Back to GetFilings.com
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, 1997
COMMISSION FILE NUMBER 1-14472
CORNELL CORRECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0433642
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4801 WOODWAY, SUITE #100E, HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) 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 27, 1998, Registrant had outstanding 9,390,904 shares of its
common stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $173,639,000 based on the
closing price of $21.00 per share as reported on the American 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 1997 Annual Meeting of Stockholders.Part III
- 1 -
PART I
ITEM 1. BUSINESS
Cornell Corrections, Inc. (the "Company") is one of the leading providers
of privatized correctional, detention and pre-release services in the United
States based on total offender capacity. The Company is the successor to
entities that began developing secure institutional correctional and detention
facilities in 1984, pre-release facilities in 1977 and juvenile facilities in
1973. The Company has significantly expanded its operations through acquisitions
and internal growth and is currently operating or developing facilities in 11
states and the District of Columbia. As of December 31, 1997, the Company had
contracts to operate 41 facilities with a total offender capacity of 7,072. The
Company's residential facilities have a total design capacity of 6,172 beds,
with 28 facilities currently in operation (4,586 beds), two facilities under
development (1,070 beds) and an existing facility under expansion (516 beds).
As of February 27, 1998, the Company has contracts to operate 41 facilities
with a total offender capacity of 7,965. The increase in total offender capacity
from December 31, 1997 includes (i) the purchase of the Great Plains
Correctional Facility, an existing 812 bed medium security prison located in
Hinton, Oklahoma, (ii) a newly awarded contract to operate a secure residential
treatment unit in South Mountain, Pennsylvania with a capacity to serve 52
juveniles and (iii) a 56 bed expansion of a pre-release center in Houston,
Texas. A decrease in offender capacity of 27 beds resulted from the expiration
of a pre-release center contract which was not renewed.
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three areas of
operational focus: (i) secure institutional correctional and detention services;
(ii) pre-release correctional services and (iii) juvenile correctional and
detention services. See "Business -- Facility Design, Construction and Finance."
Secure institutional correctional and detention services primarily consist of
the operation of secure adult incarceration facilities. Pre-release correctional
services primarily consist 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. Juvenile correctional and detention services primarily consist of
providing residential treatment and educational programs and non-residential
community-based programs to juvenile offenders between the ages of 10 and 17 who
have either been adjudicated or suffer from behavioral problems. At the adult
facilities it operates, 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. Additional
services provided in the Company's pre-release facilities typically include life
skills and employment training and job placement assistance. Juvenile services
provided by the Company include counseling, wilderness, medical and accredited
educational programs tailored to meet the special needs of juveniles. The
Company derives substantially all its revenues from operating correctional,
detention and pre-release facilities for federal, state and local governmental
agencies in the United States. Of the facilities operated or currently under
development by the Company, 11 are owned, 26 are leased and four are operated
through other arrangements. See "Business -- Properties."
HISTORY OF ACQUISITIONS
Since 1994, the Company has completed six acquisitions. In January 1998,
the Company purchased the Great Plains Correctional Facility ("Great Plains"),
an existing 812 bed medium security prison located in Hinton, Oklahoma for $43.0
million plus transaction costs of approximately $750,000. The prison is
- 2 -
currently operated pursuant to a one-year contract with nine one-year renewal
options between the Oklahoma Department of Corrections and the Hinton Economic
Development Authority ("HEDA"); HEDA in turn currently subcontracts the daily
operations of the prison to another operator. The Company immediately began the
transition from the current operator and will assume complete operation of Great
Plains on or before July 5, 1998. The Company has a 30-year operating contract
with four five-year renewals with HEDA. The purchase included an additional 20
adjacent acres of land for potential future expansion of the facility.
In September 1997, the Company acquired substantially all of the assets of
The Abraxas Group, Inc. and four related entitles (collectively, "Abraxas"), a
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. Founded in 1973, the 24 years of operating history
and approximately 750 employees of Abraxas add a significant depth of juvenile
management expertise and a vast network of relationships within the corrections
industry. Abraxas has received national recognition, including multiple
"Pennsylvania Residential Program of the Year" awards, and has been a featured
program for the Ohio governor's crime summit. Following consummation of the
acquisition, approximately 750 employees of Abraxas became employees of the
Company.
In January 1997, the Company acquired substantially all of the assets of
Interventions Co. ("Interventions") for an aggregate purchase price of $6.0
million. The acquisition included the operation of a 300 bed adult residential
pre-release facility in Dallas, Texas and a 150 bed capacity residential
transitional living center for juveniles in San Antonio, Texas. Following the
consummation of the acquisition, approximately 160 employees of Interventions
became employees of the Company.
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 Federal Bureau of Prisons ("FBOP") to house up to
1,352 offenders at the Big Spring Complex, and 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 base term of 20 years
from the closing of the acquisition and three five-year renewal options at the
discretion of the Company. The IGA has an indefinite term, although it may be
terminated or modified by the FBOP upon 90 days written notice. Following
consummation of the MidTex acquisition, approximately 250 employees of the City
of Big Spring and MidTex became employees of the Company.
In May 1996, the Company acquired a 310 bed pre-release facility located in
Houston, Texas (the "Reid Center"), for approximately $2.0 million. Included in
the acquisition were the Reid Center facility property and buildings, the
equipment, inventory and supplies used in the operation of the Reid Center
facility and the assignment of the Reid Center's contract with the Texas
Department of Criminal Justice ("TDCJ"). Following the consummation of the
acquisition, approximately 100 employees of the Reid Center became employees of
the Company.
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 design capacity of 979 beds.
Consideration for the acquisition of Eclectic was $10.0 million, consisting of
$6.0 million in cash, $3.3 million of subordinated indebtedness and $0.7 million
of other long-term obligations.
- 3 -
INDUSTRY AND MARKET
In the United States, there is 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. According to the Private Adult Correctional
Facility Census dated March 15, 1997 ("1996 Facility Census"), the design
capacity of privately managed adult secure institutional correctional and
detention facilities in operation or under construction worldwide increased from
10,973 beds at December 31, 1989 to 85,201 beds at December 31, 1996, a compound
annual growth rate of 34%. In addition, the design capacity of privately managed
adult secure institutional correctional and detention facilities increased 34%
in the last year.
The United States leads the world in private prison management contracts.
The 1996 Facility Census reports that at December 31, 1996, there were private
adult secure institutional correctional and detention facilities in operation or
under construction in 25 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 744,208 at December 31, 1985 to 1,725,842 at June 30, 1997. 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.
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.
Similar to the adult secure institutional correctional and detention
industry, the area of pre-release correctional services has experienced
substantial growth. The pre-release area is primarily comprised of individuals
that have been granted parole or sentenced to probation. 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.
According to the BJS, the number of parolees increased from 220,438 at
December 31, 1980 to 690,159 at December 31, 1994, a compound annual growth rate
of 8.5%. During the same period, the number of individuals on probation
increased from 1.1 million to approximately 3.0 million, a compound annual
growth rate of 7.4%. The probation and parole populations represent
approximately 71% of the total number of adults under correctional supervision
in the United States. The pre-release correctional services industry is
extremely fragmented with several thousand providers across the country, most of
which are small and operate in a specified geographic area.
The juvenile corrections industry has also expanded rapidly in recent years
as the need for services for at-risk and adjudicated youth has risen. According
to the Criminal Justice Institute, the population in the juvenile correctional
system, both residential and non-residential community-based, has increased from
62,268 youths at January 1, 1988 to 102,582 youths at January 1, 1995, a
compound annual growth rate of 7.4%. In 1994, there were approximately 2.7
million juvenile arrests and 5.4 million youths in special education programs.
The juvenile corrections industry is also fragmented with several thousand
providers across the country, most of which are small and operate in a specific
geographic area.
- 4 -
AREAS OF OPERATIONAL FOCUS
SECURE INSTITUTIONAL. At December 31, 1997, the Company operated or had
contracts to operate six facilities (3,882 beds) that provide secure
institutional correctional and detention services for incarcerated adults. These
facilities consisted of: (i) the 1,868 bed Big Spring Complex (which includes
the 516 bed expansion expected to be completed during the second quarter of
1998), a minimum to medium security facility operated primarily for the FBOP;
(ii) the 302 bed Wyatt Facility, a medium to maximum security facility operated
primarily for the United States Marshal Services (the "USMS") in Central Falls,
Rhode Island; (iii) two minimum security facilities with a total design capacity
of 558 beds in California operated for the California Department of Corrections
(the "CDC"); (iv) the Santa Fe County Detention Center, a contracted 604 bed
adult jail scheduled to be completed during the second quarter of 1998 (which is
currently being operated with 200 adult beds within an existing 240 bed
facility) to be operated for Santa Fe County and (v) the 550 bed Charlton County
Facility, a minimum to medium security facility, scheduled to be completed
during the third quarter of 1998, to be operated for the State of Georgia.
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 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 Wyatt Facility in Central Falls opened in 1993 and houses primarily
federal offenders awaiting adjudication under federal criminal charges.
The Leo Chesney Correctional Facility (for females) and the Baker
Correctional Facility (for males) are both in California and house primarily
offenders sentenced by the State of California, most of whom are non-violent
offenders with sentences of up to two years.
The Santa Fe County Detention Center currently consists of a 240 bed
detention facility, with approximately 200 adult and 40 juvenile beds. The adult
population will be moved into a 604 bed adult detention facility upon the
completion of its construction during the second quarter of 1998. The Santa Fe
County Detention Center houses offenders from Santa Fe County and various
surrounding counties.
