AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1996.
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORNELL CORRECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8361, 8744
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OF ORGANIZATION) CLASSIFICATION CODE NUMBER)
76-0433642
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4801 WOODWAY, SUITE 400W
HOUSTON, TEXAS 77056
(713) 623-0790
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID M. CORNELL
CHIEF EXECUTIVE OFFICER
CORNELL CORRECTIONS, INC.
4801 WOODWAY, SUITE 400W
HOUSTON, TEXAS 77056
(713) 623-0790
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JAMES L. LEADER BART FRIEDMAN
BAKER & BOTTS, L.L.P. CAHILL GORDON & REINDEL
3000 ONE SHELL PLAZA 80 PINE STREET
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10005
(713) 229-1234 (212) 701-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001
per share............................. 4,025,000 $14.00 $56,350,000 $19,432
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</TABLE>
(1) Includes 525,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CORNELL CORRECTIONS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- ---------------------------------------------- -----------------------------------------
<S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front and Outside Back Cover Pages
of Prospectus; Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors
4. Use of Proceeds......................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price......... Outside Front Cover Page of Prospectus;
Risk Factors; Underwriting
6. Dilution................................ Dilution
7. Selling Security Holders................ Principal and Selling Stockholders
8. Plan of Distribution.................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered.............................. Prospectus Summary; Dividend Policy;
Capitalization; Description of Capital
Stock
10. Interests of Named Experts and
Counsel................................. Legal Matters
11. Information with Respect to the
Registrant.............................. Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; Use of
Proceeds; Dividend Policy;
Capitalization; Dilution; Pro Forma
Financial Information; Selected
Consolidated Historical and Pro Forma
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Relationships and
Related Party Transactions; Principal and
Selling Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Underwriting; Index to Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 17, 1996
[LOGO] 3,500,000 SHARES
CORNELL CORRECTIONS, INC.
COMMON STOCK
Of the 3,500,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby, 3,023,103 shares are being offered by Cornell
Corrections, Inc. (the "Company"), and 476,897 shares are being offered by the
Selling Stockholders. See "Principal and Selling Stockholders." The Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $_______ and $________ per share. See "Underwriting" for the factors
considered in determining the initial public offering price. The Company has
applied for quotation of the Common Stock on the Nasdaq National Market under
the symbol "CRNL."
For a discussion of certain risks of an investment in the shares of Common
Stock offered hereby, see "Risk Factors" on pages 7 - 13.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions* Company` Stockholders
Per Share....... $ $ $ $
Total........... $ $ $ $
- ------------
* The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
` Before deducting estimated expenses of the offering of $ which
will be paid by the Company.
Certain stockholders of the Company have granted the Underwriters a 30-day
option to purchase up to 525,000 additional shares of Common Stock on the same
terms per share solely to cover over-allotments, if any. If such option is
exercised in full, the total price to public will be $ , the total
underwriting discounts and commissions will be $ and the total
proceeds to Selling Stockholders will be $ . See "Underwriting."
------------------------
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of the certificates
therefor will be made at the offices of Dillon, Read & Co. Inc., New York, New
York on or about , 1996. The Underwriters include:
DILLON, READ & CO. INC. EQUITABLE SECURITIES CORPORATION
The date of this Prospectus is , 1996.
<PAGE>
[GRAPHICS - MAP SHOWING LOCATION
OF COMPANY-OPERATED FACILITIES AND
PICTURES OF FACILITIES AND
PERSONNEL OF THE COMPANY]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE
INDICATES: (I) ALL REFERENCES TO THE "COMPANY" INCLUDE CORNELL CORRECTIONS, INC.
AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS, (II) THE INFORMATION
CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND GIVES EFFECT TO THE RECLASSIFICATION OF THE COMPANY'S
CAPITAL STOCK (THE "RECLASSIFICATION") (SEE "CAPITALIZATION") TO BE EFFECTED AS
OF OR PRIOR TO THE COMPLETION OF THE OFFERING BEING MADE HEREBY (THE "OFFERING")
AND (III) ALL REFERENCES TO NUMBER OF BEDS WITH RESPECT TO THE COMPANY'S
FACILITIES ARE TO DESIGN CAPACITY.
