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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998 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.)
1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS 77027
- - ------------------------------------------------ ---------------
(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 26, 1999, Registrant had outstanding 9,552,216 shares of its
common stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $148,951,000 based on the
closing price of $16.50 per share as reported on the New York Stock Exchange.
For purposes of the foregoing calculation, all directors and officers of the
Registrant have been deemed to be affiliates, but the Registrant disclaims that
any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 1999 Annual Meeting of Stockholders. Part III
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 facilities in 12 states and the
District of Columbia. As of December 31, 1998, the Company had contracts to
operate 53 facilities with a total offender capacity of 10,525. The Company's
residential facilities have a total offender capacity of 9,135 beds, with 51
facilities currently in operation and an existing facility under expansion in
Georgia (1,075 beds).
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three operating
divisions: (i) secure institutional correctional and detention services; (ii)
juvenile treatment, educational and detention services and (iii) pre-release
correctional services. Secure institutional correctional and detention services
consist primarily of the operation of secure adult incarceration facilities.
Juvenile services consist of providing residential treatment and educational
programs and non-residential community-based programs to juvenile offenders
between the ages of 10 and 17 who have either been adjudicated or suffer from
behavioral problems. 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 the secure institutional
correctional and detention facilities, the Company generally provides maximum
and medium security incarceration and minimum security residential services,
institutional food services, certain transportation services, general education
programs (such as high school equivalency and English as a second language
programs), health care (including medical, dental and psychiatric services),
work and recreational programs and chemical dependency and substance abuse
programs. Juvenile services provided by the Company include counseling,
wilderness, medical and accredited educational programs tailored to meet the
special needs of juveniles. Additional services provided in the Company's
pre-release facilities typically include life skills and employment training and
job placement assistance. 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.
For the years ended December 31, 1998, 1997 and 1996, 20.1%, 31.4% and 39.7%,
respectively, of the Company's consolidated revenues were derived from contracts
with the Federal Bureau of Prisons.
HISTORY OF ACQUISITIONS
Since 1994, the Company has completed seven acquisitions. In August 1998, the
Company acquired substantially all of the Alaskan assets of Allvest, Inc.
("Allvest"), a privately held company based in Anchorage, Alaska. The Allvest
acquisition included the operations of five pre-release facilities with an
aggregate capacity of 540 beds in Anchorage, Fairbanks and Bethel, Alaska, the
real properties of three of the five facilities and assignments of contracts
with the Alaska Department of Corrections ("ADC"). The aggregate purchase price
for the acquisition was approximately $21.3 million.
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 approximately $43.8 million. The prison was 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 subcontracted the daily operations of the prison to
another operator. The Company assumed complete operation of Great Plains in July
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.
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In September 1997, the Company acquired substantially all of the assets of
The Abraxas Group, Inc. and four related entities (collectively, "Abraxas"), a
not-for-profit juvenile operator of seven residential facilities and 11
non-residential community-based programs, serving an aggregate capacity of
approximately 1,400 juvenile offenders. The aggregate purchase price for the
acquisition was approximately $19.2 million.
In January 1997, the Company acquired substantially all of the assets of
Interventions Co. ("Interventions") for an aggregate purchase price of $6.0
million. The acquisition included the operation of the Dallas County Judicial
Center, a 300 bed adult residential pre-release facility in Dallas, Texas and
the Griffin Juvenile Facility, a 150 bed capacity residential transitional
living center for juveniles in San Antonio, Texas.
In July 1996, the Company acquired substantially all the assets of MidTex
Detentions, Inc. ("MidTex"), the operator of secure institutional facilities in
Big Spring, Texas (the "Big Spring Complex"), for an aggregate purchase price of
approximately $23.2 million. The City of Big Spring has an Intergovernmental
Agreement (the "IGA") with the Federal Bureau of Prisons ("FBOP") to house the
offenders at the Big Spring Complex. As part of the acquisition, MidTex assigned
to the Company its rights under an operating agreement with the City of Big
Spring (the "Big Spring Operating Agreement") to manage the Big Spring Complex.
The Big Spring Operating Agreement has a 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.
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 was the real and personal property and the assignment of the
Reid Center's contract with the Texas Department of Criminal Justice ("TDCJ").
In March 1994, the Company acquired Eclectic Communications, Inc.
("Eclectic"), the operator of 11 privatized secure institutional and pre-release
facilities in California with an aggregate offender capacity of 979 beds.
Consideration for the acquisition of Eclectic was $10.0 million.
INDUSTRY AND MARKET
In the United States, there 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 December 31, 1998 ("1998 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 132,572 beds at December 31, 1998, a
compound annual growth rate of 32%. In addition, the design capacity of
privately managed adult secure institutional correctional and detention
facilities increased 24% in the last year.
The United States leads the world in private prison management contracts. The
1998 Facility Census reports that at December 31, 1998, 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
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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 primarily comprises individuals who
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%. 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.
OPERATING DIVISIONS
SECURE INSTITUTIONAL CORRECTIONAL AND DETENTION SERVICES. At December 31,
1998, the Company operated seven facilities with a total offender capacity of
5,916 beds that provide secure institutional correctional and detention services
for incarcerated adults. These facilities consisted of: (i) the 812 bed Great
Plains Correctional Facility, a medium security prison operated for HEDA and the
Oklahoma Department of Corrections; (ii) the 1,947 bed Big Spring Complex, a
minimum to medium security facility operated primarily for the FBOP; (iii) the
302 bed Wyatt Detention Facility, a medium to maximum security facility operated
primarily for the United States Marshal Services (the "USMS") in Central Falls,
Rhode Island; (iv) two minimum security facilities in California with a total
offender capacity of 558 beds operated for the California Department of
Corrections (the "CDC"); (v) the Santa Fe County Adult Detention Facility, a 672
bed adult detention facility operated for Santa Fe County and (vi) the 1,625 bed
D. Ray James Prison, a minimum to medium security facility 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
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reducing the time, effort and expense incurred in transporting offenders to
offsite courtrooms. The Company completed a 560 bed expansion at the Big Spring
Complex in the fourth quarter of 1998.
The Wyatt Detention Facility in Central Falls opened in 1993 and primarily
houses 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 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 Adult Detention Facility is a 672 bed adult detention
facility that houses offenders from Santa Fe County and various surrounding
counties. Construction of the new 672 bed adult detention facility was completed
in July 1998. Prior to construction of the new facility, the Company operated a
240 bed facility which housed 200 adult and 40 juvenile offenders. The 240 bed
facility was renovated to house 115 juveniles exclusively.
The D. Ray James Prison began operations during the fourth quarter of 1998
and houses offenders from the State of Georgia. The Company is currently
operating 550 beds with a 1,075 bed expansion to be completed in the first
quarter of 1999.
Under its contracts, the Company provides a variety of programs and services
at its secure institutional facilities, including secure incarceration services,
institutional food services, certain transportation services, general education
programs (such as high school equivalency and English as a second language
programs), work and recreational programs and chemical dependency and substance
abuse programs.
JUVENILE CORRECTIONAL AND DETENTION SERVICES. Under the name "Cornell
Abraxas," the Company offers programs to meet the multiple needs of troubled
juveniles. At December 31, 1998, the Company operated or had contracts to
operate 14 residential facilities and 14 non-residential community-based
programs serving an aggregate capacity of 2,636 youths. Juvenile correctional
and detention services consist primarily of treatment programs for offenders
that are designed to lead to rehabilitation while providing public safety and
holding offenders accountable for their decisions and behavior. The Company
operates primarily within a restorative justice model. The basic philosophy is
that merely serving time in an institution does not relieve juvenile offenders
of the obligation to repay their victims and that incarceration alone does not
compensate for the societal impact of crimes. The use of a balanced approach
gives equal emphasis to accountability, competency development and community
protection.
The 160 bed Salt Lake Valley Juvenile Detention Facility in Salt Lake City,
Utah includes an interactive satellite link to juvenile courtroom facilities and
judges, which allows for processing of a high number of juvenile detainees while
reducing the time, effort and expense incurred in transporting detainees to
offsite courtrooms.
The Santa Fe County Juvenile Detention Facility in Santa Fe, New Mexico is a
contracted 115 bed facility that houses juvenile offenders for Santa Fe County
and various surrounding counties. The facility, which was previously a 240 bed
facility that housed 200 adults and 40 juveniles, was renovated to house 115
juveniles.
The Griffin Juvenile Facility is a 150 bed capacity transitional living
center for juveniles located in San Antonio, Texas. The Company currently has
contracts for the housing of adjudicated and certain homeless non-adjudicated
juveniles.
Generally, Cornell Abraxas programs include education, individual and group
counseling, social skills training, physical training, community service and
substance abuse treatment. The educational schools
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within Cornell Abraxas are accredited, whereby graduating juveniles are eligible
to receive a full high school diploma as an alternative to the traditional
General Educational Development ("G.E.D.") certificate.
The three largest facilities operated by Cornell Abraxas include: (i) the
Cornell Abraxas 1 program ("A-1"); (ii) the Leadership Development Program (the
"LDP") and (iii) Cornell Abraxas of Ohio. A-1's property is comprised of
approximately 16 buildings situated on approximately 100 acres with an aggregate
offender capacity of 204 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 offenders may earn a high school diploma, pursue vocational
tracks or receive G.E.D. instruction and testing. The LDP is conducted on
property leased by the Company, located on approximately 3.5 acres in South
Mountain, Pennsylvania. The LDP is a 15-week residential treatment program with
a wilderness component. The program includes group counseling, substance abuse
treatment and licensed educational programs. Cornell Abraxas of Ohio's facility
is located on approximately 80 acres in north central Ohio and has an offender
capacity of 108 beds. This residential program offers a comprehensive substance
abuse treatment and education program for males. Individuals participate in
intensive group curriculum which includes a wide variety of topics such as:
stages of denial, self-help tools for recovery, goal setting, values, beliefs
and morals, relapse process and prevention and sex education. Individuals may
earn a high school diploma, pursue vocational tracks or receive G.E.D.
instruction and testing.
The non-residential community-based programs transition juvenile offenders
from residential placement back to their home communities. The Company provides
in-home counseling and intensive case management services while integrating an
array of community resources into a comprehensive plan. This dual role of
service provider and intermediary serves to bridge the gap between residential
facilities and the community. The Company utilizes therapists and consulting
psychologists in its multi-level treatment programs.
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.
PRE-RELEASE CORRECTIONAL SERVICES. At December 31, 1998, the Company operated
18 facilities with an aggregate offender capacity of 1,973 beds that provide
pre-release correctional services. For a listing of facility locations and the
contracting agency, see "Facilities." 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 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.
