the Company.
Notes payable pertain to financed insurance premiums and various vehicle
notes. Scheduled maturities of long-term debt were as follows (in thousands):
For the year ending December 31 --
2000............................. $ --
2001............................. 9,500
2002............................. 12,000
2003............................. 36,250
2004............................. 6,250
Thereafter....................... 37,500
----------
Total........................ $ 101,500
==========
- 42 -
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and certain facilities under long-term
operating leases. Rent expense for all operating leases for the years ended
December 31, 1999, 1998 and 1997, was approximately $5,358,000, $4,490,000 and
$3,583,000, respectively. Under the 1998 Credit Facility, the Company has
entered into operating lease agreements for the acquisition or development of
operating facilities. The leases under this arrangement each have a term of five
years, include purchase and renewal options and provide for a substantial
residual value guarantee (approximately 85% of the total cost) by the Company
which could, under certain circumstances, be due upon termination of the leases.
Upon termination of a lease, the Company could either exercise a purchase
option, or the facilities could be sold to a third party. The Company expects
the fair market value of the leased facilities to substantially reduce or
eliminate the Company's potential obligation under the residual value guarantee.
At December 31, 1999, there was one operating lease under this arrangement;
however, the table of future minimum lease payments below includes the
anticipated lease payments related to projects currently in process for which
the Company will enter into lease arrangements at construction completion.
In November 1999, the Company entered into an agreement for the sale and
leaseback of certain of its furniture and equipment. The Company has purchase
and lease renewal options at projected future fair market values under the
agreements. The leases are classified as operating leases. At the date of sale,
furniture and equipment with carrying values totaling $11,834,000 were sold and
the gains realized on the sale totaling $7,261,000 were deferred and are being
credited to income as rent expense adjustments over the lease term.
As of December 31, 1999, the Company had the following rental commitments
under noncancelable operating leases and anticipated lease payments under the
Company's facility lease financing arrangement (in thousands):
For the year ending December 31 --
2000.............................. $ 8,777
2001.............................. 9,533
2002.............................. 8,638
2003.............................. 7,188
2004.............................. 704
Thereafter........................ 8,441
---------
Total $ 43,281
=========
401(K) PLAN
The Company has a defined contribution 401(k) plan. The Company's matching
contribution currently represents 50 percent of a participant's contribution, up
to the first six percent of the participant's salary. For the years ended
December 31, 1999, 1998 and 1997, the Company recorded $754,000, $611,000 and
$514,000, respectively, of contribution expense.
OTHER
The Company is subject to certain claims and disputes arising in the normal
course of the Company's business. In the opinion of the Company's management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse impact on the Company's financial
position or results of operations.
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8. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
On May 1, 1998, the Company adopted a stockholder rights plan. Under the
plan, each stockholder of record at the close of the business day on May 11,
1998, received one Preferred Stock Purchase Right ("Right") for each share of
common stock held. The Rights expire on May 1, 2008. Each Right initially
entitles the stockholder to purchase one one-thousandth of a Series A Junior
Participating Preferred Share for $120.00. Each Preferred Share has terms
designed to make it economically equivalent to one thousand common shares. The
Rights will become exercisable only in the event a person or group acquires 15%
or more of the Company's common stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 15% or more
of the Company's common stock. If a person or group acquires a 15% or more
position in the Company, each Right (except those held by the acquiring party)
will then entitle its holder to purchase, at the exercise price, common stock of
the Company having a value of twice the exercise price. The effect will be to
entitle the holder to buy the common stock at 50% of the market price. Also, if
following an acquisition of 15% or more of the Company's common stock, the
Company is acquired by that person or group in a merger or other business
combination transaction, each Right would then entitle its holder to purchase
common stock of the acquiring company having a value of twice the exercise
price. The effect will be to entitle the Company's stockholders to buy stock in
the acquiring company at 50% of the market price. The Company may redeem the
Rights at $0.01 per Right at any time prior to the acquisition of 15% or more of
its common stock by a person or group.
STOCK OFFERING
On October 17, 1997, the Company completed an offering of its common stock.
Net proceeds to the Company from the sale of the 2,250,000 shares of newly
issued common stock were approximately $41.1 million. Proceeds from the offering
were used to repay indebtedness of $18.0 million under a credit facility, with
the remainder used for 1998 acquisitions.
PREFERRED STOCK
Preferred stock may be issued from time to time by the Board of Directors
of the Company, which is responsible for determining the voting, dividend,
redemption, conversion and liquidation features of any preferred stock.