The Charlton County Facility is scheduled to open during the third quarter
of 1998. The Company was awarded a 500 bed contract in June 1997, which was
later expanded by an additional 50 beds. The Charlton County Facility will house
offenders from the State of Georgia.
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.
PRE-RELEASE. At December 31, 1997, the Company operated or had contracts to
operate 14 facilities (with an aggregate design capacity of 1,324 beds) that
provide pre-release correctional services. Of these facilities, six are operated
primarily for the FBOP, five are operated primarily for the CDC, one is operated
for the TDCJ, one is operated for the North Carolina Department of Corrections
(the "NCDC") and one is operated for Dallas County, Texas. Most residents of
these facilities are or will be serving the last three to six months of their
sentences and preparing for re-entry into society at large.
- 5 -
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. About 20% of the offenders
at the FBOP pre-release facilities in California, Utah and Texas are on home
confinement; monitoring is primarily done by required check-ins and by
unscheduled visits to places of residence and employment.
JUVENILE SERVICES. The Company offers programs to meet the multiple needs
of troubled juveniles and operated or had contracts to operate 10 residential
facilities and 11 non-residential community-based facilities serving an
aggregate capacity of 1,866 youths as of December 31, 1997. Juvenile
correctional and detention services primarily consist 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 Detention Center 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 Detention Center is a contracted 156 bed juvenile
detention facility scheduled to be completed during the fourth quarter of 1998
(which is currently being operated for 40 offenders within an existing 240 bed
facility).
The Griffin Juvenile Facility is a 150 bed capacity transitional living
center for juveniles located in San Antonio, Texas. The Company currently has a
44 bed contract for the housing of adjudicated and certain homeless
non-adjudicated juveniles.
In September 1997, the Company acquired substantially all the assets of
Abraxas, a nationally recognized provider of juvenile services which began
operations in 1973. The operations of Abraxas add a significant depth of
juvenile management and program expertise to the Company's existing juvenile
operations. The Abraxas operations include the operation of seven residential
facilities and 11 non-residential community-based programs, serving an aggregate
capacity of approximately 1,400 juvenile offenders in Pennsylvania, Ohio,
Delaware and the District of Columbia. The operations of Abraxas are now
conducted through Abraxas Group, Inc., a wholly-owned subsidiary of the Company.
The seven residential and 11 non-residential community-based facilities of
Abraxas provide multiple programs including education, individual and group
counseling, social skills training, physical training, community service,
substance abuse treatment and wilderness challenges. The educational schools
within 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 Abraxas include: (i) the A-1
program ("A-1"); (ii) the Leadership Development Program (the "LDP") and (iii)
Abraxas of Ohio. In the acquisition, the Company acquired A-1's property
comprised of approximately 16 buildings situated on approximately 100 acres with
an aggregate design capacity of 191 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 are
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
- 6 -
offenders may earn a high school diploma, pursue vocational tracks or receive
G.E.D. instruction and testing. The LDP is leased by the Company with property
located on approximately 3.5 acres in South Mountain, Pennsylvania. The LDP is a
15-week residential treatment program with a wilderness component. The LDP
includes group counseling, substance abuse treatment and licensed educational
programs. The Company also acquired Abraxas of Ohio's facility located on
approximately 80 acres in north central Ohio. 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 non-residential community-based programs of Abraxas transition juvenile
offenders from residential placement back to their home communities. Abraxas
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.
The Company intends to pursue additional contract awards to provide
juvenile detention and correctional services, and to continue to increase its
number of contracts for specialized rehabilitation programs and services for
juvenile offenders such as wilderness programs and secure education and training
centers.
- 7 -
FACILITIES
As of December 31, 1997, the Company operated 39 facilities and had been
awarded contracts to operate two additional facilities that are currently under
construction. In addition to providing management services, the Company has been
involved in the development, design and/or construction of many of these
facilities. The facilities currently under development are the Charlton County
Facility, which is scheduled to commence operations during the third quarter of
1998, and the Santa Fe County Adult Detention Center scheduled to open during
the second quarter of 1998. The following table summarizes certain additional
information with respect to contracts and facilities under operation by the
Company as of December 31, 1997:
PRINCIPAL
CONTRACTING TOTAL INITIAL COMMENCEMENT
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4)
--------- --------- --------- --------- --------- ---------
SECURE INSTITUTIONAL CORRECTIONAL
AND DETENTION FACILITIES:
Baker Correctional Facility ........................ CDC 288 1987 7/97 1 1/2 None
Baker, California (5)
Big Spring Complex ................................. FBOP(6) 1,868(7) (6) (6) (6) (6)
Big Spring, Texas
Charlton County Facility ........................... State of 550 1998 9/98 1 Nine
Charlton County, Georgia Georgia One-Year
Leo Chesney Correctional Facility .................. CDC 270 1988 4/93 6 1/2 None
Live Oak, California (5)
Santa Fe County Adult Detention Center ............. Santa Fe 604 1997 7/97 3 Two
Santa Fe, New Mexico (8) County One-Year
Wyatt Facility ..................................... USMS(9) 302 1992 11/93 5 One
Central Falls, Rhode Island (5) Five-Year
PRE-RELEASE FACILITIES:
Dallas County Judicial Center ...................... Dallas 300 1991 9/97 1 None
Wilmer, Texas County
Durham Center ...................................... NCDC 75 1996 12/96 4 1/2 One
Durham, North Carolina Five-Year
El Monte Center .................................... FBOP 52 1993 10/97 1 Four
El Monte, California (5) One-Year
Indiana Street Center .............................. CDC 96 1990 7/94 6 None
San Francisco, California (5)
Inglewood Men's Center ............................. CDC 53 1982 7/94 4 None
Inglewood, California (5)
Inglewood Women's Center ........................... CDC 27 1984 7/92 (10) None
Inglewood, California (5)
Leidel Community Correctional Center ............... FBOP 94 1996 1/96 3 Two
Houston, Texas One-Year
Marvin Gardens Center .............................. CDC 42 1981 7/94 4 None
Los Angeles, California (5)
Oakland Center ..................................... FBOP(11) 61 1981 9/93 (12) (12)
Oakland, California (5)
Reid Community Correctional Center ................. TDCJ 310 1996 1/96 (13) (13)
Houston, Texas
Salt Lake City Center .............................. FBOP(11) 58 1995 12/95 2 Three
Salt Lake City, Utah One-Year
San Diego Center ................................... FBOP 50 1984 11/95 2 Three
San Diego, California (5) One-Year
Santa Barbara Center ............................... CDC(14) 25 1977 7/94 4 None
Santa Barbara, California (5)
Taylor Street Center ............................... FBOP(15) 81 1984 2/96 2 Three
San Francisco, California (5) One Year
(TABLE CONTINUED ON FOLLOWING PAGE)
- 8 -
PRINCIPAL
CONTRACTING TOTAL INITIAL COMMENCEMENT
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4)
--------- --------- --------- --------- --------- ---------
JUVENILE FACILITIES:
RESIDENTIAL FACILITIES:
A-1.............................................. (16) 191 1973 7/97 1 Annual
Marienville, Pennsylvania
A-2.............................................. (16) 23 1974 7/97 1 Annual
Erie, Pennsylvania
A-3.............................................. (16) 20 1975 7/97 1 Annual
Pittsburgh, Pennsylvania
ACAF............................................. (16) 43 1989 7/97 1 Annual
Pittsburgh, Pennsylvania
Griffin Juvenile Facility........................ Bexar 150 1996 7/97 Annual None
San Antonio, Texas County
LDP.............................................. (16) 115 1994 7/97 1 Annual
S. Mountain, Pennsylvania
Abraxas of Ohio.................................. (16) 96 1993 7/97 1 Annual
Shelby, Ohio
PSRU............................................. (16) 12 1994 7/97 1 Annual
Erie, Pennsylvania
Salt Lake Valley Detention Center................ State of 160 1996 6/96 3 None
Salt Lake City, Utah Utah (17)
Santa Fe County Juvenile Detention Center........ Santa Fe 156(8) 1997 7/97 3 Two
Santa Fe, New Mexico County One-Year
NON-RESIDENTIAL COMMUNITY-BASED CENTERS:
Bensalem......................................... (16) 120 1994 7/97 1 Annual
Bensalem, Pennsylvania (18)
Day Treatment Program............................ (16) 28 1996 7/97 1 Annual
Harrisburg, Pennsylvania
Dauphin County Mental Health..................... (16) 115 1996 7/97 1 Annual
Harrisburg, Pennsylvania
Delaware......................................... (16) 20 1994 7/97 1 Annual
Milford, Delaware
Erie Mental Health............................... (16) 20 1997 7/97 1 Annual
Erie, Pennsylvania
Lehigh Valley.................................... (16) 23 1992 7/97 1 Annual
Lehigh Valley, Pennsylvania
NRC.............................................. (16) 40 1991 7/97 1 Annual
Pittsburgh, Pennsylvania
Philadelphia Family Preservation/SCOH............ (16) 64 1992 7/97 1 Annual
Philadelphia, Pennsylvania
Washington DC.................................... (16) 49 1993 7/97 1 Annual
District of Columbia
Workbridge....................................... (16) 386 1994 7/97 1 Annual
Pittsburgh, Pennsylvania
Wyoming Valley................................... (16) 35 1992 7/97 1 Annual
Wyoming Valley, Pennsylvania
- ----------
(1) Total offender capacity includes design capacity plus the program capacity
of the non-residential, community-based operations. Design capacity is
based on the physical space available presently, or with minimal additional
expenditure, for offender or residential beds in compliance with relevant
regulations and contract requirements. 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 with
the contracting governmental agency on an uninterrupted basis.