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FACILITIES
As of December 31, 1998, the Company operated 51 facilities and had been
awarded contracts to operate two additional facilities that are currently under
construction or renovation. 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 Cornell
Abraxas Youth Center, which commenced operations during the first quarter of
1999, and the New Morgan Academy scheduled to open in 2000. The following table
summarizes certain additional information with respect to contracts and
facilities under operation by the Company as of December 31, 1998:
PRINCIPAL COMMENCE-
CONTRACTING TOTAL INITIAL MENT COMPANY
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED
- - ---------------------------------------------- ---------- ---------- -------- ---------- --------- -------- -------
SECURE INSTITUTIONAL CORRECTIONAL
AND DETENTION FACILITIES:
Baker Community Correctional Facility ....... CDC 288 1987 7/97 1 1/2 None Leased
Baker, California (5)
Big Spring Complex .......................... FBOP(6) 1,947 (6) (6) (6) (6) (7)
Big Spring, Texas
D. Ray James Prison ......................... State of 1,625(8) 1998 9/98 1 Nine Owned
Charlton County, Georgia Georgia One-Year
Great Plains Correctional Facility .......... (9) 812 (9) 7/98 (9) (9) (9) Owned
Hinton, Oklahoma (5)
Chesney Community Correctional Facility ..... CDC 270 1988 4/93 6 1/2 None Leased
Live Oak, California (5)
Santa Fe County Adult Detention Facility..... Santa Fe 672 1997 7/97 3 Two (11)
Santa Fe, New Mexico (10) County One-Year
Wyatt Detention Facility .................... USMS(12) 302 1992 11/93 5(12) (12) (11)
Central Falls, Rhode Island (5)
JUVENILE CORRECTIONAL AND DETENTION FACILITIES:
RESIDENTIAL FACILITIES:
Cornell Abraxas I ........................... (13) 204 1973 7/98 1 Annual Owned
Marienville, Pennsylvania
Cornell Abraxas II .......................... (13) 23 1974 7/98 1 Annual Owned
Erie, Pennsylvania
Cornell Abraxas III ......................... (13) 24 1975 7/98 1 Annual Owned
Pittsburgh, Pennsylvania
Cornell Abraxas Center for Adolescent
Females .................................. (13) 43 1989 7/98 1 Annual Owned
Pittsburgh, Pennsylvania
Cornell Abraxas of Ohio ..................... (13) 108 1993 7/98 1 Annual Owned
Shelby, Ohio
Cornell Abraxas Youth Center ................ (13) 70 1999 3/99 1 Annual Leased
South Mountain, Pennsylvania
Danville Center for Adolescent Females ...... (13) 64 1998 2/98 1 Annual (11)
Danville, Pennsylvania
Griffin Juvenile Facility ................... Bexar 150 1996 7/98 Annual None Owned
San Antonio, Texas County
Leadership Development Program .............. (13) 120 1994 7/98 1 Annual Leased
South Mountain, Pennsylvania
New Morgan Academy .......................... (14) 180 (14) (14) (14) (14) Leased
New Morgan, Pennsylvania
(TABLE CONTINUED ON FOLLOWING PAGE)
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PRINCIPAL COMMENCE-
CONTRACTING TOTAL INITIAL MENT COMPANY
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED
- - ----------------------------------------------- ---------- ----------- ------- -------- ---------- --------- -------
RESIDENTIAL FACILITIES: (CONTINUED)
Psychosocial Rehabilitation Unit .................... (13) 13 1994 7/98 1 Annual Owned
Erie, Pennsylvania
Salt Lake Valley Juvenile Detention Facility......... State of 160 1996 6/96 3 None (11)
Salt Lake City, Utah Utah (15)
Santa Fe County Juvenile Detention Facility ......... Santa Fe 115 1997 7/97 3 Two (11)
Santa Fe, New Mexico (10) County One-Year
South Mountain Secure Residential Treatment Unit .... (13) 52 1997 10/98 1 Annual (11)
South Mountain, Pennsylvania
NON-RESIDENTIAL COMMUNITY-BASED CENTERS:
Adams County Mental Health .......................... (13) 25 1998 7/98 1 Annual Leased
Oxford, Pennsylvania
Bensalem School ..................................... (13) 120 1994 7/98 1 Annual Leased
Bensalem, Pennsylvania (16)
Day Treatment Program ............................... (13) 28 1996 7/98 1 Annual Leased
Harrisburg, Pennsylvania
Dauphin County Mental Health ........................ (13) 150 1996 7/98 1 Annual Leased
Harrisburg, Pennsylvania
Erie Mental Health .................................. (13) 30 1997 7/98 1 Annual Leased
Erie, Pennsylvania
Lycoming County Mental Health ....................... (13) 25 1998 7/98 1 Annual Leased
Williamsport, Pennsylvania
Mental Health Clinic ................................ (13) 40 1996 7/98 1 Annual Leased
Harrisburg, Pennsylvania
Non-Residential Care ................................ (13) 20 1991 7/98 1 Annual Leased
Pittsburgh, Pennsylvania
Philadelphia Family Preservation/SCOH ............... (13) 64 1992 7/98 1 Annual Owned
Philadelphia, Pennsylvania
Supervised Home Services ............................ (13) 33 1994 7/98 1 Annual Leased
Milford, Delaware
Supervised Home Services ............................ (13) 25 1992 7/98 1 Annual Leased
Lehigh Valley, Pennsylvania
Supervised Home Services/Home Detention.............. (13) 50 1993 7/98 1 Annual Leased
District of Columbia
Workbridge .......................................... (13) 375 1994 7/98 1 Annual Leased
Pittsburgh, Pennsylvania
Workbridge .......................................... (13) 325 1998 7/98 1 Annual Leased
Philadelphia, Pennsylvania
PRE-RELEASE CORRECTIONAL FACILITIES:
Cordova Center ...................................... ADC 192 1985 12/97 3 None Owned
Anchorage, Alaska (5)
Dallas County Judicial Center ....................... Dallas 300 1991 9/98 1 None Leased
Wilmer, Texas County
Durham Center ....................................... NCDC 75 1996 12/96 4 1/2 One Leased
Durham, North Carolina Five-Year
El Monte Center ..................................... FBOP 52 1993 10/97 1 Four Leased
El Monte, California (5) One-Year
Inglewood Men's Center .............................. CDC 53 1982 7/94 4 (17) (17) Leased
Inglewood, California
(TABLE CONTINUED ON FOLLOWING PAGE)
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PRINCIPAL COMMENCE-
CONTRACTING TOTAL INITIAL MENT COMPANY
GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/
FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED
- - ----------------------------------------------- ------------ ----------- ------- -------- ---------- --------- --------
PRE-RELEASE CORRECTIONAL FACILITIES: (CONTINUED)
Leidel Community Correctional Center ......... FBOP 150 1996 1/96 3 Two Owned
Houston, Texas (5) One-Year
Marvin Gardens Center ........................ CDC 42 1981 1/99 5 None Leased
Los Angeles, California (5)
Midtown Center ............................... ADC 32 1998 2/98 3 None Owned
Anchorage, Alaska
Northstar Center ............................. ADC 105 1990 12/97 3 None Leased
Fairbanks, Alaska (5)
Oakland Center ............................... FBOP(18) 61 1981 9/98 2 None Leased
Oakland, California (5)
Parkview Center .............................. ADC 112 1993 11/96 3 None Leased
Anchorage, Alaska (5)
Reid Community Correctional Center ........... TDCJ 310 1996 9/98 1 None Owned
Houston, Texas
Salt Lake City Center ........................ FBOP(15) 58 1995 12/95 2 Three Leased
Salt Lake City, Utah (5) One-Year
San Diego Center ............................. FBOP 50 1984 11/95 2 Three Leased
San Diego, California (5) One-Year
San Diego Drug Aftercare Program.............. FBOP 80 1998 10/98 2 None Leased
San Diego, California
Santa Barbara Center ......................... FBOP 25 1996 3/96 2 Three Leased
Santa Barbara, California (5) One-Year
Taylor Street Center ......................... (19) 177 1984 (19) (19) (19) Leased
San Francisco, California (5)
Tundra Center ................................ ADC 99 1986 12/97 4 None Owned
Bethel, Alaska
- - ----------
(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.
(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 560
bed expansion of the Big Spring Complex, the portion of the Big Spring
Operating Agreement relating to the expansion has a term of 30 years with
four five-year renewal options at the Company's discretion.
(7) In connection with the acquisition of MidTex, and as part of the purchase
price, the Company prepaid a majority of the facility costs related to
three of the Big Spring Complex units through at least the year 2030. The
Company owns the 560 bed expansion unit constructed in 1998.
(8) The Company is currently operating 550 beds and expects to phase-in the
remaining 1,075 beds during 1999.
(9) The prison is operated pursuant to a one-year contract with nine one-year
renewal options between the Oklahoma Department of Corrections and HEDA.
HEDA in turn has subcontracted the operations to the Company under a
30-year operating contract with four five-year renewals.
(10) The Company took over the operation of an existing 240 bed adult and
juvenile facility on July 1, 1997, while beginning construction of a new
672 bed adult detention facility, which was completed in the second
quarter of 1998. The offenders housed in the 240 bed facility were
transferred to the new 672 bed detention facility and the 240 bed facility
was converted into a 115 bed juvenile detention facility.
(11) The Company does not incur any facility use costs for these facilities
which are owned by a governmental agency or by the contracting agency.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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(12) 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
Detention 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. The Company is
currently finalizing a contract with a term of three years with one
two-year renewal option.
(13) The Cornell Abraxas programs/facilities contract with numerous counties
throughout Pennsylvania, Ohio, Delaware and with the District of Columbia.
(14) The facility is currently under development and construction. The Company
anticipates obtaining contracts with various counties when construction is
complete in 2000.
(15) Utah Department of Human Services, Division of Youth Corrections.
(16) Operates within Pennsylvania Youth Department Center/State Facility.
(17) The current contract, which expired in July 1998, was extended by the CDC
for six months. The contract is currently out for bid.
(18) 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 to provide beds at these
facilities.
(19) The Company has a contract with the FBOP for 53 beds for the period
February 1996 through January 2001 and with the CDC for 40 beds for the
period July 1998 through June 2003. The Company also contracts with
Pretrial Services for 5 beds.