THE COMPANY
The Company is one of the leading providers of privatized correctional,
detention and pre-release services in the United States. The Company is the
successor to entities that began developing institutional correctional and
detention facilities in Massachusetts and Rhode Island in 1991 and pre-release
facilities in California in 1977. The Company has rapidly expanded its
operations through acquisitions and internal growth and is currently developing
or operating facilities in California, Texas, Rhode Island, Utah and North
Carolina. As of July 15, 1996, the Company has contracts to operate 20 private
correctional, detention and pre-release facilities with an aggregate design
capacity of 3,349 beds. Of these facilities, 18 are currently in operation
(3,114 beds) and two are under development (235 beds).
The Company provides to governmental agencies the integrated development,
design, construction and operation of facilities within three areas of
operational focus: (i) secure institutional correctional and detention services,
(ii) non-secure pre-release correctional services and (iii) juvenile
correctional and detention services. Institutional correctional and detention
services primarily consist of the operation of secure adult incarceration
facilities. Non-secure pre-release correctional services primarily consist of
providing pre-release and halfway house programs for adult inmates serving the
last three to six months of their sentences and preparing for re-entry into
society at large. The Company is currently developing and constructing a 160-bed
juvenile short-term correctional and detention facility scheduled to commence
operations in the first quarter of 1997. At the facilities it operates, the
Company generally provides secure incarceration and non-secure residential
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), health care (including medical, dental and psychiatric
services), work and recreational programs and chemical dependency and substance
abuse programs. Additional services provided in the Company's pre-release
facilities typically include life skills and employment training and job
placement assistance. Juvenile services provided by the Company will include
medical, educational and counseling programs tailored to meet the special needs
of juveniles.
There is a growing trend in the United States toward privatization of
governmental correctional and detention services and functions. Generally, this
trend results from continuing pressures faced by governments to control costs
and improve service efficiency as a result of the rapidly growing inmate
population in the United States. According to reports issued by the United
States Department of Justice, Bureau of Justice Statistics ("BJS"), the number
of adult inmates in United States federal and state prison facilities increased
from 503,601 at December 31, 1985 to 1,104,074 at June 30, 1995, an increase of
more than 119%. According to the Private Adult Correctional Facility Census,
prepared by the Private Corrections Project Center for Studies in Criminology &
Law, University of Florida ("1995 Census"), the design capacity of privately
managed adult correctional and detention facilities in the United States
increased from 26 facilities with a design capacity of 10,973 beds at December
31, 1989 to 92 facilities with a design capacity of 57,609 beds at December 31,
1995. Even after such growth, according to the 1995 Census, less than five
percent of adult inmates in United States correctional and detention facilities
were housed in privately managed facilities.
3
OPERATING STRATEGIES
The Company's objective is to enhance its position as one of the leading
providers of private correctional, detention and pre-release services. The
Company is committed to the following operating strategies:
PURSUE DIVERSE MARKETS.
The Company intends to continue to diversify its business within three
areas of operational focus. Historically, the Company primarily provided
pre-release services and believes that it has a long-standing reputation as an
effective manager of such facilities. However, after giving effect to the
Company's acquisition of substantially all the assets of MidTex Detentions, Inc.
("MidTex") in July 1996, a majority of the Company's facility capacity and
revenues will be concentrated in the institutional correctional and detention
service area. In addition, the Company is currently developing a juvenile
correctional and detention facility and intends to pursue additional contracts
to provide juvenile correctional and detention services. The Company believes
that, by being a diversified provider of services, the Company will be able to
compete for more types of contract awards and adapt to changes in demands within
its industry for varying categories of services.
DELIVER COST EFFECTIVE AND QUALITY MANAGEMENT PROGRAMS.
The Company intends to position itself as a low cost, high quality provider
of services in all its markets. The Company will focus on improving operating
performance and efficiency through standardization of practices, programs and
reporting procedures, efficient staffing and attention to productivity
standards. The Company also emphasizes quality of services by providing trained
personnel and effective programs designed to meet the needs of contracting
governmental agencies.