(3) Substantially all contracts are terminable by the contracting governmental
agency for any reason upon the required notice to the Company.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
- 9 -
(4) Except as otherwise noted, the renewal option, if any, is at the discretion
of the contracting governmental agency.
(5) Facility is accredited by the American Correctional Association.
(6) 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 has
a term of 20 years with three five-year 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 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.
(7) Includes the 516 bed expansion, expected to be completed during the second
quarter of 1998.
(8) These facilities are currently housed in a single 240 bed facility. This
project will be completed in phases, whereby, on July 1, 1997, the Company
took over the operation of an existing 240 bed adult and juvenile facility,
while beginning construction of a new 604 bed adult detention facility,
scheduled to be completed during the second quarter of 1998. The offenders
housed in the 240 bed facility will then be transferred to the new 604 bed
detention facility, along with offenders from surrounding counties at which
time, the 240 bed facility will be converted into a 156 bed juvenile
detention facility, scheduled to be completed during the fourth quarter of
1998.
(9) The USMS entered into an intergovernmental agreement with the Central Falls
Detention Facility Corporation ("DFC") in August 1991 for an indefinite
term (until modified or terminated) with respect to the Wyatt Facility. The
DFC, in turn, entered into a Professional Management Agreement with the
Company for the Company to operate this facility effective November 1993
for a term of five years, with one five-year renewal option.
(10) The contract expired December 31, 1997.
(11) In addition to its contract with the FBOP with respect to these facilities,
the Company has contracts with the Administrative Office of the United
States Courts, Pretrial Services ("Pretrial Services") to provide beds at
these facilities.
(12) The current contract term was two years, with an original termination date
of August 1995; the FBOP has exercised the last of its three one-year
renewal options.
(13) The current contract expired August 31, 1997 and TDCJ granted a one-year
extension.
(14) In addition to its contract with the CDC with respect to this facility, in
March 1996 the Company entered into a contract with the FBOP, with a term
of two years and three one-year renewal options, to provide beds at this
facility.
(15) In addition to its contract with the FBOP with respect to this facility,
the Company has contracts with Pretrial Services and with the City of San
Francisco to provide beds at this facility.
(16) The Abraxas programs/facilities contract with numerous counties throughout
Pennsylvania, Ohio and Delaware, and with the District of Columbia.
(17) Utah Department of Human Services, Division of Youth Corrections. (18)
Operates within Pennsylvania's Youth Development Center/State Facility.
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 and have ranged between $30,000 and $1.5 million. 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
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.
- 10 -
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
The Company's principal customers are federal, state and local governmental
agencies responsible for adult and juvenile correctional, detention and
pre-release services. These governmental agencies generally procure these
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 activities in the
area of 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 10 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 marketing process for obtaining facility management contracts consists
of several critical events. 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.
- 11 -
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, programmatic
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.
- 12 -
Abraxas has received awards and recognition for its operations and
programs, including being recognized (i) in 1995 by the Pennsylvania Juvenile
Court Judges' Commission as "Residential Program of the Year" and (ii) in 1994
by the Office of Juvenile Justice and Delinquency Prevention in its Program
Report titled "What Works: Promising Interventions in Juvenile Justice."
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 three areas of operational
focus, including:
TOTAL
OFFENDER
FACILITY NAME CAPACITY SERVICES PROVIDED
Wyatt Facility................................... 302 Development, design and construction
Plymouth, Massachusetts Detention Center......... 1,140 Development, design and construction
Baker Correctional Facility...................... 288 Development
Leo Chesney Correctional Facility................ 270 Development
Leidel Community Correctional Center............. 94 Development, design and construction
Salt Lake City Juvenile Detention Facility....... 160 Development, design and construction
A-1.............................................. 191 Development
Abraxas of Ohio.................................. 96 Development
LDP.............................................. 115 Development
The Company is currently managing the development, design and construction
of: (i) the 516 bed expansion of the Big Spring Complex; (ii) the 550 bed
Charlton County Facility; (iii) the 604 bed adult facility in Santa Fe County,
New Mexico and (iv) the renovation of the 156 bed juvenile facility in Santa Fe
County, New Mexico. Currently, the Company operates or will operate all of the
facilities it has developed, designed and constructed with the exception of the
detention center in Plymouth, Massachusetts, which is operated by the Sheriff's
Department of the County of Plymouth, Massachusetts.
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
- 13 -
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. Of the 41 facilities the Company
operates or has contracted to operate, four were funded using various of the
above-described financing methods, 11 are owned by the Company and 26 are
leased. The Big Spring Complex is operated under long-term leases ranging from
34 to 50 years including renewal options at the discretion of the Company. As
part of the purchase price for the MidTex acquisition, the Company prepaid a
majority of the facility costs related to the Big Spring Complex through at
least the year 2030.
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, 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.
COMPETITION
The Company competes with a number of companies, including, but not limited
to, Corrections Corporation of America ("CCA"), Wackenhut Corrections
Corporation ("WHC"), Youth Services International, Inc. ("YSII") and
Correctional Services Corporation ("CSCQ "). At December 31, 1996, CCA and WHC
accounted for more than 75% of the privatized secure institutional adult beds
under contract in the United States, according to the Private Correctional
Facility Census. 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, 1997, the Company had approximately 1,625 full-time
employees and 340 part-time employees. The Company employs management,
administrative and clerical, security, educational and counseling services,
health services and general maintenance personnel. Approximately 165 employees
at one of the residential facilities of Abraxas are represented by a union. The
union's collective bargaining agreement effectively terminated on September 9,
1997, the closing date of the Abraxas acquisition. The Company is currently
negotiating with the union's representative over terms for a new agreement. The
correctional officers of the Wyatt Facility have voted to have the Rhode Island
Private Correction Officers represent them for purposes of collective
bargaining. On September 4, 1997, the National Labor Relations Board certified
this union as the exclusive representative for purposes of collective bargaining
for these employees. The Company is currently negotiating with the union's
representative over terms for an agreement. The Company believes its relations
with its employees are good.
- 14 -
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 that 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 respect to these requirements.
ITEM 2. PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas
and regional administrative offices in Ventura, California, Big Spring, Texas
and Pittsburgh, Pennsylvania. The Company also leases space for 26 of the
facilities it is currently operating or developing. 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 the Big Spring Complex through at
least the year 2030.
The Company owns, or will own upon completion of construction, 11
facilities: (i) the Leidel Center and the Reid Center, both located in Houston,
Texas; (ii) the Griffin Juvenile Facility in San Antonio, Texas; (iii) the A-3
and ACAF facilities in Pittsburgh, Pennsylvania; (iv) the A-2 and PSRU
facilities in Erie, Pennsylvania; (v) the A-1 facility in Marienville,
Pennsylvania; (vi) Abraxas of Ohio in Shelby, Ohio; (vii) the Philadelphia
Family Preservation/SCOH facility in Philadelphia, Pennsylvania and (viii) the
Charlton County Facility in Charlton County, Georgia. The Company is not
required to lease space at the Wyatt Facility, which is owned by the DFC, the
Salt Lake Valley Detention Center, which is owned by the County of Salt Lake and
leased to the State of Utah, or the Santa Fe County Adult Detention Center and
the Santa Fe County Juvenile Detention Center, which are owned by Santa Fe
County. For a list of the locations of each facility, see "Facilities."
The Company is currently constructing and financing the 550 bed Charlton
County Facility which it will own. Additionally, the Company is currently
constructing and financing the 516 bed expansion at the Big Spring Complex and
has the right to use the facility for 50 years.
- 15 -
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, inmate
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 1997.
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 American Stock
Exchange ("AMEX") under the symbol "CRN". As of February 27, 1998, there were
approximately 45 record holders of common stock. The high and low sales prices
for the common stock on the AMEX since the common stock began trading on October
3, 1996 are shown below:
HIGH LOW
------- -------
1996:
Fourth Quarter (from October 3) ................. $12 3/4 $ 8 7/8
1997:
First Quarter ................................... 11 5/8 9
Second Quarter .................................. 18 9
Third Quarter ................................... 16 5/8 14 7/16
Fourth Quarter .................................. 20 3/4 15 3/4
1998:
First Quarter (through February 27) ............. 21 19 7/16
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 Second Amended and Restated
Credit Agreement dated as of October 31, 1997, ("1997 Credit Facility")
currently prohibits the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
- 16 -
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,
---------------------------------------------------------------
1997 (1) 1996 (2) 1995 1994 (3) 1993
--------- --------- --------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 70,302 $ 32,327 $ 20,692 $ 15,689 $ 3,198
Operating expenses............................ 57,047 26,038 16,351 12,315 2,827
Depreciation and amortization................. 2,231 1,390 820 758 16
General and administrative expenses........... 5,394 4,560 3,531 2,959 1,315
--------- --------- --------- -------- ---------
Income (loss) from operations................. 5,630 339 (10) (343) (960)
Interest expense (4).......................... 491 2,810 1,115 294 --
Interest income............................... (414) (167) (136) (138) (45)
--------- --------- --------- -------- ---------
Income (loss) before income taxes............. 5,553 (2,304) (989) (499) (915)
Provision for income taxes.................... 1,999 75 -- 101 --
--------- --------- --------- -------- ---------
Net income (loss)............................. $ 3,554 $ (2,379) $ (989) $ (600) $ (915)
========= ========= ========= ======== =========
Earnings (loss) per share:
- Basic................................... $ .48 $ (.65) $ (.32) $ (.21) $ (.51)
- Diluted................................. $ .46 $ (.65) $ (.32) $ (.21) $ (.51)
Number of shares used to compute EPS (in thousands) (5):
- Basic................................... 7,350 3,673 3,095 2,923 1,807
- Diluted................................. 7,740 3,673 3,095 2,923 1,807
OPERATING DATA:
Total offender capacity:
Residential................................... 6,172 3,577 1,640 1,281 302
Non-residential community-based............... 900 -- -- -- --
Total....................................... 7,072 3,577 1,640 1,281 302
Beds under contract (end of period) (6)....... 5,747 3,254 1,478 1,155 282
Contract beds in operation (end of period) (6) 4,161 2,899 1,135 1,155 282
Average occupancy based on contracted
beds in operation (6) (7)................... 97.6% 97.0% 98.9% 92.1% --
BALANCE SHEET DATA:
Working capital............................... $ 26,220 $ 7,747 $ 1,525 $ 2,015 $ 810
Total assets.................................. 104,109 46,824 14,184 13,095 2,048
Long-term debt................................ 432 745 7,649 3,447 --
Stockholders' equity.......................... 86,730 41,051 3,053 6,631 1,085
- ----------
(1) Includes the operations of Interventions and Abraxas acquired in January
1997 and September 1997, respectively.