FACILITY MANAGEMENT CONTRACTS
The Company is compensated on the basis of the number of offenders held or
supervised under each of its facilities' management contracts. The Company's
existing facility management contracts generally provide that the Company will
be compensated at an occupant per diem rate. Such compensation is invoiced in
accordance with applicable law and is typically paid on a monthly basis. Under a
per diem rate structure, a decrease in occupancy rates would cause a decrease in
revenues and profitability. The Company is, therefore, dependent upon
governmental agencies to supply the Company's facilities with a sufficient
number of offenders to meet the contract capacities, and in most cases such
governmental agencies are under no obligation to do so. Moreover, because
certain of the Company's facilities have offenders serving relatively short
sentences or only the last three to six months of their sentences, the high
turnover rate of offenders requires a constant influx of new offenders from the
relevant governmental agencies to provide sufficient occupancies to achieve
profitability. Occupancy rates during the start-up phase when facilities are
first opened typically result in capacity underutilization for 30 to 90 days.
After a management contract has been awarded, the Company incurs facility
start-up costs consisting principally of initial employee training, travel and
other direct expenses incurred in connection with the contract. These costs vary
by contract. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
All the Company's contracts are subject to legislative appropriations. A
failure by a governmental agency to receive appropriations could result in
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.
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.
- 10 -
MARKETING AND DEVELOPMENT
The Company's principal customers are federal, state and local governmental
agencies responsible for adult and juvenile correctional, detention and
pre-release services. These governmental agencies generally procure services
from the private sector by issuing a Request for Proposal ("RFP") to which a
number of companies may respond. Most of the Company's efforts in securing new
business are expected to be in the form of responding to RFPs. As part of the
Company's process of responding to RFPs, management of the Company meets with
appropriate personnel from the requesting agency to best determine the agency's
distinct needs. If the Company believes that the project complies with its
business strategy, the Company will submit a written response to the RFP. When
responding to RFPs, the Company incurs costs, typically ranging from $10,000 to
$75,000 per proposal, to determine the prospective client's distinct needs and
prepare a detailed response to the RFP. In addition, the Company may incur
substantial costs to acquire options to lease or purchase land for a proposed
facility and engage outside consulting and legal expertise related to a
particular RFP. The preparation of a response to an RFP typically takes from
five to 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 development process for obtaining facility management contracts consists
of several steps. These include issuance of an RFP by a governmental agency,
submission of a response to the RFP by the Company, the award of the contract by
a governmental agency and the commencement of construction or operation of the
facility. The Company's experience has been that a substantial period of time
may elapse from the initial inquiry to receipt of a new contract, although, as
the concept of privatization has gained wider acceptance, the length of time
from inquiry to the award of contract has shortened. The length of time required
to award a contract is also affected, in some cases, by the need to introduce
enabling legislation. The bidding and award process for an RFP typically takes
from three to nine months. Generally, if the facility for which an award has
been made must be constructed, the Company's experience has been that a newly
constructed facility typically commences operations between 12 and 24 months
after the governmental agency's award.
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.
- 11 -
OPERATIONS
Pursuant to the terms of its management contracts, the Company is responsible
for the overall operation of its facilities, including staff recruitment,
general administration of the facilities, security and supervision of the
offenders and facility maintenance. The Company also provides a variety of
rehabilitative and educational programs at many of its facilities. Offenders at
most adult facilities managed by the Company may receive basic education through
academic programs designed to improve offender literacy levels (including
English as a second language programs) and the opportunity to acquire G.E.D.
certificates. Programs for offenders at the Company's juvenile facilities
typically have an increased emphasis on education and counseling. At many
facilities, the Company also offers vocational training to offenders who lack
marketable job skills. In addition, the Company offers life skills, transition
planning programs that provide offenders job search training and employment
skills, health education, financial responsibility training and other skills
associated with becoming productive citizens. At several of its facilities, the
Company also offers counseling, education and/or treatment to offenders with
chemical dependency or substance abuse problems.
The Company operates each facility in accordance with Company-wide policies
and procedures generally based on the standards and guidelines established by
the American Correctional Association ("ACA") Commission on Accreditation and/or
the appropriate licensing agencies (collectively "Accreditation Standards"). The
ACA is an independent organization comprised of professionals in the corrections
industry which establishes guidelines and standards by which a correctional
institution may gain accreditation. The Accreditation Standards describe
specific objectives to be accomplished and cover such areas as administration,
personnel and staff training, security, medical and health care, food service,
offender supervision and physical plant requirements.
Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programming and
fiscal audits; facility inspections; regular review of logs, reports and files;
and strict maintenance of personnel standards, including an active training
program. Each of the Company's facilities develops its own training plan that is
reviewed, evaluated and updated annually. Dedicated space and equipment for
training is provided and outside resources such as community colleges are
utilized in the training process. All adult correctional officers undergo a
minimum 40-hour orientation upon their hiring and receive academy-level training
amounting to 120 hours and on-the-job training of up to 80 hours. Each
correctional officer also receives up to 40 hours of training and education
annually. All juvenile treatment employees undergo a minimum 80-hour orientation
upon their hiring and also receive up to 40 hours of training and education
annually.
Cornell 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 operating divisions.
- 12 -
During 1998, the Company completed the development, design and construction
of: (i) the 560 bed expansion of the Big Spring Complex; (ii) the 672 bed adult
detention facility in Santa Fe, New Mexico and (iii) various facility
expansions. Additionally, the Company completed a portion (550 beds) of the D.
Ray James Prison in Charlton, Georgia in the fourth quarter of 1998. The
construction of the remaining 1,075 beds is expected to be completed in the
first half of 1999. Currently, the Company operates 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 sale of such
bonds or obligations. Substantial expenditures for construction will not be made
on such a project until the tax-exempt bonds or other obligations are sold. If
such bonds or obligations are not sold, construction and management of the
facility will be delayed until alternate financing is procured or development of
the project will be entirely suspended. When the Company is awarded a facility
management contract, appropriations for the first annual or bi-annual period of
the contract's term have generally already been approved, and the contract is
subject to governmental appropriations for subsequent annual or bi-annual
periods.
The Company has in the past worked with governmental agencies and placement
agents to obtain and structure financing for construction of facilities. In some
cases, an unrelated special purpose corporation is established to incur
borrowings to finance construction and, 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.
- 13 -
COMPETITION
The Company competes with a number of companies, including, but not limited
to, Corrections Corporation of America, Wackenhut Corrections Corporation, Youth
Services International, Inc. and Correctional Services Corporation. The Company
also competes in some markets with small local companies that may have better
knowledge of local conditions and may be better able to gain political and
public acceptance. In addition, the Company may compete in some markets with
governmental agencies that operate correctional and detention facilities.
EMPLOYEES
At December 31, 1998, the Company had approximately 2,333 full-time employees
and 621 part-time employees. The Company employs management, administrative and
clerical, security, educational and counseling services, health services and
general maintenance personnel. Approximately 150 employees at two of the
Company's facilities are represented by unions. The Company is currently
negotiating over terms for an agreement at a third facility with approximately
35 employees. The Company believes its relations with its employees are good.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations administered by a variety of regulatory authorities.
Generally, prospective providers of correctional, detention and pre-release
services must comply with a variety of applicable state and local regulations,
including education, healthcare and safety regulations. The Company's contracts
frequently include extensive reporting requirements and require supervision with
on-site monitoring by representatives of contracting governmental agencies.
In addition to regulations requiring certain contracting governmental
agencies to enter into a competitive bidding procedure before awarding
contracts, the laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
INSURANCE
The Company maintains a $10 million per occurrence per facility general
liability insurance policy for all its operations. The Company also maintains
insurance in amounts it deems adequate to cover property and casualty risks,
workers' compensation and directors' and officers' liability.
The Company's contracts and the statutes of certain states in which the
Company operates typically require the maintenance of insurance by the Company.
The Company's contracts provide that, in the event the Company does not maintain
such insurance, the contracting agency may terminate its agreement with the
Company. The Company believes that it is in compliance in all material respects
with respect to these requirements.
ITEM 2. PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas and
divisional administrative offices in Ventura, California and Pittsburgh,
Pennsylvania. The Company also leases various facilities it is currently
operating or developing. For a listing of owned and leased facilities, see
"Business - Facilities."
- 14 -
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, offender
privileges and employment matters. In the opinion of management of the Company,
the outcome of the proceedings to which the Company is currently a party will
not have a material adverse effect upon the Company's operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR CORNELL CORRECTIONS, INC. COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is currently listed on the New York Stock
Exchange ("NYSE") under the symbol "CRN." As of February 26, 1999, there were
approximately 47 record holders of common stock. The high and low closing sales
prices for the common stock 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................... 24 1/2 19 7/16
Second Quarter.................. 25 7/16 18 1/2
Third Quarter................... 21 1/16 8
Fourth Quarter.................. 19 11
1999:
First Quarter (through
February 26)................... 19 7/8 16 1/4
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain excess cash flow, if any, for use in the
operation and expansion of its business and does not anticipate paying cash
dividends on the common stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other factors, the Company's results of operations;
financial condition; capital requirements; restrictions, if any, imposed by
financing commitments and legal requirements. The Third Amended and Restated
Credit Agreement, dated as of December 3, 1998 ("1998 Credit Facility")
currently prohibits the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
- 15 -
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,
-----------------------------------------------------------------
1998 (1) 1997 (2) 1996 (3) 1995 1994 (4)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues .................................................. $ 123,119 $ 70,302 $ 32,327 $ 20,692 $ 15,689
Operating expenses ........................................ 98,721 57,047 26,038 16,351 12,315
Depreciation and amortization ............................. 4,228 2,231 1,390 820 758
General and administrative expenses ....................... 7,581 5,394 4,560 3,531 2,959
--------- --------- --------- --------- ---------
Income (loss) from operations ............................. 12,589 5,630 339 (10) (343)
Interest expense (5) ...................................... 2,601 491 2,810 1,115 294
Interest income ........................................... (116) (414) (167) (136) (138)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ......................... 10,104 5,553 (2,304) (989) (499)
Provision for income taxes ................................ 4,042 1,999 75 -- 101
--------- --------- --------- --------- ---------
Net income (loss) ......................................... $ 6,062 $ 3,554 $ (2,379) $ (989) $ (600)
========= ========= ========= ========= =========
Earnings (loss) per share:
- Basic .............................................. $ .64 $ .48 $ (.65) $ (.32) $ (.21)
- Diluted ............................................ $ .62 $ .46 $ (.65) $ (.32) $ (.21)
Number of shares used to compute EPS (in thousands) (6):
- Basic .............................................. 9,442 7,350 3,673 3,095 2,923
- Diluted ............................................ 9,772 7,740 3,673 3,095 2,923
OPERATING DATA:
Total offender capacity:
Residential ............................................... 9,135 6,172 3,577 1,640 1,281
Non-residential community-based ........................... 1,390 900 -- -- --
Total .................................................. 10,525 7,072 3,577 1,640 1,281
Contracted offender capacity in operation
(end of period) ........................................... 8,700 5,061 2,899 1,135 1,155
Contracted beds in operation (end of period) (7) ............. 7,310 4,161 2,899 1,135 1,155
Average occupancy based on contracted
beds in operation (7) (8) ................................. 93.8% 97.6% 97.0% 98.9% 92.1%
BALANCE SHEET DATA:
Working capital ........................................... $ 16,828 $ 26,220 $ 7,747 $ 1,525 $ 2,015
Total assets .............................................. 212,695 104,109 46,824 14,184 13,095
Long-term debt ............................................ 98,480 432 745 7,649 3,447
Stockholders' equity ...................................... 91,500 86,730 41,051 3,053 6,631
- - ----------
(1) Includes the operations of the Great Plains Correctional Facility acquired
in January 1998 and the Alaska facilities purchased from Allvest in August
1998.