OPTIONS
In May 1996, the Company adopted the 1996 Stock Option Plan and amended and
restated the plan in April 1998 ("1996 Plan"). Pursuant to the 1996 Plan, the
Company may grant non-qualified and incentive stock options. The Compensation
Committee of the Board of Directors is responsible for determining the exercise
price and vesting terms for the options. Additionally, prior to the Company's
initial public offering ("IPO"), the Company made various grants of options to
purchase the Company's common stock.
Under the 1996 Plan, the Company may grant options for up to the greater of
1,500,000 shares or 15% of the aggregate number of shares of common stock
outstanding. The 1996 Plan option exercise price can be no less than the market
price of the Company's common stock on the date of grant. The 1996 Plan options
vest up to seven years and expire seven to ten years from the grant date.
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A summary of the status of the Company's 1996 Plan and other options at
December 31, 1999, 1998 and 1997, and changes during the years then ended is
presented in the tables below:
1999 1998 1997
---------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ----------- -------- ----------- ---------
Outstanding at beginning of year....... 1,338,839 $ 15.73 854,454 $ 6.60 1,078,109 $ 4.32
Granted................................ 463,000 11.98 932,872 22.83 161,000 12.57
Exercised.............................. (57,200) 10.60 (177,187) 2.94 (375,505) 2.55
Forfeited or canceled.................. (502,002) 23.40 (271,300) 19.76 (9,150) 9.67
---------- ----------- -----------
Outstanding at end of year............. 1,242,637 11.46 1,338,839 15.73 854,454 6.60
========== =========== ===========
Exercisable at end of year............. 523,712 7.17 487,557 5.84 613,604 4.64
Weighted average fair value of
options granted at market........... $9.48 $16.41 $9.42
In connection with the acquisition of Abraxas in September 1997, the
Company granted options to purchase 10,000 shares of common stock at an exercise
price of $7.59, which was equal to 50% of the fair market value of the Company's
common stock. The fair value of these options, which were not granted under the
1996 Plan, was $12.57 per share.
The following table summarizes information about stock options outstanding
at December 31, 1999:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------------------- ------------- ---------- ----------- ------------- -----------
$ 2.00 to $ 2.50............. 103,919 5.0 $ 2.07 103,919 $ 2.07
3.75 to 5.64............... 277,248 6.4 4.90 277,248 4.90
7.59 to 10.50.............. 374,000 9.6 10.33 25,000 9.93
11.75 to 16.00.............. 313,603 8.6 15.09 82,995 13.92
19.00 to 24.375............. 173,867 8.3 23.43 34.550 22.56
----------- -----------
1,242,637 8.1 $ 11.46 523,712 $ 7.17
=========== ===========
Had compensation cost for the stock option grants under the 1996 Plan and
other stock options and warrants been determined under SFAS No. 123, the
Company's net income and diluted net earnings per share would have been the
following pro forma amounts (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ------------ ----------
Net income: As reported $ 5,352 $ 6,062 $ 3,554
Pro forma 3,662 4,380 3,177
Earnings per share (diluted): As reported .55 .62 .46
Pro forma .38 .45 .41
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Under SFAS No. 123, the fair value of each option grant was estimated on
the date of grant using the minimum value calculation prior to the IPO and the
Black-Scholes option pricing model subsequent to the IPO. The following weighted
average assumptions were used for grants in 1999, 1998 and 1997, respectively:
risk-free interest rates of 6.6%, 5.8% and 6.5%; dividend rates of $0, $0 and
$0; expected lives of 10.0, 10.0 and 10.0 years; expected volatility of 65.74%,
54.70% and 54.79%.
The Black-Scholes option pricing model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
On July 8, 1996, the Chairman of the Board and the Chief Executive Officer
of the Company exercised options to purchase 137,110 and 82,750 shares of Class
A Common Stock and Class B Common Stock at an aggregate price of $274,220 and
$180,638, respectively. In connection with the exercise, each officer entered
into a promissory note with the Company for the respective aggregate exercise
amounts. The promissory notes, as amended, bear interest at the applicable
short-term federal rate as prescribed by Internal Revenue Service regulations,
mature in June 2004, are full recourse and are collateralized by shares of
common stock.
TREASURY STOCK
During the year ended December 31, 1998, the Company repurchased 142,100
shares of common stock on the open market under a share repurchase program at an
aggregate cost of $1,646,000.