(2) Includes the operations of the Big Spring Complex and the Reid Center
acquired in July 1996 and May 1996, respectively.
(3) Includes the operations of Eclectic purchased by the Company on March 31,
1994.
(4) Interest expense for 1996 includes a $1.3 million non-recurring charge
($726,000 of which was non-cash) to expense deferred financing costs
associated with the early retirement of debt.
(5) Prior to March 31, 1994, the Company was organized as a partnership. For
purposes of computing average shares outstanding for the period prior to
March 31, 1994, the partnership units were converted to common shares using
a one-to-one unit-to-share conversion ratio.
(6) Occupancy percentages are based on contracted offender capacity of
residential facilities in operation. Since certain facilities have offender
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(7) For any applicable facilities, includes reduced occupancy during the
start-up phase. For the year ended December 31, 1993, occupancy did not
commence until December 1993.
- 17 -
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 areas of
operational focus. The following table sets forth the number of facilities and
beds under contract or award at the end of the periods shown.
DECEMBER 31,
---------------------------------
1997 1996 1995
------ ------ -------
Facilities in operation (1)................................................ 39 16 12
Total offender capacity:
Residential........................................................... 6,172 3,577 1,640
Non-residential community based....................................... 900 -- --
Total............................................................... 7,072 3,577 1,640
Beds under contract (end of period) (3).................................... 5,747 3,254 1,478
Contracted beds in operation (end of period (3)............................ 4,161 2,899 1,135
Average occupancy based on contracted beds in operation (2) (3)............ 97.6% 97.0% 98.9%
- -----------
(1) As of December 31, 1997, the Company had 39 facilities in operation and
contracts to operate two additional facilities under development. Of the 41
facilities, 11 are non-residential community-based facilities.
(2) For any applicable facilities, includes reduced occupancy during the
start-up phase.
(3) Occupancy percentages are based on contracted offender capacity of
residential facilities in operation. Since certain facilities have offender
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
The Company derives substantially all its revenues from operating
correctional, detention and pre-release facilities for federal, state and local
governmental agencies in the United States. Revenues for operation of
correctional, detention and pre-release facilities are generally recognized on a
per diem rate based upon the number of occupant days for the period.
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, pre-release or
juvenile) 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 incurs 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 (three facilities in operation at December 31, 1997).
- 18 -
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 depends on occupancy levels at the
facilities operated by the Company. These variable operating expenses include
food, medical services, supplies and clothing. 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. Since a majority of the Company's
operating expenses are fixed, to the extent that the Company can increase
revenues at a facility through higher occupancy or expansion of the number of
beds under contract, the Company should be able to improve operating results.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
accounting, finance, personnel and other services and costs of developing new
contracts.
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 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 and by expenses incurred by the Company (including the cost of
options to purchase or lease proposed facility sites and the cost of engaging
outside consultants and legal experts related to submitting responses to RFP's).
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 is realized.
RESULTS OF OPERATIONS
The Company's historical operating results reflect that the Company has
significantly expanded its business since 1995. Material fluctuations in the
Company's results of operations are principally the result of the timing and
effect of acquisitions and 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
areas of operational focus. Since pre-release facilities involve contracts with
a fewer number of beds than secure institutions, fluctuations in the occupancy
levels in such facilities have a more significant impact on their operating
margins.
- 19 -
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,
---------------------------------
1997 1996 1995
------ ------ -------
Revenues.................................. 100.0% 100.0% 100.0%
Operating expenses........................ 81.1 80.5 79.0
Depreciation and amortization............. 3.2 4.3 4.0
General and administrative expenses....... 7.7 14.1 17.0
------ ------ -------
Income (loss) from operations............. 8.0 1.1 0.0
Interest expense, net..................... 0.1 8.2 4.8
------ ------ -------
Income (loss) before income taxes......... 7.9 (7.1) (4.8)
Provision for income taxes................ 2.8 0.2 0.0
------ ------ -------
Net income (loss)......................... 5.1% (7.3)% (4.8)%
====== ====== =======
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased 117.5% to $70.3 million for the year ended
December 31, 1997 from $32.3 million for the year ended December 31, 1996. The
increase in revenues of approximately $38.0 million was due principally to the
September 1997 acquisition of Abraxas, the January 1997 acquisition of
Interventions and a full year of results from the 1996 acquisitions of MidTex
and Reid Center. Additionally, the Company opened a 75 bed pre-release facility
in Durham, North Carolina and a 160 bed juvenile detention facility in Salt Lake
City, Utah in February 1997, and assumed the operation of a 240 bed adult and
juvenile detention facility in Santa Fe, New Mexico in July 1997.
OPERATING EXPENSES. Operating expenses increased 119.1% to $57.0 million
for the year ended December 31, 1997 from $26.0 million for the year ended
December 31, 1996. The increase in operating expenses was due principally to the
September 1997 acquisition of Abraxas, the January 1997 acquisition of
Interventions and a full year of results from the 1996 acquisitions of MidTex
and Reid Center. Additionally, the Company opened two new facilities in February
1997 and assumed the operation of the Santa Fe Facility in July 1997. As a
percentage of revenues, operating expenses increased to 81.1% from 80.5%. The
increase in operating expenses as a percentage of revenues is principally a
result of lower operating margins at the Santa Fe facility and certain juvenile
facilities. The Company's operating margins fluctuate depending on the relative
mix of operating contracts among the Company's three areas of operational focus
and their respective occupancies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
60.5% to $2.2 million for the year ended December 31, 1997 from $1.4 million for
the year ended December 31, 1996. The increase was due principally to a full
year of amortization of prepaid facility use costs of the Big Spring Complex
acquired in July 1996, the depreciation of the Griffin Juvenile Facility and
related assets acquired in the January 1997 acquisition of Interventions,
depreciation and amortization of assets acquired in the September 1997 Abraxas
acquisition and depreciation and amortization of deferred start-up costs for the
three new facilities which began operations during 1997. In addition,
amortization costs include approximately $187,000 to expense start-up costs
related to the non-renewal of a 120 bed juvenile contract as of June 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 18.3% to $5.4 million for the year ended December 31, 1997 from $4.6
million for the year ended December 31, 1996. General and administrative
expenses for the year ended December 31, 1996 included a non-recurring, non-cash
charge of $870,000 in connection with options to purchase shares of common stock
granted in July 1996 to certain officers of the Company. Excluding the
non-recurring charge, general and administrative expenses
- 20 -
increased $1.7 million or 46.2% as a result of adding corporate and
administrative personnel, including a new chief operating officer, to manage the
increased business of the Company, and from additional costs of administering
the Company since the initial public offering in the fourth quarter of 1996
("IPO"). As a percentage of revenues, general and administrative expenses
decreased to 7.7% from 11.4%, excluding the non-recurring charge, due
principally to spreading fixed costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, decreased to $77,000
for the year ended December 31, 1997 from $2.6 million for the year ended
December 31, 1996. The decrease in net interest expense was principally due to
the $1.3 million non-recurring charge ($726,000 of which was non-cash) in the
third quarter of 1996 to expense deferred financing costs associated with the
early retirement of significant portions of the 1996 Credit Facility using the
proceeds of the IPO. Excluding the non-recurring charge, interest expense
decreased approximately $1.0 million, or 67.9%, as a result of lower outstanding
borrowings under the 1996 and 1997 Credit Facilities for the respective periods.
During 1997, the Company capitalized interest totaling $151,000 related to the
construction and development of facilities. In addition, 1997 interest income
increased $247,000, or 147.9% as a result of interest earned on the investment
of a portion of the proceeds from the Company's stock offering in October 1997.
INCOME TAXES. For the year ended December 31, 1997, the Company recognized
a provision for income taxes at an estimated effective rate of 36% compared to
no provision for federal income taxes for the year ended December 31, 1996 due
to a taxable loss. The effective income tax rate applied in 1997 includes a
benefit for the reversal of reserves for deferred tax assets resulting from
prior net operating losses which are expected to be utilized in 1997 and 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased by 56.2% to $32.3 million for the year
ended December 31, 1996 from $20.7 million for the year ended December 31, 1995.