(2) Includes the operations of Interventions and Abraxas acquired in January
1997 and September 1997, respectively.
(3) Includes the operations of the Big Spring Complex and the Reid Center
acquired in July 1996 and May 1996, respectively.
(4) Includes the operations of Eclectic purchased by the Company on March 31,
1994.
(5) 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.
(6) 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.
(7) 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.
(8) For any applicable facilities, includes reduced occupancy during the
start-up phase.
- 16 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company provides integrated facility development, design, construction
and operational services to governmental agencies within three operating
divisions: (i) secure institutional correctional and detention services; (ii)
juvenile treatmen, educational and detention services and (iii) pre-release
correctional services. The following table sets forth total offender capacity,
the contracted offender capacity and beds in operation at the end of the periods
shown, and the average occupancy percentage for the year then ended.
DECEMBER 31,
-----------------------
1998 1997 1996
------ ------ -----
Total offender capacity:
Residential..................................... 9,135 6,172 3,577
Non-residential community-based................. 1,390 900 --
Total......................................... 10,525 7,072 3,577
Contracted offender capacity in operation
(end of period)............................... 8,700 5,061 2,899
Contracted beds in operation (end of period) (1)... 7,310 4,161 2,899
Average occupancy based on contracted beds in
operation (1) (2)............................. 93.8% 97.6% 97.0%
- - -----------
(1) 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.
(2) For any applicable facilities, includes reduced occupancy during the
start-up phase.
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, juvenile or
pre-release) based on the level of competition for the contract award, the
proposed length of the contract, the occupancy levels for a facility, the level
of capital commitment required with respect to a facility and the anticipated
changes in operating costs, if any, over the term of the contract.
The Company is responsible for all facility operating expenses, except for
certain debt service and lease payments with respect to facilities for which the
Company has only a management contract (six facilities in operation at December
31, 1998).
- 17 -
A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company's variable operating expenses, including food, medical services,
supplies and clothing, depend on occupancy levels at the facilities operated by
the Company. The Company's largest single operating expense, facility payroll
expense and related employment taxes and costs, has both a fixed and a variable
component. The Company can adjust the staffing and payroll to a certain extent
based on occupancy at a facility, but a minimum fixed number of employees is
required to operate and maintain any facility regardless of occupancy levels.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
accounting, finance, human resources, payroll, information systems and other
services, and costs of business development.
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving offenders. Offenders are typically assigned to a
newly opened facility on a phased-in basis over a one- to three-month period.
The Company may incur start-up operating losses at new facilities until
break-even occupancy levels are reached. Quarterly results can be substantially
affected by the timing of the commencement of operations as well as development
and construction of new facilities.
Working capital requirements generally increase immediately prior to the
Company's commencing management of a new facility as the Company incurs start-up
costs and purchases necessary equipment and supplies before facility management
revenue is realized.
RESULTS OF OPERATIONS
The Company's historical operating results reflect a significant expansion of
the Company's business since 1996. Material fluctuations in the Company's
results of operations are principally the result of the timing and effect of
acquisitions, the level of development activity conducted by the Company, and
occupancy rates at Company-operated facilities. The Company's acquisitions to
date have been accounted for using the purchase method of accounting, whereby
the operating results of the acquired businesses have been reported in the
Company's operating results since the date of acquisition.
The Company's income from operations as a percentage of revenues fluctuates
depending on the relative mix of operating contracts among the Company's three
operating divisions.
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,
-----------------------
1998 1997 1996
------ ------ -----
Revenues............................................. 100.0% 100.0% 100.0%
Operating expenses................................... 80.2 81.1 80.5
Depreciation and amortization........................ 3.4 3.2 4.3
General and administrative expenses.................. 6.2 7.7 14.1
----- ----- -----
Income from operations............................... 10.2 8.0 1.1
Interest expense, net................................ 2.0 0.1 8.2
----- ----- -----
Income (loss) before income taxes.................... 8.2 7.9 (7.1)
Provision for income taxes........................... 3.3 2.8 0.2
----- ----- -----
Net income (loss).................................... 4.9% 5.1% (7.3)%
===== ===== =====
- 18 -
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased by 75.1% to $123.1 million for the year ended
December 31, 1998, from $70.3 million for the year ended December 31, 1997.
Secure institutional division revenues increased 63.0% to $52.6 million in 1998
from $32.3 million in 1997, due principally to the purchase of the Great Plains
Correctional Facility in January 1998; a full year of operations at the Santa Fe
County Adult Detention Facility, which commenced in July 1997; and the 560 bed
expansion unit at the Big Spring Complex and the opening of the D. Ray James
Prison, both of which began operations in the fourth quarter of 1998. Juvenile
division revenues increased 153.7 % to $47.0 million in 1998 from $18.5 million
in 1997, due principally to a full year of results from the Abraxas acquisition
in September 1997, additional programs which began in 1998 and expansions of
various facilities. Pre-release division revenues increased 20.4% to $23.5
million in 1998 from $19.5 million in 1997, due principally to the acquisition
of Allvest in August 1998.
OPERATING EXPENSES. Operating expenses increased 73.1% to $98.7 million for
the year ended December 31, 1998, from $57.0 million for the year ended December
31, 1997.
Secure institutional division operating expenses increased 51.0% to $37.8
million in 1998 from $25.1 million in 1997, due principally to the purchase of
the Great Plains Correctional Facility in January 1998; a full year of
operations at the Santa Fe County Adult Detention Facility, which commenced in
July 1997; and the 560 bed expansion unit at the Big Spring Complex and the
opening of the D. Ray James Prison, both of which began operations in the fourth
quarter of 1998. As a percentage of revenues, secure institutional division
operating expenses were 71.9% in 1998 and 77.6% in 1997. The higher operating
margin in 1998 versus 1997 was due principally to a greater mix of owned versus
leased facilities, including the Great Plains Correctional Facility, offset in
part by lower operating margins at start-up facilities such as the expansion
unit at the Big Spring Complex, the D. Ray James Prison and the Santa Fe County
Adult Detention Facility.
Juvenile division operating expenses increased 159.1% to $41.2 million in
1998 from $15.9 million in 1997, due principally to a full year of results from
the Abraxas acquisition in September 1997, additional programs which began in
1998 and expansions of various facilities. As a percentage of revenues, juvenile
division operating expenses were 87.7% in 1998 and 85.9% in 1997. The lower
operating margin in 1998 versus 1997 was due principally to an increase in
juvenile programs which are funded on a cost-plus basis and the results of the
Griffin Juvenile Facility, which has experienced lower occupancy in 1998.
Pre-release division operating expenses increased 17.5% to $18.7 million in
1998 from $15.9 million in 1997, due principally to the acquisition of Allvest
in August 1998. As a percentage of revenues, pre-release division operating
expenses were 79.8% in 1998 and 81.8% in 1997. The higher operating margin in
1998 versus 1997 was due principally to a greater mix of owned versus leased
facilities, including those acquired as part of the Allvest acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 89.5%
to $4.2 million for the year ended December 31, 1998, from $2.2 million for the
year ended December 31, 1997, due principally to depreciation of buildings and
equipment acquired from Abraxas in September 1997, the Great Plains Correctional
Facility purchased in January 1998, the 560 bed expansion unit at the Big Spring
Complex, the opening of the D. Ray James Prison and various facility expansions
and related equipment.
- 19 -
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 40.5% to $7.6 million for the year ended December 31, 1998, from $5.4
million for the year ended December 31, 1997. The increase in general and
administrative expenses resulted from additional corporate, business development
and administrative personnel needed to manage the increased business of the
Company and for development of new contracts. As a percentage of revenues,
general and administrative expenses decreased to 6.2% from 7.7%, due principally
to spreading the costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $2.5 million
for the year ended December 31, 1998, from $77,000 for the year ended December
31, 1997. The increase in net interest expense was principally due to borrowings
under the Company's 1997 Credit Facility for the purchase of the Great Plains
Correctional Facility in January 1998, for the acquisition of Allvest in August
1998 and for working capital for various new programs and facility expansions.
For the year ended December 31, 1998, the Company capitalized interest totaling
$2.3 million related to costs of facilities under construction and development,
including the 560 bed Big Spring Complex expansion and the 1,625 bed D. Ray
James Prison.
INCOME TAXES. For the year ended December 31, 1998, the Company recognized a
provision for income taxes at an estimated effective annual rate of 40%,
compared to 36% for the year ended December 31, 1997. The effective income tax
rate applied in 1997 included a benefit for the reversal of previously reserved
deferred tax assets resulting from prior net operating losses.
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.
Secure institutional division revenues increased 51.0% to $32.3 million in 1997
from $21.4 million in 1996, due principally to a full year of operations from
the July 1996 acquisition of the Big Spring Complex (formerly MidTex) and
assuming the operation of the Santa Fe County Adult Detention Facility, which
commenced in July 1997. Juvenile division revenues were $18.5 million in 1997
due to the September 1997 acquisition of Abraxas, the opening of the Salt Lake
Valley Juvenile Detention Center in the first quarter of 1997 and the
acquisition of the Griffin Juvenile Facility in January 1997. The Company did
not operate any juvenile facilities in 1996. Pre-release division revenues
increased 78.0% to $19.5 million in 1997 from $10.9 million in 1996, due
principally to the January 1997 acquisition of the Dallas County Judicial Center
(formerly part of Interventions), a full year of operations of the Reid
Community Correctional Center acquired in May 1996 and the opening of the Durham
Center in the first quarter of 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.