9. SEGMENT DISCLOSURE
The Company's three operating divisions are its reportable segments. The
secure institutional segment consists of the operation of secure adult
incarceration facilities. The juvenile segment consists of providing residential
treatment and educational programs and non-residential community-based programs
to juveniles between the ages of 10 and 17 who either have been adjudicated or
suffer from behavioral problems. The pre-release segment consists of providing
pre-release and halfway house programs for adult offenders who are either on
probation or serving the last three to six months of their sentences on parole
and preparing for re-entry into society at large. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Intangible assets are not included in each segment's
reportable assets, and the amortization of intangible assets is not included in
the determination of a segment's operating income or loss. The Company evaluates
performance based on income or loss from operations before general and
administrative expenses, incentive bonuses, amortization of intangibles,
interest and income taxes. Corporate and other assets is comprised primarily of
cash, accounts receivable, deposits, deferred costs and deferred taxes.
- 46 -
The only significant noncash item reported in the respective segments'
income or loss from operations is depreciation and amortization (excluding
intangibles):
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues
Secure institutional.............................................. $ 76,011 $ 52,630 $ 32,283
Juvenile.......................................................... 67,131 47,032 18,536
Pre-release....................................................... 33,825 23,457 19,483
---------- ---------- ----------
Total revenues......................................................... $ 176,967 $ 123,119 $ 70,302
========== ========== ==========
Depreciation and amortization
Secure institutional.............................................. $ 3,013 $ 2,145 $ 693
Juvenile.......................................................... 1,001 739 493
Pre-release....................................................... 831 685 613
Amortization of intangibles....................................... 810 415 340
Corporate and other............................................... 352 244 92
---------- ---------- ----------
Total depreciation and amortization.................................... $ 6,007 $ 4,228 $ 2,231
========== ========== ==========
Income (loss) from operations
Secure institutional.............................................. $ 17,930 $ 12,638 $ 6,532
Juvenile.......................................................... 8,482 5,058 2,128
Pre-release....................................................... 7,122 4,043 2,930
General and administrative expenses............................... (9,932) (7,581) (5,394)
Incentive bonuses................................................. (50) (803) (50)
Amortization of intangibles....................................... (810) (415) (340)
Corporate and other............................................... (493) (351) (176)
---------- ---------- ----------
Total income from operations........................................... $ 22,249 $ 12,589 $ 5,630
========== ========== ==========
Assets
Secure institutional.............................................. $ 141,268 $ 127,774 $ 38,495
Juvenile.......................................................... 53,498 37,917 27,779
Pre-release....................................................... 47,952 28,815 8,469
Intangible assets, net............................................ 17,911 9,935 6,104
Corporate and other............................................... 13,362 8,254 23,262
---------- ---------- ----------
Total assets........................................................... $ 273,991 $ 212,695 $ 104,109
========== ========== ==========
Capital expenditures
Secure institutional.............................................. $ 13,536 $ 40,243 $ 7,872
Juvenile.......................................................... 4,203 5,927 272
Pre-release....................................................... 5,184 2,188 966
Corporate and other............................................... 6,144 1,125 530
---------- ---------- ----------
Total capital expenditures............................................. $ 29,067 $ 49,483 $ 9,640
========== ========== ==========
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10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER (1) QUARTER QUARTER QUARTER YEAR
----------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999:
Revenues..................................... $ 38,356 $ 43,609 $ 45,321 $ 49,681 $ 176,967
Income from operations....................... 3,987 4,815 5,945 7,502 22,249
Income before cumulative effect of
change in accounting principle............. 1,440 1,783 2,287 2,796 8,306
Net income (loss)............................ (1,514) 1,783 2,287 2,796 5,352
Earnings per share before cumulative
effect of change in accounting principle:
- Basic...................................... $ .15 $ .19 $ .24 $ .30 $ .88
- Diluted.................................... $ .15 $ .18 $ .24 $ .29 $ .86
Earnings per share:
- Basic...................................... $ (.16) $ .19 $ .24 $ .30 $ .57
- Diluted.................................... $ (.16) $ .18 $ .24 $ .29 $ .55
1998:
Revenues..................................... $ 27,041 $ 29,099 $ 30,731 $ 36,248 $ 123,119
Income from operations....................... 2,393 2,482 3,285 4,429 12,589
Net income................................... 1,258 1,281 1,596 1,927 6,062
Earnings per share:
- Basic...................................... $ .13 $ .14 $ .17 $ .20 $ .64
- Diluted.................................... $ .13 $ .13 $ .16 $ .20 $ .62
(1) The Company adopted SOP 98-5 in January 1999 and recorded a net-of-tax
charge of approximately $3.0 million for the cumulative effect of a change
in accounting principle.