The increase in revenues of $11.6 million was due principally to the acquisition
of MidTex as of July 1, 1996, the opening of two new pre-release facilities
during the first quarter of 1996 and the acquisition of the Reid Center in May
1996.
OPERATING EXPENSES. Operating expenses increased by 59.2% to $26.0 million
for the year ended December 31, 1996 from $16.4 million for the year ended
December 31, 1995. This increase was principally attributable to the acquisition
of MidTex in July 1996, the opening of two new pre-release facilities during the
first quarter of 1996, and the acquisition of the Reid Center in May 1996. As a
percentage of revenues, operating expenses increased to 80.5% from 79.0% due
primarily to the relative increase in secure institutional operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
69.5% to $1.4 million for the year ended December 31, 1996 from $820,000 for the
year ended December 31, 1995. The increase was principally due to the
amortization of prepaid facility use costs of the Big Spring Complex, the
opening of two new pre-release facilities in January 1996 and the acquisition of
the Reid Center in May 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 29.1% to $4.6 million for the year ended December 31, 1996 from
$3.5 million for the year ended December 31, 1995. Included in general and
administrative expenses for the year ended December 31, 1996 was a
non-recurring, non-cash charge of $870,000 in connection with the July 1996
grant of certain options to purchase shares of the Company's Common Stock. As a
percentage of revenues, excluding the non-recurring charge, general and
administrative expenses decreased to 11.4% from 17.0% due principally to
spreading fixed costs over a larger revenue base.
- 21 -
INTEREST. Interest expense, net of interest income, increased to $2.6
million for the year ended December 31, 1996 from $979,000 for the year ended
December 31, 1995. The increase in net interest expense was due principally to
the $1.3 million non-recurring charge ($726,000 of which was non-cash) to
expense deferred financing costs associated with the early retirement of
significant portions of the 1996 Credit Facility, borrowings under the Company's
1995 Credit Facility and the 1996 Credit Facility related to the acquisition of
MidTex in July 1996, the Company's financing of the purchase of certain
outstanding stock in November 1995, the construction and development of the two
new pre-release facilities which opened during the first quarter of 1996 and the
acquisition of the Reid Center in May 1996.
INCOME TAXES. The Company did not recognize any provision for federal
income taxes due to a taxable loss in both years. The Company recognized a
provision for state income taxes of $75,000 for the year ended December 31,
1996. As of December 31, 1996, the Company had recognized a deferred tax asset
of $608,000. Management of the Company believes that this deferred tax asset is
realizable.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased 31.9% to $20.7 million for the year ended
December 31, 1995 from $15.7 million for the year ended December 31, 1994. The
revenue increase was due principally to the recognition of occupancy fees for a
full 12 months in 1995 related to the acquisition of Eclectic Communications,
Inc. ("Eclectic") versus the recognition of nine months in 1994. Additionally,
an increase in revenues of approximately $1.1 million was attributable to the
Wyatt Facility principally as a result of a higher occupancy and per diem rate
in 1995 compared to 1994.
OPERATING EXPENSES. Operating expenses increased 32.8% to $16.4 million for
the year ended December 31, 1995 from $12.3 million for the year ended December
31, 1994. The increase in operating expenses was due principally to the
recognition of operating expenses of Eclectic for a full 12 months in 1995. As a
percentage of revenues, operating expenses increased to 79.0% from 78.5%
principally for the same reason.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
8.2% to $820,000 for the year ended December 31, 1995 from $758,000 for the year
ended December 31, 1994. The increase was due principally to recognizing 12
months of contract value and goodwill amortization in 1995 as compared to nine
months of amortization in 1994 resulting from the acquisition of Eclectic,
offset in part by an accounting adjustment in the first quarter of 1995 to
adjust depreciation expense in prior periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0
million for the year ended December 31, 1994. The increase in general and
administrative expenses was due principally to the addition of the operations of
Eclectic and an increase in RFP and development costs. Development costs
increased by $457,000 for the year ended December 31, 1995 compared to the year
ended December 31, 1994. As a percentage of revenues, general and administrative
expenses decreased to 17.0% from 18.9% due principally to spreading fixed costs
over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $979,000
for the year ended December 31, 1995 from $156,000 for the year ended December
31, 1994. The increase resulted from the expensing of debt issuance costs and
commitment fees of $472,000 associated with the 1995 Credit Facility, the
incurrence of $4.0 million of debt and other long-term obligations in connection
with the acquisition of Eclectic and increased borrowings under the 1995 Credit
Facility to purchase treasury stock.
- 22 -
INCOME TAXES. There was no provision for income taxes for the year ended
December 31, 1995 due to a taxable loss. The Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994, even though the
Company incurred a loss for financial reporting purposes in 1994, principally
because certain goodwill amortization contributing to the loss for financial
reporting purposes was not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements are for acquisitions,
construction of new facilities, expansions of existing facilities, working
capital, start-up costs related to new operating contracts, and 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 (through occupancy fees) is realized. Some of
the Company's management contracts have required the Company to make substantial
initial expenditures of cash in connection with the opening or renovating of a
facility. Substantially all these start-up expenditures are fully or partially
recoverable as pass-through costs or are reimbursable from the contracting
governmental agency over the term of the contract.
CASH PROVIDED BY OPERATING ACTIVITIES. The Company had net cash provided by
operating activities of $5.6 million for the year ended December 31, 1997
including a $2.0 million advance from the State of Georgia for the construction
and development of the Charlton County Facility. This advance will be applied to
future per diem billings to the State of Georgia once the facility begins
operations in 1998. Significant uses of operating cash during the period include
increased accounts receivable and start-up costs for facilities under
development and increased prepaid insurance and other items related to the
additional acquired and newly opened facilities.
WORKING CAPITAL. The Company's working capital increased to $26.2 million
at December 31, 1997 from $7.7 million at December 31, 1996. This increase was
principally due to excess cash proceeds from the October 1997 stock offering
after repayment of indebtedness and an increase in receivables resulting from
the acquisitions of Interventions in January 1997 and Abraxas in September 1997.
EXISTING CREDIT FACILITY. On September 9, 1997, the Company entered into a
$60.0 million revolving line of credit and on October 31, 1997, the Company
formalized terms under an amended and restated credit agreement (the "1997
Credit Facility"). The 1997 Credit Facility, which matures in March 2003,
provides for borrowings of up to $60 million for acquisitions, new projects and
working capital. The Credit Facility bears interest, at the election of the
Company, at either the prime rate plus a margin from 0% to .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. The 1997 Credit Facility is secured by 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. As of December 31, 1997, there
were no outstanding borrowings under the 1997 Credit Facility.
1997 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
newly issued shares were approximately $41.1 million. The Company used a portion
of the proceeds to repay borrowings of $18.0 million under the 1997 Credit
Facility.
In January 1998, the Company acquired the Great Plains Correctional
Facility located in Hinton, Oklahoma. The Company financed the $43.0 million
purchase price with $18.8 million of borrowings under the 1997 Credit Facility,
and the remainder with cash remaining from the October 1997 stock offering. See
Note 9 to the consolidated financial statements.
- 23 -
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1997 were $9.6 million and related to construction in progress for the 516 bed
expansion of the Big Spring Complex and the 550 bed Charlton County Facility,
improvements and furniture and equipment at the newly opened facilities and
normal replacement of furniture and equipment at various facilities. The Company
is committed to additional expenditures of approximately $21.0 million through
1998 to complete the Big Spring Complex expansion and the development of the
Charlton County Facility.
In January 1997, the Company financed the acquisition of substantially all
of the assets of Interventions with cash and $2.0 million of borrowings under
the 1996 Credit Facility. In September 1997, the Company purchased substantially
all of the assets of Abraxas. The Company financed the $19.2 million purchase
price with borrowings under the 1997 Credit Facility. See Note 6 to the
Company's Consolidated Financial Statements.
The Company anticipates making cash investments in connection with future
acquisitions and expansions. The Company believes that the cash flow from
operations and amounts available under its Credit Facility will be sufficient to
meet its capital requirements for the foreseeable future. Furthermore,
management believes that additional resources may be available to the Company
through a variety of other financing methods.
INFLATION
Management of the Company 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.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate a year. As the century date change
occurs, date-sensitive systems will recognize the year 2000 as 1900 or not at
all. The inability to recognize or properly treat the Year 2000 may cause
systems to process critical financial and operational information incorrectly.
Management of the Company has assessed the impact of the Year 2000 issue on the
Company's computer hardware and software systems. Based on this assessment,
management currently believes that the costs of resolving the Year 2000 issues
will not be material to the Company's results of operations or financial
condition.
PROPOSED ACCOUNTING STANDARD
The American Institute of Certified Public Accountants has proposed an
accounting standard which it may issue during 1998 that would require entities
to expense start-up costs as incurred. If adopted, the standard may require the
Company to expense previously capitalized start-up costs as a cumulative effect
of a change in accounting principle in January 1999. At December 31, 1997,
unamortized start-up costs were $1,256,000.
SEGMENT REPORTING
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
in 1998. SFAS No. 131 provides revised disclosure guidelines for segments of an
enterprise based on a management approach to defining operating segments.