Secure institutional division operating expenses increased 45.6% to $25.1
million in 1997 from $17.2 million in 1996, due principally to a full year of
operations from the July 1996 acquisition of the Big Spring Complex and assuming
the operation of the Santa Fe County Adult Detention Facility, which commenced
in July 1997. As a percentage of revenues, secure institutional division
operating expenses were 77.6% in 1997 and 80.5% in 1996. The higher operating
margin in 1997 versus 1996 for the secure institutional division was due
principally to a full year of results of the Big Spring Complex acquired in July
1996.
Juvenile division operating expenses were $15.9 million in 1997, due to the
September 1997 acquisition of Abraxas, the opening of the Salt Lake Valley
Juvenile Detention Center in the first quarter of 1997 and the January 1997
acquisition of the Griffin Juvenile Facility. The Company did not operate any
juvenile facilities in 1996. As a percentage of revenues, juvenile division
operating expenses were 85.9% in 1997.
- 20 -
Pre-release division operating expenses increased 81.0% to $15.9 million in
1997 from $8.8 million in 1996 due principally to the January 1997 acquisition
of the Dallas County Judicial Center, a full year of operations of the Reid
Community Correctional Center acquired in May 1996 and the opening of the Durham
Center in the first quarter of 1997. As a percentage of revenues, pre-release
division operating expenses were 81.8% in 1997 and 80.5% in 1996.
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, 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
for 1997 included 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 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 a $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 a significant portion 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 were utilized in 1997 and 1998.
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
- 21 -
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.
WORKING CAPITAL. The Company's working capital was $16.8 million at December
31, 1998, and $26.2 million at December 31, 1997. This decrease was principally
due to the use of cash to fund a portion of the Great Plains Correctional
Facility purchase in January 1998.
CASH PROVIDED BY OPERATING ACTIVITIES. The Company had net cash provided by
operating activities of $1.4 million for the year ended December 31, 1998.
Significant sources of cash include $10.3 million of net income plus
depreciation and amortization and an increase in accounts payable and accrued
liabilities. Significant uses of operating cash during the year included
start-up costs for facilities under development, including the Big Spring
Complex expansion and the D. Ray James Prison, and an increase in accounts
receivable due to the opening and the timing of receivable collections of
various facilities.
EXISTING CREDIT FACILITY. In December 1998, the Company amended and restated
its existing credit agreement with a financial institution (the "1998 Credit
Facility" and previously the "1997 Credit Facility"). The 1998 Credit Facility
provides for borrowings of up to $60.0 million under a revolving line of credit,
the availability of which is determined by the Company's projected pro forma
cash flow. The 1998 Credit Facility matures in March 2003 and bears interest, at
the election of the Company, at either the prime rate plus a margin of 0% to
0.5% or a rate which is 1.75% to 2.50% above the applicable LIBOR-rate. Interest
is payable monthly with respect to prime-rate loans and at the expiration of the
applicable LIBOR period for LIBOR-based loans. Commitment fees equal to 0.375%
per annum are payable on the unused portion of the facility. The 1998 Credit
Facility is secured by all of the Company's assets, including the stock of all
the Company's subsidiaries, does not permit the payment of cash dividends and
requires the Company to comply with certain earnings, net worth and debt service
covenants. Additionally, the 1998 Credit Facility provides the Company with the
ability to enter into future operating lease agreements that provide for
residual value guarantees. See Note 7 - Commitments and Contingencies. As of
December 31, 1998, the Company had borrowings of $48.4 million outstanding under
the 1998 Credit Facility.
On July 15, 1998, the Company completed a private placement of $50.0 million
of Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in
July 1998 and $25.0 million in August 1998. The Senior Notes, which bear
interest at a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior
Notes purchase agreements, the Company is required to make eight annual
principal payments of $6.25 million beginning on July 15, 2003. Earlier payments
of principal are allowed subject to certain prepayment provisions. Interest is
payable semi annually. The principal amount of $50.0 million was used by the
Company to repay outstanding borrowings under the 1997 Credit Facility. The
holders of the Senior Notes and the lender under the 1998 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in all the assets of the Company.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31,
1998, were $49.5 million and related principally to construction of the 560 bed
expansion of the Big Spring Complex and the 1,625 bed D. Ray James Prison, and
other facility expansions and improvements. The Company is committed to spending
an additional $3.5 million through 1999 to complete construction of the D. Ray
James Prison.
TREASURY STOCK. During the year ended December 31, 1998, the Company
repurchased 142,100 shares of common stock on the open market under a share
repurchase program at an aggregate cost of $1,646,000.
ACQUISITIONS. In January 1998, the Company acquired the Great Plains
Correctional Facility. The Company financed the $43.8 million purchase price
with a combination of $18.8 million in borrowings under
-22-
the 1997 Credit Facility and the proceeds from the October 1997 stock offering
and cash generated from operations.
In August 1998, the Company acquired substantially all of the Alaskan assets
of Allvest, a privately held company based in Anchorage, Alaska. The Company
financed the $21.3 million purchase price with borrowings under the 1997 Credit
Facility. The acquisition included the operations of five pre-release facilities
with an aggregate capacity of 540 beds in Anchorage, Fairbanks and Bethel,
Alaska, and the real properties of three of the five facilities. In addition,
the Company and Allvest agreed to enter into a cooperative venture to jointly
pursue the development of a private prison in Delta Junction, Alaska.
Management of the Company believes that the cash flows generated from
operations, together with the credit available under the 1998 Credit Facility
and operating lease capacity thereunder, will provide sufficient liquidity to
meet the Company's committed capital and working capital requirements for the
near term. It is not anticipated that the 1998 Credit Facility will provide
sufficient financing to fund construction costs related to future secure
institutional contract awards, expansions or significant future acquisitions.
The Company anticipates obtaining additional sources of financing to fund such
activities.
YEAR 2000 ISSUES
The Company continues to identify, evaluate and implement modifications to
its business systems in order to achieve Year 2000 date conversion compliance.
The Company's business systems are comprised of third-party vendor systems and
certain internally developed systems that vary greatly in size, complexity and
technical architecture. As a part of the Company's ongoing business plan, the
Company continues to install new applications and upgrade existing ones in order
to bring applications for its various locations into compliance. The majority of
information technology systems readiness efforts and critical-systems testing
are scheduled to be completed by the middle of 1999. The remaining systems are
to be completed by the fourth quarter of 1999. The Company is in the process of
receiving responses from third-party software vendors. Preliminary indications
are that they will be Year 2000 ready and will provide updated software on a
timely basis.
The majority of the non-information technology ("non-IT") systems are
scheduled to be inventoried by the second quarter of 1999. All non-IT systems
are scheduled to be ready by the end of the third quarter of 1999, with minor
exceptions. Normal maintenance schedules for the fourth quarter of 1999 will
allow the Company to complete any final readiness efforts.
Contacts are currently being made with all critical third parties, such as
governmental agencies, financial institutions, suppliers and vendors, to
determine if they will be Year 2000 compliant. An aggressive follow-up will be
implemented with those third parties not responding or those returning an
unacceptable response. If it is determined that there is a significant risk, an
effort will be made to work with this third party. If this is not successful, a
new provider of the same services will be found. The Company still has not yet
determined the complete status of Year 2000 compliance of its third parties or
what additional costs, if any, might be required by the Company.
The Company is currently implementing a broad information systems upgrade.
The estimated costs associated with upgrading hardware and software associated
with Year 2000 readiness are approximately $1.8 million and include efforts
which were accelerated due to Year 2000 compliance. Total costs incurred as of
December 31, 1998, for Year 2000 readiness have not been material. As Year 2000
impact assessment nears completion and the renovation planning, readiness
implementation and testing evolve, the estimated costs may change.
The most reasonably likely worst-case Year 2000 scenarios would be the
inability of third-party suppliers, such as utility providers, telecommunication
companies, and other critical suppliers, such as food
-23-
service suppliers and health care suppliers, to continue providing their
products and services or the inability of the Company's contracting governmental
agencies to timely pay the Company for its services. These pose the most
material operational, safety and/or financial risks to the Company. In addition,
the Company may not obtain accurate and timely Year 2000 date impact information
from suppliers of automation and process control systems and processes. Without
quality information from suppliers, specifically on embedded chip technology,
some Year 2000 problems could go undetected until after January 1, 2000.
The Company has localized contingency plans already in place and is currently
working to develop a corporate-wide contingency plan format. This format
includes a template and other guidelines to help develop a plan that will cover
the Year 2000 areas of concern. These plans are to be completed and tested, when
practicable, by the fourth quarter of 1999.
The foregoing Year 2000 discussion includes forward-looking statements of the
Company's efforts and management's expectations relating to Year 2000 readiness.
The Company's ability to achieve Year 2000 readiness, and the level of costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
install or modify proprietary hardware and software, and unanticipated problems
identified in the ongoing Year 2000 readiness review.
NEW ACCOUNTING STANDARD
In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities ("SOP 98-5") was issued. SOP 98-5 requires entities to expense
start-up costs as incurred and to expense previously capitalized start-up costs
as a cumulative effect of a change in accounting principle in the year adopted.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998. At
December 31, 1998, the Company's unamortized start-up costs were approximately
$4.9 million. In January 1999, the Company adopted SOP 98-5 and recorded a
net-of-tax charge of approximately $3.0 million for the cumulative effect of a
change in accounting principle.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
The Company is not exposed to any other significant market risks, including
commodity price risk, foreign currency exchange risk or interest rate risks from
the use of derivative financial instruments. Management does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or commodity prices.
- 24 -
INTEREST RATE EXPOSURE
The Company's exposure to changes in interest rates primarily results from
its long-term debt with both fixed and floating interest rates. The Company's
debt with fixed interest rates consists of the Senior Notes. The Company's debt
with variable interest is its revolving line of credit. At December 31, 1998,
approximately 49.2% ($48.4 million) of the long-term debt was subject to
variable interest rates. The detrimental effect of a hypothetical 100 basis
point increase in interest rates would be to reduce income before provision for
income taxes by approximately $200,000 for the year ended December 31, 1998. At
December 31, 1998, the fair value of the Company's fixed rate debt approximated
carrying value based upon discounted future cash flows using current market
prices.