- 48 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10, 11, 12 and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, not
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial statements and reports of Arthur Andersen LLP
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial statement schedules
All schedules are omitted because they are not applicable
or because the required information is included in the
financial statements or notes thereto.
3. Exhibits
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
3.1 Restated Certificate of Incorporation of the Company. 1
3.2 Amended and Restated Bylaws of the Company. 10
4.1 Certificate representing Common Stock. 2
4.2 Registration Rights Agreement dated as of March 31, 1994, as amended, 2
among the Company and the stockholders listed on the signature pages
thereto.
4.3 Rights Agreement dated as of May 1, 1998 between the Company and 7
the stockholders listed on the signature pages thereto.
9.1 Stock Transfer and Voting Agreement dated November 23, 1994 2
between David M. Cornell and Jane B. Cornell.
10.1 Cornell Corrections, Inc. Amended and Restated 1996 Stock Option 6
Plan.(a)
10.2 Employment Agreement dated as of September 9, 1997 between Abraxas 3
Group, Inc. and Arlene R. Lissner.(a)
10.3 Covenant Not to Compete Agreement dated as of September 9, 1997 by 3
and between the Company and Arlene R. Lissner.(a)
10.4 Form of Indemnification Agreement between the Company and each of 2
its directors and executive officers.
10.5 Stockholders Agreement among certain stockholders named therein dated 3
September 15, 1997.
- 49 -
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
10.6 Contract between CCCI and the CDC (No. 92.401) for the Baker, 2
California Facility dated June 25, 1992, as amended.
10.7 Professional Management Agreement between the Company and Central 2
Falls Detention Facility Corporation dated July 15, 1992.
10.8 Operating Agreement by and between each of MidTex Detentions, Inc., 2
the City of Big Spring, Texas ("Big Spring") and Cornell Corrections of
Texas, Inc. ("CCTI") dated as of July 1, 1996 and related Assignment
and Assumption of Operating Agreement.
10.9 Contract between CCCI and the CDC (No. R92.132) for the Live Oak, 2
California Facility dated March 1, 1993, as amended.
10.10 Asset Purchase Agreement dated as of January 31, 1997 by and between 4
CCTI and Interventions Co.
10.11 Asset Purchase Agreement dated as of August 14, 1997 by and between 3
the Company and Abraxas Group, Inc., Foundation for Abraxas, Inc.,
Abraxas Foundation, Inc., Abraxas Foundation of Ohio and Abraxas, Inc.
10.12 Contract between Texas Alcoholism Foundation, Inc. and the Texas 2
Department of Criminal Justice, Parole Division for the Reid Facility
dated January 31, 1996, as amended.
10.13 Form of Contract between CCCI and the Utah State Department of 2
Human Services, Division of Youth Corrections for the Salt Lake City,
Utah Juvenile Facility.
10.14 Asset Purchase Agreement among CCTI, Texas Alcoholism Foundation, 2
Inc. and the Texas House Foundation, Inc. dated May 14, 1996.
10.15 Asset Purchase Agreement among CCTI, the Company, Ed Davenport, 2
Johnny Rutherford and MidTex Detentions, Inc. dated May 22, 1996.
10.16 Lease Agreement between CCCI and Baker Housing Company dated 2
August 1, 1987 for the Baker, California facility.
10.17 Lease Agreement between CCCI and Sun Belt Properties dated as of May 2
23, 1988, as amended for the Live Oak, California facility.
10.18 Lease Agreement between Big Spring and Ed Davenport dated as of July 2
1, 1996 for the Interstate Unit and related Assignment and Assumption of
Leases.
10.19 Secondary Sublease Agreement between Big Spring and Ed Davenport 2
dated as of July 1, 1996 for the Airpark Unit and related Assignment and
Assumption of Leases.
10.20 Secondary Sublease Agreement between Big Spring and Ed Davenport 2
dated as of July 1, 1996 for the Flightline Unit and related Assignment
and Assumption of Leases.
10.21 Stock Option Agreement between the Company and CEP II dated July 9, 2
1996.
10.22 Form of Option Agreement between the Company and the Optionholder 10
listed therein dated as of November 1, 1995.
10.23 Third Amended and Restated Credit Agreement among the Company, 10
Subsidiaries of the Company, the Lenders and ING, as agent to the
Lenders dated as of December 3, 1998.
10.24 Senior Note Agreement by and between the Company and the Note 8
Purchasers dated July 15, 1998.
10.25 Asset Purchase Agreement dated as of November 17, 1997 by and 5
between Foresite Capital Facilities Corporation and the Hinton Economic
Development Authority.