- 24 -
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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1998
- 25 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------------
1997 1996
---------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 18,968 $ 4,874
Accounts receivable (net of allowance for doubtful accounts
of $2,644 and $19, respectively).............................................. 20,137 4,976
Deferred tax asset.............................................................. 604 120
Prepaids and other.............................................................. 1,366 1,339
Restricted assets............................................................... 1,564 1,124
---------- ---------
Total current assets........................................................ 42,639 12,433
PROPERTY AND EQUIPMENT, net.......................................................... 52,516 26,074
OTHER ASSETS:
Intangible assets, net.......................................................... 6,104 5,864
Deferred tax asset, noncurrent.................................................. -- 488
Deferred costs and other........................................................ 2,850 1,965
---------- ---------
Total assets................................................................ $ 104,109 $ 46,824
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................................ $ 13,576 $ 4,382
Deferred revenues............................................................... 2,549 21
Current portion of long-term debt............................................... 294 283
---------- ---------
Total current liabilities................................................... 16,419 4,686
LONG-TERM DEBT, net of current portion............................................... 138 462
DEFERRED TAX LIABILITIES............................................................. 58 --
OTHER LONG-TERM LIABILITIES.......................................................... 764 625
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,
9,945,904 and 7,320,398 shares issued and outstanding, respectively........... 10 7
Additional paid-in capital...................................................... 89,684 47,562
Stock option loans.............................................................. (455) (455)
Accumulated deficit............................................................. (156) (3,710)
Treasury stock (555,000 shares of common stock, at cost)........................ (2,353) (2,353)
---------- ---------
Total stockholders' equity.................................................. 86,730 41,051
---------- ---------
Total liabilities and stockholders' equity.................................. $ 104,109 $ 46,824
========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
- 26 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
--------- -------- ---------
REVENUES................................................................... $ 70,302 $ 32,327 $ 20,692
OPERATING EXPENSES......................................................... 57,047 26,038 16,351
DEPRECIATION AND AMORTIZATION.............................................. 2,231 1,390 820
GENERAL AND ADMINISTRATIVE EXPENSES........................................ 5,394 4,560 3,531
--------- -------- ---------
INCOME (LOSS) FROM OPERATIONS.............................................. 5,630 339 (10)
INTEREST EXPENSE........................................................... 491 2,810 1,115
INTEREST INCOME............................................................ (414) (167) (136)
--------- -------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............................ 5,553 (2,304) (989)
PROVISION FOR INCOME TAXES................................................. 1,999 75 --
--------- -------- ---------
NET INCOME (LOSS).......................................................... $ 3,554 $ (2,379) $ (989)
========= ======== =========
NET EARNINGS (LOSS) PER SHARE:
BASIC .................................................................. $ .48 $ (.65) $ (.32)
DILUTED................................................................. .46 (.65) (.32)
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC................................................................... 7,350 3,673 3,095
DILUTED................................................................. 7,740 3,673 3,095
The accompanying notes are an integral part of these consolidated
financial statements.
- 27 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL STOCK
COMMON STOCK PAID-IN OPTION ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL LOANS DEFICIT STOCK
---------- ------- -------- ------ ------- -------
BALANCES AT DECEMBER 31, 1994......................... 3,188,385 $ 32 $ 6,941 $ -- $ (342) $ --
EXERCISE OF STOCK OPTIONS............................. 1,000 -- 3 -- -- --
PURCHASE OF TREASURY STOCK
(555,000 shares, at cost).......................... -- -- -- -- -- (2,603)
ISSUANCE OF WARRANTS.................................. -- -- 11 -- -- --
NET LOSS.............................................. -- -- -- -- (989) --
---------- ------- -------- ------ ------- -------
BALANCES AT DECEMBER 31, 1995......................... 3,189,385 32 6,955 -- (1,331) (2,603)
CONVERSION OF PAR VALUE
FROM $.01 to $.001................................. -- (29) 29 -- -- --
ISSUANCES OF COMMON STOCK............................. 3,618,091 3 37,670 -- -- --
EXERCISE OF STOCK OPTIONS
AND WARRANTS....................................... 512,922 1 1,140 (455) -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED.................................. -- -- 172 -- -- --
STOCK-BASED COMPENSATION.............................. -- -- 1,596 -- -- --
REVERSAL OF PUT RIGHT COST............................ -- -- -- -- -- 250
NET LOSS.............................................. -- -- -- -- (2,379) --
---------- ------- -------- ------ ------- -------
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)
========== ======= ======== ====== ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
- 28 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 3,554 $ (2,379) $ (989)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities --
Depreciation.......................................................... 928 498 166
Amortization.......................................................... 1,303 892 654
Deferred income taxes................................................. 62 (172) --
Non-cash stock-based compensation and financing charges............... -- 1,596 --
Change in assets and liabilities, net of effects from acquisition
of businesses --
Accounts receivable............................................... (4,880) 1,090 (1,086)
Restricted assets................................................. (440) (233) (5)
Other assets...................................................... (1,291) (1,765) 166
Accounts payable and accrued liabilities.......................... 4,332 (88) (145)
Deferred revenues and other liabilities........................... 2,051 21 8
--------- -------- ---------
Net cash provided by (used in) operating activities................... 5,619 (540) (1,231)
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................... (9,640) (1,256) (1,159)
Acquisition of businesses, less cash acquired........................... (23,621) (25,174) --
--------- -------- ---------
Net cash used in investing activities................................. (33,261) (26,430) (1,159)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................................ 29,500 40,841 11,360
Payments on long-term debt.............................................. (29,813) (47,745) (7,158)
Proceeds from issuance of common stock.................................. 41,100 37,673 3
Proceeds from exercise of stock options and warrants.................... 949 685 --
Purchase of treasury stock.............................................. -- -- (2,353)
--------- -------- ---------
Net cash provided by financing activities............................. 41,736 31,454 1,852
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 14,094 4,484 (538)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... 4,874 390 928
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 18,968 $ 4,874 $ 390
========= ======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized............................... $ 720 $ 1,454 $ 520
========= ======== =========
Income taxes paid....................................................... $ 1,000 $ 75 $ --
========= ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
- 29 -
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 areas of operational focus: (i) secure institutional correctional and
detention services, (ii) pre-release correctional services and (iii) juvenile
correctional and detention services.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESTRICTED ASSETS
For certain facilities, the Company maintains bank accounts for restricted
cash belonging to inmates and commissary operations, for an equipment
replacement fund for the replacement of equipment used in state programs, and
for a restoration fund for any necessary restorations of the related facilities.
These bank accounts and commissary inventories are collectively referred to as
"restricted assets" 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
MidTex, is being amortized over 35 years using the straight-line method.
Buildings and improvements are depreciated over their estimated useful lives of
30 to 40 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.
CAPITALIZED INTEREST
The Company capitalizes interest in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Costs," on
facilities under development and construction. Interest capitalized during 1997
and 1996 was $151,000 and $0, respectively.
INTANGIBLE ASSETS
Goodwill represents the consideration the Company paid to acquire Eclectic
in excess of the fair market value of the net tangible and identifiable
intangible assets acquired. 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 business. Under Accounting Principles Board
("APB") Opinion No. 17 and SFAS No. 121, the Company periodically evaluates
whether events and circumstances after the acquisition date indicate that the
remaining balance of goodwill may not be recoverable. If factors indicate that
goodwill should be evaluated for possible impairment, the Company would compare
estimated undiscounted future cash flow from the related operations to the
carrying amount of goodwill. If the carrying amount of goodwill were greater
than undiscounted future cash flow, an impairment loss would be recognized. Any
impairment
- 30 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss would be computed as the excess of the carrying amount of goodwill over the
estimated fair value of the goodwill (calculated based on discounting estimated
future cash flows). Accumulated amortization of goodwill was $1,279,000 and
$939,000 as of December 31, 1997 and 1996, respectively.
The non-compete agreement was entered into with the President of Abraxas in
conjunction with the acquisition of Abraxas in September 1997. The agreement is
being amortized over ten years using the straight line method. Accumulated
amortization at December 31, 1997 was $20,000.
Intangible assets at December 31, 1997 and 1996 were as follows (in
thousands):
1997 1996
------- -------
Goodwill ......................... $ 6,803 $ 6,803
Non-compete agreement ............ 600 --
------- -------
7,403 6,803
Accumulated amortization ......... (1,299) (939)
------- -------
$ 6,104 $ 5,864
======= =======
DEFERRED COSTS
Facility start-up costs, which include costs of initial employee training,
travel and other direct expenses incurred in connection with the opening of new
facilities or initiating new services or programs in existing facilities, are
capitalized and generally amortized on a straight-line basis over the lesser of
the initial term of the contract plus renewals or five years. Direct incremental
development costs paid to unrelated third parties incurred in securing new
facilities, including certain costs of responding to requests for proposal
("RFPs"), are capitalized as deferred costs and amortized as part of start-up
costs. Internal payroll and other costs incurred in securing new facilities are
expensed to general and administrative expenses. Deferred development costs are
charged to general and administrative expenses when the success of obtaining a
new facility project is considered doubtful.
The American Institute of Certified Public Accountants has proposed an
accounting standard which it may issue during 1998 that would require entities
to expense start-up costs as incurred. If adopted, the standard may require the
Company to expense previously capitalized start-up costs as a cumulative effect
of a change in accounting principle in January 1999. At December 31, 1997,
unamortized start-up costs were $1,256,000.
Costs incurred relating to obtaining long-term debt financing are
capitalized and amortized over the term of the related indebtedness. At December
31, 1997, the Company had recorded net deferred debt issuance costs of $896,000
related to obtaining the 1997 Credit Facility.
REALIZATION OF LONG-LIVED ASSETS
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. The Company adopted SFAS No. 121 effective January 1, 1996.
Management believes its long-lived assets are realizable and that no impairment
allowance is necessary pursuant to the provision of SFAS No. 121 as of December
31, 1997.