- 25 -
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1999
- 26 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 2,519 $ 18,968
Accounts receivable (net of allowance for doubtful accounts
of $3,141 and $2,644, respectively) .................................. 27,564 20,137
Deferred tax asset ..................................................... 1,209 604
Prepaids and other ..................................................... 2,203 1,366
Restricted assets ...................................................... 2,613 1,564
--------- ---------
Total current assets ................................................ 36,108 42,639
PROPERTY AND EQUIPMENT, net ............................................... 159,219 52,516
OTHER ASSETS:
Intangible assets, net ................................................. 9,935 6,104
Deferred costs and other ............................................... 7,433 2,850
--------- ---------
Total assets ........................................................ $ 212,695 $ 104,109
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ............................... $ 17,838 $ 13,576
Deferred revenues ...................................................... 1,369 2,549
Current portion of long-term debt ...................................... 73 294
--------- ---------
Total current liabilities ........................................... 19,280 16,419
LONG-TERM DEBT, net of current portion .................................... 98,407 138
DEFERRED TAX LIABILITIES .................................................. 2,769 58
OTHER LONG-TERM LIABILITIES ............................................... 739 764
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none outstanding ..................................................... -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
10,105,916 and 9,945,904 shares issued and outstanding, respectively . 10 10
Additional paid-in capital ............................................. 90,038 89,684
Stock option loans ..................................................... (455) (455)
Retained earnings (deficit) ............................................ 5,906 (156)
Treasury stock (697,100 and 555,000 shares of common stock,
respectively, at cost) ............................................... (3,999) (2,353)
Total stockholders' equity .......................................... 91,500 86,730
--------- ---------
Total liabilities and stockholders' equity .......................... $ 212,695 $ 104,109
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 27 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES ...................................... $ 123,119 $ 70,302 $ 32,327
OPERATING EXPENSES ............................ 98,721 57,047 26,038
DEPRECIATION AND AMORTIZATION ................. 4,228 2,231 1,390
GENERAL AND ADMINISTRATIVE EXPENSES ........... 7,581 5,394 4,560
--------- --------- ---------
INCOME FROM OPERATIONS ........................ 12,589 5,630 339
INTEREST EXPENSE .............................. 2,601 491 2,810
INTEREST INCOME ............................... (116) (414) (167)
--------- --------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 10,104 5,553 (2,304)
PROVISION FOR INCOME TAXES .................... 4,042 1,999 75
--------- --------- ---------
NET INCOME (LOSS) ............................. $ 6,062 $ 3,554 $ (2,379)
========= ========= =========
NET EARNINGS (LOSS) PER SHARE:
BASIC ...................................... $ .64 $ .48 $ (.65)
DILUTED .................................... $ .62 $ .46 $ (.65)
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC ...................................... 9,442 7,350 3,673
DILUTED .................................... 9,772 7,740 3,673
The accompanying notes are an integral part of these consolidated financial
statements.
- 28 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL STOCK RETAINED
COMMON STOCK PAID-IN OPTION EARNINGS TREASURY
SHARES AMOUNT CAPITAL LOANS (DEFICIT) STOCK
----------- ------- --------- -------- --------- ---------
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)
EXERCISE OF STOCK OPTIONS................................ 160,012 -- 176 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED..................................... -- -- 178 -- -- --
PURCHASE OF TREASURY STOCK
(142,100 SHARES, AT COST)............................. -- -- -- -- -- (1,646)
NET INCOME............................................... -- -- -- -- 6,062 --
----------- ------- --------- -------- --------- ---------
BALANCES AT DECEMBER 31, 1998............................ 10,105,916 $ 10 $ 90,038 $ (455) $ 5,906 $ (3,999)
========== ======= ========= ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 29 -
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 6,062 $ 3,554 $ (2,379)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities --
Depreciation .................................................... 2,880 928 498
Amortization .................................................... 1,348 1,303 892
Deferred income taxes ........................................... 2,106 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 ........................................ (7,427) (4,880) 1,090
Restricted assets .......................................... (1,049) (440) (233)
Other assets ............................................... (5,590) (1,291) (1,765)
Accounts payable and accrued liabilities ................... 4,249 4,332 (88)
Deferred revenues and other liabilities .................... (1,205) 2,051 21
--------- --------- ---------
Net cash provided by (used in) operating activities ............. 1,374 5,619 (540)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (49,483) (9,640) (1,256)
Acquisition of businesses, less cash acquired ...................... (65,096) (23,621) (25,174)
--------- --------- ---------
Net cash used in investing activities ........................... (114,579) (33,261) (26,430)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ....................................... 176,379 29,500 40,841
Payments on long-term debt ......................................... (78,331) (29,813) (47,745)
Proceeds from issuance of common stock ............................. -- 41,100 37,673
Proceeds from exercise of stock options and warrants ............... 354 949 685
Purchases of treasury stock ........................................ (1,646) -- --
--------- --------- ---------
Net cash provided by financing activities ....................... 96,756 41,736 31,454
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. (16,449) 14,094 4,484
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 18,968 4,874 390
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 2,519 $ 18,968 $ 4,874
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized .......................... $ 765 $ 720 $ 1,454
========= ========= =========
Income taxes paid .................................................. $ 3,341 $ 1,000 $ 75
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
- 30 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cornell Corrections, Inc. (collectively with its subsidiaries, the
"Company"), a Delaware corporation, provides to governmental agencies the
integrated development, design, construction and management of facilities within
three operating divisions: (i) secure institutional correctional and detention
services, (ii) juvenile correctional and detention services and (iii)
pre-release correctional 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 offenders or residents, commissary operations, an equipment
replacement fund used in state programs and a restoration fund for certain
facilities. These bank accounts and commissary inventories are collectively
referred to as "restricted assets" in the accompanying financial statements.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and repair
costs are expensed, while renewal and betterment costs are capitalized. Prepaid
facility use cost, which resulted from the July 1996 acquisition of the Big
Spring Complex, 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 1998
and 1997 was $2,293,000 and $151,000, respectively.
INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquired businesses over the
fair market value of their net tangible and identified intangible assets.
Goodwill is being amortized on a straight-line basis over 20 years, which
represents management's estimation of the related benefit to be derived from the
acquired 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 loss
would be
- 31 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,694,000 and $1,279,000
as of December 31, 1998 and 1997, respectively.
A non-compete agreement was entered into with the President of Abraxas Group,
Inc. ("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 was $80,000 and $20,000 at December 31, 1998
and 1997, respectively.
Intangible assets at December 31, 1998 and 1997, were as follows (in
thousands):
1998 1997
-------- --------
Goodwill ............... $ 11,109 $ 6,803
Non-compete agreement .. 600 600
-------- --------
11,709 7,403
Accumulated amortization (1,774) (1,299)
-------- --------
$ 9,935 $ 6,104
======== ========
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.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires
entities to expense start-up costs as incurred and to expense previously
capitalized start-up costs as a cumulative effect of a change in accounting
principle in the year adopted. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. At December 31, 1998, unamortized start-up costs were
$4,923,000. In January 1999, the Company adopted SOP 98-5 and recorded a net of
tax charge of $2,954,000 for the cumulative effect of a change in accounting
principle.
Costs incurred related to obtaining long-term debt financing are capitalized
and amortized over the term of the related indebtedness. At December 31, 1998,
the Company had recorded net deferred debt issuance costs of approximately
$1,718,000 related to obtaining the 1997 Credit Facility and the Senior Secured
Notes. See Note 6 to Consolidated Financial Statements.
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 provisions of SFAS No. 121 as of December
31, 1998.
- 32 -
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, 1998 and 1997, was
approximately $2,003,000 and $1,756,000, respectively, 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 fully reserved for its
estimate of such disallowances. 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, including the
portion 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.
For the years ended December 31, 1998, 1997 and 1996, 20.1%, 31.4% and 39.7%,
respectively, of the Company's consolidated revenues were derived from contracts
with the Federal Bureau of Prisons.
FINANCIAL INSTRUMENTS
The Company considers the fair value of all financial instruments not to be
materially different from their carrying values at the end of each fiscal year
based on management's estimate of the Company's ability to borrow funds under
terms and conditions similar to those of the Company's existing debt.
- 33 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS 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.
2. ACQUISITIONS
In January 1998, the Company purchased the Great Plains Correctional
Facility, a secure institutional facility in Hinton, Oklahoma, with a capacity
of 812 beds. In August 1998, the Company acquired substantially all of the
Alaskan assets of Allvest, Inc. ("Allvest"), a privately held company based in
Anchorage, Alaska. The Allvest acquisition included the operations of five
pre-release facilities with an aggregate capacity of 540 beds in Anchorage,
Fairbanks and Bethel, Alaska, and the real properties of three of the five
facilities. Total consideration for these acquisitions was approximately $65.1
million. The acquisitions were financed through borrowings under the 1997 Credit
Facility, proceeds from the 1997 stock offering and cash generated from
operations.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions were as follows (in thousands):
GREAT
PLAINS ALLVEST
------- -------
Cash paid.................................. $43,000 $20,399
Transaction costs.......................... 750 947
------- -------
Total purchase price.................... $43,750 $21,346
======= =======
Net assets acquired --
Current assets........................... $ -- $ 39
Property and equipment................... 43,750 17,014
Goodwill................................. -- 4,306
Accounts payable and accrued liabilities. -- (13)
------- -------
$43,750 $21,346
======= =======
In January 1997, the Company acquired 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 residential
transitional living center for juveniles in San Antonio, Texas.
In September 1997, the Company acquired substantially all of the assets of
the Abraxas and four related entities (collectively, "Abraxas"), 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).
- 34 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.................. 4,577 12,528
Other assets............................. -- 605
Accounts payable and accrued liabilities. (546) (3,087)
------ -------
$6,003 $19,193
====== =======
The 1998 and 1997 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 1998 and 1997 acquisitions had occurred as of the beginning of the
Company's fiscal year 1997 were as follows (amounts in thousands, except per
share data):
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
Total revenues ....... $ 128,981 $ 115,798
Net income ........... 6,568 4,860
Net earnings per share
- Basic ............. .70 .66
- Diluted ........... .67 .63
3. PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
DECEMBER 31,
----------------------
1998 1997
--------- ---------
Land ............................................... $ 14,030 $ 4,346
Prepaid facility use ............................... 21,637 21,637
Buildings and improvements ......................... 101,549 17,168
Furniture and equipment ............................ 7,880 2,770
Construction in progress ........................... 20,457 9,374
--------- ---------
165,553 55,295
Accumulated depreciation and amortization .......... (6,334) (2,779)
--------- ---------
$159,219 $ 52,516
========= =========
- 35 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Construction in progress at December 31, 1998, consists primarily of
construction and costs attributable to that portion of the 1,625 bed D. Ray
James Prison which is not yet complete. The Company is committed to spending an
additional $3.5 million through early 1999 to complete construction of the D.