10.26 Amendment dated December 10, 1997 to Asset Purchase Agreement 5
dated as of November 17, 1997.
10.27 Amendment No. 2 dated January 6, 1998 to Asset Purchase Agreement 5
dated as of November 17, 1997.
- 50 -
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
10.28 Assignment of Agreement of Purchase and Sale dated as of January 5, 5
1998 by and between Foresite Capital Facilities Corporation and Cornell
Corrections of Oklahoma, Inc.
10.29 Allvest Asset Purchase Agreement dated as of June 20, 1998 by and 9
between the Company and Allvest, Inc., St. John Investments, and
William C. Weimar.
10.30 Subordinated Bridge Loan Agreement by and between the Company and 11
ING dated October 14, 1999.
10.31 Asset Purchase Agreement by and among the Company and Interventions 11
and IDDRS Foundation dated May 10, 1999.
10.32 Extension of Asset Purchase Agreement by and among the Company and 11
Interventions and IDDRS Foundation dated September 30, 1999.
10.33 Asset Purchase Agreement by and among BHS Consulting Corp., its 11
Shareholders and the Company dated May 10, 1999.
10.34 Extension of Asset Purchase Agreement by and among BHS Consulting 11
Corp., its Shareholders and the Company dated September 30, 1999.
10.35 Amendment to Asset Purchase Agreement by and among BHS 11
Consulting Corp., its Shareholders and the Company dated November 12,
1999.
10.36 Participation Agreement among the Company and certain of its
subsidiaries and Heller Financial Leasing, Inc. dated November 23, 1999.
10.37 Lease Agreement between First Security Bank, National Association,
and the Company and certain of its subsidiaries dated November 23,
1999.
10.38 Lease Agreement by and among Hinton Economic Development
Authority, the Town of Hinton, Oklahoma, and Cornell Corrections of
Oklahoma, Inc. dated December 31, 1999.
10.39 Consulting Agreement between the Company and David M. Cornell dated
December 15, 1999. (a)
10.40 Form of Severance Agreement executed by John Hendrix, Arlene
Lissner, Thomas Jenkins, Thomas Rathjen, Patrick Perrin and Steven
Logan. (a)
11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
(a) Management compensatory plan or contract.
(1) Annual Report on Form 10-K of the Company for the year ended December 31,
1996.
(2) Registration Statement on Form S-1 of the Company (Registration No.
333-08243).
(3) Registration Statement on Form S-1 of the Company (Registration No.
333-35807).
(4) Current Report on Form 8-K of the Company dated January 31, 1997.
(5) Current Report on Form 8-K of the Company dated January 6, 1998.
(6) Definitive Proxy Statement dated March 9, 1998.
(7) Registration Statement on Form 8-A of the Company filed May 11, 1998.
(8) Quarterly Report on Form 10-Q of the Company for the quarter ended June 30,
1998.
(9) Current Report on Form 8-K of the Company dated August 13, 1998.
(10) Annual Report on Form 10-K of the Company for the year ended December 31,
1998.
(11) Quarterly Report on Form 10-Q of the Company for the quarter ended
September 30, 1999.
(b) REPORTS ON FORM 8-K
On November 24, 1999, the Company filed Form 8-K dated November
24, 1999 reporting the acquisition of Interventions, Inc.
- 51 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CORNELL CORRECTIONS, INC.
Dated: March 30, 2000 By: /S/ STEVEN W. LOGAN
-------------------
Steven W. Logan
President and
Chief Executive Officer
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ STEVEN W. LOGAN President, Chief Executive March 30, 2000
Steven W. Logan Officer and Director
(Principal Executive Officer)
/S/ JOHN L. HENDRIX Vice President and March 30, 2000
John L. Hendrix Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/S/ DAVID M. CORNELL* Chairman of the Board March 30, 2000
David M. Cornell
/S/ ANTHONY CHASE* Director March 30, 2000
Anthony Chase
/S/ JAMES H.S. COOPER* Director March 30, 2000
James H.S. Cooper
/S/ CAMPBELL A. GRIFFIN, JR.* Director March 30, 2000
Campbell A. Griffin, Jr.
/S/ PETER A. LEIDEL* Director March 30, 2000
Peter A. Leidel
/S/ ARLENE R. LISSNER * Director March 30, 2000
Arlene R. Lissner
/S/ TUCKER TAYLOR* Director March 30, 2000
Tucker Taylor
* By: STEVEN W. LOGAN
---------------
Steven W. Logan
Attorney-in-Fact
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