- 31 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Included in accounts receivable at December 31, 1997 is approximately
$1,756,000 of net receivables from the Pennsylvania Department of Education
related to Abraxas' school programs. The Company is reimbursed for these
programs by the Department of Education based upon its actual direct costs plus
a percentage for allowable indirect costs. Historically, the Department of
Education has disallowed certain costs in connection with its annual audit. The
Company has filed appeals with the Department of Education for each year
audited, which includes each school year in the period from July 1, 1989 through
June 30, 1996. The ultimate outcome of these appeals is uncertain, however in
the opinion of management, such resolution will not have a materially adverse
effect on the Company's results of operations.
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.
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 related to the
accounts receivable from Abraxas' school programs.
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.
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.
- 32 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The Company, as required, adopted SFAS No. 128, "Earnings Per Share." In
1997 SFAS No. 128 revised the historical methodology used in computing earnings
per share (EPS) such that the computations required for primary and fully
diluted EPS were replaced with basic and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as fully
diluted EPS, except that, among other changes, the average share price for the
period is used in all cases when applying the treasury stock method to
potentially dilutive outstanding options. All earnings per share amounts
presented herein have been restated to reflect the adoption of SFAS No. 128.
SEGMENT REPORTING
The Company will adopt SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in 1998. SFAS No. 131 provides revised
disclosure guidelines for segments of an enterprise based on a management
approach to defining operating segments.
2. ACQUISITIONS
In January 1997, the Company completed the acquisition of substantially all
the assets of Interventions Co. ("Interventions"), a non-profit operator of a
300 bed adult residential pre-release facility in Dallas, Texas and 150 bed
capacity residential transitional living center for juveniles in San Antonio,
Texas.
In September 1997, the Company acquired substantially all of the assets of
the Abraxas Group, Inc. and four related entities (collectively, "Abraxas").
Abraxas is a provider of residential and non-residential community based
juvenile programs, serving approximately 1,400 juvenile offenders throughout
Pennsylvania, Ohio, Delaware and the District of Columbia. The acquisitions were
financed primarily through borrowings under the 1997 and 1996 Credit Facilities
(see Note 6).
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):
INTERVENTIONS ABRAXAS
Cash paid ......................................... $ 5,773 $ 18,593
Transaction costs ................................. 230 600
-------- --------
Total purchase price .......................... $ 6,003 $ 19,193
======== ========
Net assets acquired --
Cash ............................................ $ 409 $ 489
Receivables, net ................................ 1,509 8,551
Other current assets ............................ 54 107
Property and equipment, net ..................... 4,577 12,528
Other assets .................................... -- 605
Accounts payable and accrued liabilities ........ (546) (3,087)
-------- --------
$ 6,003 $ 19,193
======== ========
In July 1996, the Company completed the acquisition of substantially all
the assets of MidTex Detentions, Inc. ("MidTex"), a private correctional center
operator for the Federal Bureau of Prisons ("FBOP"), operating secure
institutional facilities in Big Spring, Texas with a capacity of 1,305 beds at
the date of acquisition ("Big Spring Complex"). In May 1996, the Company
acquired a 310-bed facility located
- 33 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in Houston, Texas ("Reid Center"), previously operated by Texas Alcoholism
Foundation, Inc., and The Texas House Foundation, Inc. (collectively, "Texas
House"). Total consideration for these acquisitions was approximately $25.7
million. The acquisitions were financed primarily through borrowings under the
1996 Credit Facility and a short-term convertible note. In connection with the
MidTex acquisition, the Company entered into various agreements for the use of
the facilities and the annual payment of $216,000 (in lieu of property taxes)
per year for approximately the next 35 years.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions are as follows (in thousands):
MIDTEX REID CENTER
-------- -------
Cash paid ............................................. $ 23,200 $ 1,986
Transaction costs ..................................... 470 90
-------- -------
Total purchase price .............................. $ 23,670 $ 2,076
======== =======
Net assets acquired --
Cash ................................................ $ 486 $ --
Receivables, net .................................... 2,726 --
Other current assets ................................ 755 --
Property and equipment, net:
Prepaid facility use .............................. 21,710 --
Other ............................................. 10 2,090
Other assets ........................................ 5 --
Accounts payable and accrued liabilities ............ (2,022) (14)
-------- -------
$ 23,670 $ 2,076
======== =======
The carrying value of the prepaid facility use relates to the Company's
right to use the three detention facilities retained by the City of Big Spring
for 19, 20, and 23 years, respectively, plus three five-year extensions.
Extensions of the lease agreement are at the option of the Company. The costs
will be amortized over the respective periods, including the option periods. The
Company currently intends to exercise these extensions.
The 1997 and 1996 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 1997 and 1996 acquisitions had occurred as of the beginning of the
Company's fiscal year 1996 were as follows (amounts in thousands, except per
share data):
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
------------ -----------
Total revenues .............................. $ 93,134 $ 80,385
Net income (loss) ........................... 3,065 (1,040)
Net earnings (loss) per share
- Basic ................................... .42 (.28)
- Diluted ................................. .40 (.28)
- 34 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
DECEMBER 31,
-----------------------------
1997 1996
------------ -----------
Land ........................................ $ 4,346 $ 561
Prepaid facility use ........................ 21,637 21,637
Buildings and improvements .................. 17,168 3,751
Furniture and equipment ..................... 2,770 938
Construction in progress .................... 9,374 439
------------ -----------
55,295 27,326
Accumulated depreciation and amortization ... (2,779) (1,252)
------------ -----------
$ 52,516 $ 26,074
============ ===========
Construction in progress at December 31, 1997 includes construction and
costs attributable to the 516 bed expansion of the Big Spring Complex and the
550 bed Charlton County Facility. The Company is committed to additional
expenditures of approximately $21.0 million through 1998 to complete the Big
Spring Complex expansion and the development of the Charlton County Facility.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following (in
thousands):
DECEMBER 31,
-----------------------------
1997 1996
------------ -----------
Accounts payable ............................ $ 4,257 $ 1,240
Accrued compensation expense ................ 3,055 1,606
Accrued income taxes payable ................ 898 --
Due to escrow ............................... 1,000 --
Other ....................................... 4,366 1,536
------------ -----------
$ 13,576 $ 4,382
============ ===========
Due to escrow represents an amount payable related to the purchase of
Abraxas which was still outstanding as of December 31, 1997.
- 35 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The following is an analysis of the Company's deferred tax assets (in
thousands):
DECEMBER 31,
-------------------
1997 1996
------- -------
Deferred tax assets:
Net operating loss carryforwards ..................... $ 522 $ 609
Depreciation and amortization ........................ 368 290
Accrued expenses ..................................... 986 282
Deferred compensation ................................ 331 331
Other ................................................ 252 --
------- -------
2,459 1,512
Deferred tax liabilities:
Start-up costs amortization .......................... 493 --
Prepaid facility use amortization .................... 438 --
Prepaid expenses ..................................... 201 --
Other ................................................ 361 --
------- -------
1,493 --
Net deferred tax asset before valuation allowance .... 966 1,512
Valuation allowance .................................... (420) (904)
------- -------
Net deferred tax asset ............................... $ 546 $ 608
======= =======
The components of the Company's income tax provision were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
------ ----- --------
Current provision ........................ $1,937 $ 247 $ --
Deferred provision (benefit) ............. 62 (172) --
------ ----- --------
Tax provision .......................... $1,999 $ 75 $ --
====== ===== ========
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,
-------------------------
1997 1996 1995
------- ----- -----
Computed taxes at statutory rate of 34 percent .... $ 1,888 $(783) $(336)
Amortization of non-deductible intangibles ........ 116 186 162
State income taxes, net of federal benefit ........ 229 (39) --
Changes in valuation allowance .................... (484) 629 190
Other ............................................. 250 82 (16)
------- ----- -----
$ 1,999 $ 75 $--
======= ===== =====
- 36 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Company has a net operating loss carryforward
for income tax purposes of approximately $1,375,000 available to offset future
taxable income. This carryforward will expire beginning 2008. The Company's
income tax provision for the year ended December 31, 1997 included a benefit for
the reversal of a portion of the valuation allowance resulting from the
utilization of prior net operating losses.
6. LONG-TERM DEBT
The Company's long-term debt consisted of the following (in thousands):
DECEMBER 31,
----------------
1997 1996
---- ----
Notes payable, interest at 2.9% to 9.9% ................ $432 $745
Less -- current maturities ........................... 294 283
---- ----
$138 $462
==== ====
On September 9, 1997, the Company entered into a $60.0 million revolving
line of credit with a financial institution and on October 31, 1997, the Company
formalized terms under an amended and restated credit agreement (the "1997
Credit Facility"). The 1997 Credit Facility provides for borrowings of up to
$60.0 million, the availability of which is determined by the Company's
projected pro forma cash flow. The 1997 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 .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 1997 Credit Facility is secured by 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. As of December 31, 1997,
there were no outstanding borrowings under the 1997 Credit Facility.
Notes payable pertain to financed insurance premiums and various vehicle
notes. Scheduled maturities of long-term debt were as follows (in thousands):
DECEMBER 31,
1997
-----------
1998 ..................................................... $294
1999 ..................................................... 135
2000 ..................................................... 3
----
Total ................................................. $432
====
- 37 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 1996 and 1995, was approximately $3,583,000, $2,358,000, and
$2,244,000, respectively. As of December 31, 1997, the Company had the following
rental commitments under noncancelable operating leases (in thousands):
For the year ending December 31 --
1998 ........................................ $3,377
1999 ........................................ 1,678
2000 ........................................ 1,010
2001 ........................................ 617
2002 ........................................ 312
Thereafter .................................. 2,004
------
$8,998
401(K) PLAN
The Company has a defined contribution 401(k) plan. The Company's matching
contribution represents 50 percent of a participant's contribution, up to the
first six percent of the participant's salary. The Company can also make
additional discretionary profit-sharing contributions. For the years ended
December 31, 1997, 1996 and 1995, the Company recorded $514,000, $210,000 and
$139,000, respectively, of contribution expense.