Ray James Prison.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following (in
thousands):
DECEMBER 31,
-----------------
1998 1997
------- -------
Accounts payable ........... $ 5,780 $ 4,257
Accrued compensation expense 3,969 3,055
Accrued interest payable ... 1,852 16
Due to escrow .............. -- 1,000
Other ...................... 6,237 5,248
------- -------
$17,838 $13,576
======= =======
Due to escrow represents an amount payable related to the purchase of Abraxas
which was outstanding at December 31, 1997.
5. INCOME TAXES
The following is an analysis of the Company's deferred tax assets
(liabilities) (in thousands):
DECEMBER 31,
---------------
1998 1997
------ ------
Deferred tax assets:
Net operating loss carryforwards.........$ -- $ 522
Depreciation and amortization............ 147 368
Accrued expenses......................... 1,511 986
Deferred compensation.................... 331 331
Other.................................... 165 252
------ ------
2,154 2,459
------ ------
Deferred tax liabilities:
Start-up costs amortization.............. 1,877 493
Prepaid facility use amortization........ 682 438
Prepaid expenses......................... 328 201
Other.................................... 827 361
------ ------
3,714 1,493
------ ------
Net deferred tax asset (liability) before
valuation allowance..................... (1,560) 966
Valuation allowance........................ -- (420)
------ ------
Net deferred tax asset (liability).......$(1,560) $ 546
====== ======
- 36 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's income tax provision were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
-------------------------
Current provision................. $1,936 $1,937 $ 247
Deferred provision (benefit)...... 2,106 62 (172)
------ ------ ------
Tax provision................... $4,042 $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,
-----------------------------
1998 1997 1996
------- ------- -------
Computed taxes at statutory rate of 34 percent $ 3,435 $ 1,888 $ (783)
Amortization of non-deductible intangibles ... 116 116 186
State income taxes, net of federal benefit ... 499 229 (39)
Changes in valuation allowance ............... (420) (484) 629
Other ........................................ 412 250 82
------- ------- -------
$ 4,042 $ 1,999 $ 75
======= ======= =======
The Company's income tax provision for the year ended December 31, 1998,
included a benefit for the reversal 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,
--------------------
1998 1997
-------- --------
Revolving Line of Credit due March 2003 with
an interest rate of prime plus 0% to 0.5% or
LIBOR plus 1.75% to 2.50% .................. $ 48,400 $ --
Senior Secured Notes due July 2010
with an interest rate of 7.74% ............. 50,000 --
Notes Payable, interest at 4.8% to 7.15% ..... 80 432
-------- --------
Total debt ................................... 98,480 432
Less: current maturities ..................... (73) (294)
-------- --------
Long-term debt ............................... $ 98,407 $ 138
======== ========
On December 3, 1998, the Company formalized terms under an amended and
restated credit agreement with a financial institution (the "1998 Credit
Facility" and previously the "1997 Credit Facility"). The 1998 Credit Facility
provides for borrowings up to $60.0 million under a revolving line of credit,
the availability of which is determined by the Company's projected pro forma
cash flow. The 1998 Credit Facility matures in March 2003 and bears interest, at
the election of the Company, at either the prime rate plus a margin of 0% to
0.5% or a rate which is 1.75% to 2.50% above the applicable LIBOR rate. Interest
is payable monthly
- 37 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with respect to prime rate loans and at the expiration of the applicable LIBOR
period for LIBOR based loans. Commitment fees equal to 0.375% per annum are
payable on the unused portion of the facility. The 1998 Credit Facility is
secured by all of the Company's assets, including the stock of all the Company's
subsidiaries, does not permit the payment of cash dividends and requires the
Company to comply with certain earnings, net worth and debt service covenants.
Additionally, the 1998 Credit Facility provides the Company with the ability to
enter into future operating lease agreements that provide for residual value
guarantees. See Note 7 - Commitments and Contingencies.
On July 15, 1998, the Company completed a private placement of $50.0 million
of Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in
July 1998 and $25.0 million in August 1998. The Senior Notes, which bear
interest at a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior
Notes purchase agreements, the Company is required to make eight annual
principal payments of $6.25 million beginning on July 15, 2003 and comply with
certain financial covenants. Earlier payments of principal are allowed subject
to certain prepayment provisions. Interest is payable semi annually. The holders
of the Senior Notes and the lender under the 1998 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in all the assets of the Company.
Notes payable pertain to financed insurance premiums and various vehicle
notes. Scheduled maturities of long-term debt were as follows (in thousands):
For the year ending December 31 --
1999................................... $ 73
2000................................... 7
2001................................... --
2002................................... --
2003................................... 48,400
Thereafter............................. 50,000
------
Total.............................. $98,480
=======
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, 1998, 1997 and 1996, was approximately $4,490,000, $3,583,000 and
$2,358,000, respectively. Under the 1998 Credit Facility, the Company is allowed
to enter into future operating lease agreements for the acquisition or
development of operating facilities at a cost not to exceed $40 million. The
lease(s) under this arrangement will have a term of five years, will include
purchase and renewal options and will provide for a substantial residual value
guarantee (approximately 85% of the total cost) by the Company which would be
due upon termination of the lease(s). Upon termination of a lease, the Company
could either exercise a purchase option, or the facilities could be sold to a
third party. The Company expects the fair market value of the leased facilities
to substantially reduce or eliminate the Company's payment under the residual
value guarantee. At December 31, 1998, there are no operating leases under this
arrangement; however, the table of future minimum lease payments below includes
the residual value guarantee related to projects currently in process for which
the Company will enter into lease arrangements at construction completion. As of
December 31, 1998, the Company had the following rental commitments under
noncancelable operating leases and residual value guarantees (in thousands):
- 38 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ending December 31 --
1999................................... $3,053
2000................................... 2,439
2001................................... 2,049
2002................................... 877
2003................................... 594
Thereafter............................. 6,224
------
Total $15,236
=======
401(K) PLAN
The Company has a defined contribution 401(k) plan. The Company's matching
contribution currently represents 50 percent of a participant's contribution, up
to the first six percent of the participant's salary. For the years ended
December 31, 1998, 1997 and 1996, the Company recorded $611,000, $514,000 and
$210,000, respectively, of contribution expense.
OTHER
The Company is currently negotiating with union representatives over terms
for agreements covering an employee group at one of its facilities.
The estimated costs associated with Year 2000 readiness are approximately
$1.8 million including various hardware and software. As Year 2000 impact
assessment nears completion and the renovation planning, readiness
implementation and testing evolve, the estimated costs may change.
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
STOCKHOLDER RIGHTS PLAN
On May 1, 1998, the Company adopted a stockholder rights plan. Under the
plan, each stockholder of record at the close of the business day on May 11,
1998, received one Preferred Stock Purchase Right ("Right") for each share of
common stock held. The Rights expire on May 1, 2008. Each Right initially
entitles the stockholder to purchase one one-thousandth of a Series A Junior
Participating Preferred Share for $120.00. Each Preferred Share has terms
designed to make it economically equivalent to one thousand common shares. The
Rights will become exercisable only in the event a person or group acquires 15%
or more of the Company's common stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 15% or more
of the Company's common stock. If a person or group acquires a 15% or more
position in the Company, each Right (except those held by the acquiring party)
will then entitle its holder to purchase, at the exercise price, common stock of
the Company having a value of twice the exercise price. The effect will be to
entitle the holder to buy the common stock at 50% of the market price. Also, if
following an acquisition of 15% or more of the Company's common stock, the
Company is acquired by that person or group in a merger or other business
combination transaction, each Right would then entitle its holder to purchase
common stock of the acquiring company having a value of twice the exercise
price. The effect will be to entitle the Company's stockholder to buy stock in
the acquiring company at 50% of the market price. The Company may redeem the
Rights at $0.01 per Right at any time prior to the acquisition of 15% or more of
its common stock by a person or group.
- 39 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 used for 1998 acquisitions.
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
Preferred stock may be issued from time to time by the Board of Directors of
the Company, which is responsible for determining the voting, dividend,
redemption, conversion and liquidation features of any preferred stock.
OPTIONS
In May 1996, the Company adopted the 1996 Stock Option Plan and amended and
restated the plan in April 1998 ("1996 Plan"). Pursuant to the 1996 Plan, the
Company may grant non-qualified and incentive stock options. The Compensation
Committee of the Board of Directors is responsible for determining the exercise
price and vesting terms for the options. Additionally, prior to the IPO, the
Company made various grants of options to purchase the Company's common stock.
Under the 1996 Plan, the Company may grant options for up to the greater of
1,500,000 shares or 15% of the aggregate number of shares of common stock
outstanding. Including options granted from forteitures and cancellations, the
Company has granted options on 1,757,230 shares through December 31, 1998, under
the 1996 Plan. The 1996 Plan option exercise price can be no less than the
market price of the Company's common stock on the date of grant. The 1996 Plan
options vest up to seven years and expire seven to ten years from the grant
date.
A summary of the status of the Company's 1996 Plan and other options at
December 31, 1998, 1997 and 1996, and changes during the years then ended is
presented in the tables below:
1998 1997 1996
--------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------ --------- ------ ---------- ------
Outstanding at beginning of year 854,454 $ 6.60 1,078,109 $ 4.32 814,562 $ 2.12
Granted ........................ 932,872 22.83 161,000 12.57 776,469 5.24
Exercised ...................... (177,187) 2.94 (375,505) 2.55 (512,922) 2.22
Forfeited or canceled .......... (271,300) 19.76 (9,150) 9.67 -- --
--------- ------ --------- ------ ---------- ------
Outstanding at end of year ..... 1,338,839 15.73 854,454 6.60 1,078,109 4.32
========= ========= ==========
Exercisable at end of year ..... 487,557 5.84 613,604 4.64 930,609 3.46
Weighted average fair value of
options granted at market .. -- $16.41 -- $ 9.42 -- $ 4.10
- 40 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------- ------------- -------- ---------- ------------- ----------
$ 2.00 to $ 2.50............. 103,919 6.7 $ 2.07 103,919 $ 2.07
3.75 to 7.59............. 297,248 7.5 4.95 280,498 4.88
10.375 to 15.81............. 295,005 8.6 13.65 103,140 12.24
19.875 to 24.375............. 642,667 9.3 23.88 -- --
------------- -------- ---------- ------------- ----------
1,338,839 8.5 $ 15.73 487,557 $ 5.84
============= ======== ========== ============= ==========
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 diluted net earnings (loss) per share would have
been the following pro forma amounts (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ------------ -----------
Net income (loss): As reported............. $ 6,062 $ 3,554 $ (2,379)
Pro forma .............. 4,380 3,177 (3,503)
Earnings (loss) per share (diluted): As reported............. .62 .46 (.65)
Pro forma .............. .45 .41 (.95)
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 1998, 1997 and 1996, respectively:
risk-free interest rates of 5.8%, 6.5% and 6.8%; dividend rates of $0, $0 and
$0; expected lives of 10.0, 10.0 and 7.5 years; expected volatility of 54.70%
for 1998, 54.79% for 1997 and 32.5% since the Company's stock began trading in
October 1996.