OTHER
The Company is currently negotiating with union representatives over terms
for agreements covering employee groups at two of its facilities.
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.
8. STOCKHOLDERS' EQUITY
STOCK OFFERINGS
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 the 1997 Credit Facility
with the remainder to be used for future acquisitions and general working
capital purposes.
On October 3, 1996, the Company completed an initial public offering of its
common stock ("IPO"). Net proceeds to the Company from the sale of the 3,523,103
shares of newly issued common stock were approximately $37.4 million.
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.
- 38 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS
In May 1996, the Company adopted the 1996 Stock Option Plan ("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 IPO, the Company made various grants of
options to purchase the Company's common stock.
The Company may grant options for up to 880,000 shares under the 1996 Plan
under which the Company has granted options on 824,358 shares through December
31, 1997. 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 five years, and expire after seven to ten years.
A summary of the status of the Company's 1996 plan and other options at
December 31, 1997, 1996, and 1995 and changes during the years then ended is
presented in the tables below:
1997 1996 1995
-------------------- ----------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ----------- -------- ---------- --------
Outstanding at beginning of year........ 1,078,109 $ 4.32 814,562 $ 2.12 83,062 $ 5.11
Granted................................. 161,000 12.57 776,469 5.24 732,500 1.78
Exercised............................... (375,505) 2.55 (512,922) 2.22 (1,000) 2.50
Forfeited............................... (9,150) 9.67 -- -- -- --
Expired................................. -- -- -- -- -- --
---------- ----------- ---------
Outstanding at end of year.............. 854,454 1,078,109 4.32 814,562 2.12
========== =========== =========
Exercisable at end of year.............. 613,604 4.64 930,609 3.46 793,562 2.11
Weighted average fair value of
options granted at market............ $9.42 $4.10 $.55
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. In July 1996, the Company recorded compensation
expense of $870,000 related to options granted to certain officers of the
Company.
The following table summarizes information about stock options outstanding
at December 31, 1997:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------------- ----------- --------- -------- ------------ ----------
$ 2.00 to $ 2.82........... 251,606 7.9 $ 2.22 247,856 $ 2.22
3.75 to 7.59........... 327,248 8.5 5.01 294,748 4.92
10.375 to 15.19........... 275,600 9.1 12.49 71,000 11.89
----------- -----------
854,454 8.5 6.60 613,604 4.64
=========== ===========
- 39 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (loss) and net earnings (loss) per share would have been
the following pro forma amounts (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ------------ --------
Net income (loss): As reported $ 3,554 $ (2,379) $ (989)
Pro forma 3,177 (3,503) (1,391)
Earnings (loss) per share (diluted): As reported .46 (.65) (.32)
Pro forma .41 (.95) (.45)
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
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 1997, 1996, and 1995, respectively:
risk-free interest rates of 6.5%, 6.8%, and 6.1%; dividend rates of $0, $0, and
$0; expected lives of 10.0, 7.5 and 7.0 years; expected volatility of 54.79% for
1997 and 32.5% since the Company's stock began trading in October 1996.
The Black-Scholes option valuation 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 financial 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 bear interest at the applicable short-term federal
rate as prescribed by Internal Revenue Service regulations, mature in four
years, are full recourse and are collateralized by shares of common stock
exercised.
TREASURY STOCK
Effective November 1, 1995, the Company repurchased 555,000 shares of
Class A Common Stock from a former officer of the Company ("Stock Repurchase").
The Stock Repurchase and related expenses were financed with borrowings under
the 1995 Credit Facility. In connection with the Stock Repurchase, the Company
issued options to purchase 555,000 shares of Class B Common Stock, each with an
exercise price of $2.00 per share, to certain existing stockholders and to the
lender under the 1995 Credit Facility.
- 40 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
On January 6, 1998, the Company acquired the Great Plains Correctional
Facility ("Great Plains") located in Hinton, Oklahoma. The Company paid an
aggregate purchase price of $43.8 million comprised of $43.0 million in cash,
and approximately $750,000 of transaction costs. The Company financed the
purchase with $18.8 million of borrowings under its 1997 Credit Facility and the
remainder with cash. The acquisition is being treated as a purchase for
accounting purposes.
Great Plains is currently operated pursuant to a one-year contract with
nine one-year renewal options between the Oklahoma Department of Corrections and
HEDA; HEDA in turn currently subcontracts the daily operations of the prison to
another operator. The Company will immediately begin the transition from the
current operator and will assume the complete operations of the prison on or
before July 5, 1998. The purchase included the 812 bed facility and all
surrounding infrastructure, a 30 year operating contract with four five year
renewals between HEDA and the Company, plus an additional 20 adjacent acres of
land for potential future expansion of the facility.
ITEM 9. CHANGES 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, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995
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
- 41 -
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. (2)
4.1 Certificate representing Common Stock. (3)
4.2 Registration Rights Agreement dated as of March 31, 1994, as amended, (3)
among the Company and the stockholders listed on the signature pages
thereto.
9.1 Stock Transfer and Voting Agreement dated November 23, 1994 (3)
between David M. Cornell and Jane B. Cornell.
10.1 Cornell Corrections, Inc. 1996 Stock Option Plan. (3)
10.2 Employment Agreement dated as of September 9, 1997 between Abraxas (2)
Group, Inc. and Arlene R. Lissner.
10.3 Covenant Not to Compete Agreement dated as of September 9, 1997 by (2)
and between the Company and Arlene R. Lissner.
10.4 Form of Indemnification Agreement between the Company and each of (3)
its directors and executive officers.
10.5 Stockholders Agreement among certain stockholders named therein dated (2)
September 15, 1997.
10.6 Contract between CCCI and the CDC (No. 92.401) for the Baker, (3)
California Facility dated June 25, 1992, as amended.
10.7 Professional Management Agreement between the Company and Central (3)
Falls Detention Facility Corporation dated July 15, 1992.
10.8 Operating Agreement by and between each of MidTex Detentions, Inc., (3)
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, (3)
California Facility dated March 1, 1993, as amended.
10.10 Asset Purchase Agreement dated as of January 31, 1997 by and between (4)
Cornell Corrections of Texas, Inc. and Interventions Co.
10.11 Asset Purchase Agreement dated as of August 14, 1997 by and between (2)
Cornell Corrections, Inc. 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 (3)
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 (3)
Human Services, Division of Youth Corrections for the Salt Lake City,
Utah Juvenile Facility.
10.14 Asset Purchase Agreement among CCTI, Texas Alcoholism Foundation, (3)
Inc. and the Texas House Foundation, Inc. dated May 14, 1996.
10.15 Asset Purchase Agreement among CCTI, the Company, Ed Davenport, (3)
Johnny Rutherford and MidTex Detentions, Inc. dated May 22, 1996.
10.16 Lease Agreement between CCCI and Baker Housing Company dated (3)
August 1, 1987 for the Baker, California facility.
10.17 Lease Agreement between CCCI and Sun Belt Properties dated as of May (3)
23, 1988, as amended for the Live Oak, California facility.
10.18 Lease Agreement between Big Spring and Ed Davenport dated as of July (3)
1, 1996 for the Interstate Unit and related Assignment and Assumption of
Leases.
- 42 -
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
10.19 Secondary Sublease Agreement between Big Spring and Ed Davenport (3)
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 (3)
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, (3)
1996.
10.22 Form of Option Agreement between the Company and the Optionholder (3)
listed therein dated as of November 1, 1995.
10.23 Second Amended and Restated Credit Agreement among the Company,
Subsidiaries of the Company, the Lenders and ING, as agent to the
Lenders dated as of October 31, 1997.
11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
- ----------- -------------------------------------------------------------------- -------------------------------------
(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. 333-35807).
(3) Registration Statement on Form S-1 of the Company (Registration No. 333-08243).
(4) Current Report on Form 8-K of the Company dated January 31, 1997 (File No. 1-14472).
(b) REPORTS ON FORM 8-K
On November 10, 1997, the Company filed Amendment No. 1 to Form
8-K dated September 9, 1997 reporting the acquisition of Abraxas
Group, Inc.
- 43 -
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 9, 1998 By: /S/ DAVID M. CORNELL
David M. Cornell
Chairman of the Board, President
and Chief Executive Officer
SIGNATURE TITLE DATE
/S/ DAVID M. CORNELL Chairman of the Board, President March 9, 1998
David M. Cornell and Chief Executive Officer
(Principal Executive Officer)
/S/ STEVEN W. LOGAN Senior Vice President and March 9, 1998
Steven W. Logan Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/S/ CAMPBELL A. GRIFFIN, JR.* Director March 9, 1998
Campbell A. Griffin, Jr.
/S/ RICHARD T. HENSHAW III* Director March 9, 1998
Richard T. Henshaw III
/S/ PETER A. LEIDEL* Director March 9, 1998
Peter A. Leidel
/S/ ARLENE R. LISSNER * Director March 9, 1998
Arlene R. Lissner
/S/ TUCKER TAYLOR* Director March 9, 1998
Tucker Taylor
* By: DAVID M. CORNELL
David M. Cornell
Attorney-in-Fact
- 44 -