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CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option pricing model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
On July 8, 1996, the Chairman of the Board and the former 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
During the year ended December 31, 1998, the Company repurchased 142,100
shares of common stock on the open market under a share repurchase program at an
aggregate cost of $1,646,000. In November 1995, the Company repurchased 555,000
shares of common stock from a former officer of the Company.
9. SEGMENT DISCLOSURE
In July 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997.
The Company's three operating divisions are its reportable segments. The
secure institutional segment consists of the operation of secure adult
incarceration facilities. The juvenile segment consists of providing residential
treatment and educational programs and non-residential community-based programs
to juveniles between the ages of 10 and 17 who either have been adjudicated or
suffer from behavioral problems. The pre-release segment consists of providing
pre-release and halfway house programs for adult offenders who are either on
probation or serving the last three to six months of their sentences on parole
and preparing for re-entry into society at large.
The Company's reportable segments are managed separately because each
business has different contractual requirements and needs specific to the
respective offenders or residents. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
Intangible assets are not included in each segment's reportable assets, and the
amortization of intangible assets is not included in the determination of a
segment's operating income or loss. The Company evaluates performance based on
income or loss from operations before general and administrative expenses,
incentive bonuses, amortization of intangibles, interest and income taxes.
- 42 -
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The only significant noncash item reported in the respective segments' income
or loss from operations is depreciation and amortization (excluding
intangibles):
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- --------
Revenues
Secure institutional .................. $ 52,630 $ 32,283 $ 21,390
Juvenile .............................. 47,032 18,536 --
Pre-release ........................... 23,457 19,483 10,937
--------- --------- --------
Total revenues ........................... $ 123,119 $ 70,302 $ 32,327
========= ========= ========
Depreciation and amortization
Secure institutional .................. $ 2,145 $ 693 $ 358
Juvenile .............................. 739 493 --
Pre-release ........................... 685 613 464
Amortization of intangibles ........... 415 340 546
Corporate and other ................... 244 92 22
--------- --------- --------
Total depreciation and amortization ...... $ 4,228 $ 2,231 $ 1,390
========= ========= ========
Income (loss) from operations
Secure institutional .................. $ 12,638 $ 6,532 $ 3,823
Juvenile .............................. 5,058 2,128 --
Pre-release ........................... 4,043 2,930 1,664
General and administrative expense .... (7,581) (5,394) (4,560)
Incentive bonuses ..................... (803) (50) --
Amortization of intangibles ........... (415) (340) (546)
Corporate and other ................... (351) (176) (42)
--------- --------- --------
Total income from operations ............. $ 12,589 $ 5,630 $ 339
========= ========= ========
Assets
Secure institutional .................. $ 127,774 $ 38,495 $ 26,119
Juvenile .............................. 37,917 27,779 --
Pre-release ........................... 28,815 8,469 7,030
Intangible assets, net ................ 9,935 6,104 5,864
Corporate and other ................... 8,254 23,262 7,811
--------- --------- --------
Total assets ............................. $ 212,695 $ 104,109 $ 46,824
========= ========= ========
Capital expenditures
Secure institutional .................. $ 22,484 $ 7,872 $ 33
Juvenile .............................. 5,927 272 --
Pre-release ........................... 19,947 966 1,222
Corporate and other ................... 1,125 530 1
--------- --------- --------
Total capital expenditures ............... $ 49,483 $ 9,640 $ 1,256
========= ========= ========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10, 11, 12 and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, not
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial statements and reports of Arthur Andersen LLP
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial statement schedules
All schedules are omitted because they are not applicable or
because the required information is included in the financial
statements or notes thereto.
3. Exhibits
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
- - ------- ------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company. 1
3.2 Amended and Restated Bylaws of the Company.
4.1 Certificate representing Common Stock. 2
4.2 Registration Rights Agreement dated as of March 31, 1994, as amended, 2
among the Company and the stockholders listed on the signature pages
thereto.
4.3 Rights Agreement dated as of May 1, 1998 between the Company and 9
American Securities Transfer & Trust, Inc. as Rights Agent.
9.1 Stock Transfer and Voting Agreement dated November 23, 1994 between 2
David M. Cornell and Jane B. Cornell.
10.1 Cornell Corrections, Inc. Amended and Restated 1996 Stock Option 3
Plan.
10.2 Employment Agreement dated as of September 9, 1997 between Abraxas 4
Group, Inc. and Arlene R. Lissner.
10.3 Covenant Not to Compete Agreement dated as of September 9, 2997 by 4
and between the Company and Arlene R. Lissner.
10.4 Form of Indemnification Agreement between the Company and each of its 2
directors and executive officers.
- 44 -
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE
- - ------- ------------------------------------------------------------------------------------------------
10.5 Stockholders Agreement among certain stockholders named therein dated 4
September 15, 1997.
10.6 Contract between CCCI and the CDC (No. 92.401) for the Baker, 2
California Facility dated June 25, 1992, as amended.
10.7 Professional Management Agreement between the Company and Central 2
Falls Detention Facility Corporation dated July 15, 1992.
10.8 Operating Agreement by and between each of MidTex Detentions, Inc., 2
the City of Big Spring, Texas ("Big Spring") and Cornell Corrections of
Texas, Inc. ("CCTI") dated as of July 1, 1996 and related Assignment
and Assumption of Operating Agreement.
10.9 Contract between CCCI and the CDC (No. R92.132) for the Live Oak, 2
California Facility dated March 1, 1993, as amended.
10.10 Asset Purchase Agreement dated as of January 31, 1997 by and between 5
Cornell Corrections of Texas, Inc. and Interventions Co.
10.11 Asset Purchase Agreement dated as of August 14, 1997 by and between 4
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 2
Department of Criminal Justice, Parole Division for the Reid Facility
dated January 31, 1996, as amended.
10.13 Form of Contract between CCCI and the Utah State Department of 2
Human Services, Division of Youth Corrections for the Salt Lake City,
Utah Juvenile Facility.
10.14 Asset Purchase Agreement among CCTI, Texas Alcoholism Foundation, 2
Inc. and the Texas House Foundation, Inc. dated May 14, 1996.
10.15 Asset Purchase Agreement among CCTI, the Company, Ed Davenport, 2
Johnny Rutherford and MidTex Detentions, Inc. dated May 22, 1996.
10.16 Lease Agreement between CCCI and Baker Housing Company dated 2
August 1, 1987 for the Baker, California facility.
10.17 Lease Agreement between CCCI and Sun Belt Properties dated as of May 2
23, 1988, as amended for the Live Oak, California facility.
10.18 Lease Agreement between Big Spring and Ed Davenport dated as of July 2
1, 1996 for the Interstate Unit and related Assignment and Assumption of
Leases.
10.19 Secondary Sublease Agreement between Big Spring and Ed Davenport 2
dated as of July 1, 1996 for the Airpark Unit and related Assignment and
Assumption of Leases.
10.20 Secondary Sublease Agreement between Big Spring and Ed Davenport 2
dated as of July 1, 1996 for the Flightline Unit and related Assignment
and Assumption of Leases.
10.21 Stock Option Agreement between the Company and CEP II dated July 9, 2
1996.
10.22 Form of Option Agreement between the Company and the Optionholder 2
listed therein dated as of November 1, 1995.
10.23 Third Amended and Restated Credit Agreement among the Company,
Subsidiaries of the Company, the Lenders and ING, as agent to the
Lenders dated as of December 3, 1998
10.24 Senior Note Agreement by and between the Company and the Note 6
Purchasers, dated July 15, 1998.
10.25 Asset Purchase Agreement dated as of November 17, 1997 by and 7
between Foresite Capital Facilities Corporation and the Hinton Economic
Development Authority.
-45-
10.26 Amendment dated December 10, 1997 to Asset Purchase Agreement 7
dated as of November 17, 1997.
10.27 Amendment No. 2 dated January 6, 1998 to Asset Purchase Agreement 7
dated as of November 17, 1997.
10.28 Assignment of Agreement of Purchase and Sale dated as of January 5, 7
1998 by and between Foresite Capital Facilities Corporation and Cornell
Corrections of Oklahoma, Inc.
10.29 Allvest Asset Purchase Agreement dated as of June 20, 1998 by and 8
between the Company and Allvest, Inc., St. John Investments, and
William C. Weimar.
11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
(1) Annual Report on Form 10-K of the Company for the year ended December 31,
1996.
(2) Registration Statement on Form S-1 of the Company (Registration No.
333-08243).
(3) Definitive Proxy Statement dated March 9, 1998.
(4) Registration Statement on Form S-1 of the Company (Registration No.
333-35807).
(5) Current Report on Form 8-K of the Company dated January 31, 1997 (File No.
1-14472).
(6) Quarterly Report on Form 10-Q of the Company for the quarter ended June
30, 1998.
(7) Current Report on Form 8-K of the Company dated January 6, 1998.
(8) Current Report on Form 8-K of the Company dated August 13, 1998.
(9) Registration Statement on Form 8-A of the Company filed May 11, 1998.
(b) REPORTS ON FORM 8-K
On November 13, 1998, the Company filed Amendment No. 2 to Form 8-K
dated August 13, 1998 reporting the acquisition of Allvest, Inc.
- 46 -
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 31, 1999 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 31, 1999
David M. Cornell and Chief Executive Officer
(Principal Executive Officer)
/s/ BRIAN E. BERGERON Chief Financial Officer March 31, 1999
Brian E. Bergeron and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ CAMPBELL A. GRIFFIN, JR.* Director March 31, 1999
Campbell A. Griffin, Jr.
/s/ PETER A. LEIDEL* Director March 31, 1999
Peter A. Leidel
/s/ ARLENE R. LISSNER * Director March 31, 1999
Arlene R. Lissner
/s/ TUCKER TAYLOR* Director March 31, 1999
Tucker Taylor
* By: DAVID M. CORNELL
David M. Cornell
Attorney-in-Fact
- 47 -