PROVIDE INNOVATIVE SERVICES.
The Company intends to implement specialized and innovative services to
address unique needs of governmental agencies and certain segments of the inmate
population. For example, certain facilities of the Company are equipped with
interactive satellite links to courtrooms and judges that should reduce the
time, effort and expense related to transporting inmates to offsite courtrooms.
The Company also intends to actively pursue contracts to provide services for
specialized segments of the inmate population categorized by age (such as
services for aging inmates or juvenile offenders), medical status, gender or
security needs.
GROWTH STRATEGIES
The Company expects the growth in privatization of correctional, detention
and pre-release facilities by governmental agencies to continue in the
foreseeable future. By expanding the number of beds under contract, the Company
should be able to increase economies of scale and purchasing power and qualify
to be considered for additional contract awards. The Company will seek to
increase revenues by pursuing the following growth strategies:
BID FOR NEW CONTRACT AWARDS.
The Company will selectively pursue opportunities to obtain contract awards
for new privatized facilities. As of June 30, 1996, the Company has submitted
written bids to operate eight new projects with an aggregate design capacity of
over 3,200 beds. Awards for these projects should be made by the applicable
governmental agencies by the end of 1996. The Company is also currently
considering five additional projects with an aggregate design capacity of over
3,600 beds for which it may submit written bids before the end of 1996.
INCREASE BED CAPACITY OF EXISTING FACILITIES.
The Company has the potential for substantial capacity expansion at certain
existing facilities with modest capital investment. As a result, the Company
intends to pursue expansion of such facilities by obtaining awards of additional
or supplemental contracts to provide services at these facilities.
4
PURSUE STRATEGIC ACQUISITIONS.
The Company believes that the private correctional and detention industry
is consolidating. The Company believes that the larger, better capitalized
providers will acquire smaller providers that are typically too undercapitalized
to pursue the industry's growth opportunities. The Company intends to pursue
selective acquisitions of other operators or developers of private correctional
and detention facilities in institutional, pre-release and juvenile areas of
operational focus to enhance its position in its current markets, to acquire
operations in new markets and to acquire operations that will broaden the types
of services which the Company can provide. The Company believes there are
opportunities to eliminate costs through consolidation and coordination of the
Company's current and subsequently acquired operations.
RECENT EXPANSION
During 1996, the Company has added the management of 2,002 beds through
opening or contracting to open four new facilities (387 beds) and two
acquisitions (1,615 beds). In May 1996, the Company completed the acquisition of
a 310-bed pre-release facility located in Houston, Texas (the "Reid Center")
previously operated by the Texas Alcoholism Foundation, Inc. and The Texas House
Foundation, Inc. The Company believes that the Reid Center is the largest single
facility pre-release center in Texas and that its acquisition enhances the
Company's position as one of the leaders in providing pre-release services.
In July 1996, the Company completed the acquisition of substantially all
the assets of MidTex, an operator of three secure institutional facilities (the
"Big Spring Facilities") with an aggregate design capacity of 1,305 beds for
the United States Department of Justice, Federal Bureau of Prisons ("FBOP") in
Big Spring, Texas. The MidTex acquisition more than doubled the number of
institutional facility beds managed by the Company, and the Company believes
that the acquisition provides a basis for continued expansion of the Company's
institutional area of operational focus.
------------------------
The Company's principal executive offices are located at 4801 Woodway,
Suite 400W, Houston, Texas 77056, and its telephone number at such address is
(713) 623-0790.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company..................................... 3,023,103 shares
Common Stock offered by the Selling Stockholders........................ 476,897 shares
-----------
Total Common Stock offered......................................... 3,500,000 shares
===========
Common Stock to be outstanding after the Offering....................... 6,265,398 shares(1)
Use of Proceeds by the Company.......................................... For repayment of indebtedness and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.................................. CRNL
</TABLE>
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(1) Excludes an aggregate of 353,498 shares of Common Stock reserved for
issuance after completion of the Offering upon exercise of outstanding stock
options granted under the Company's 1996 Stock Option Plan (the "Stock
Option Plan") and 624,611 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options and warrants not included under the
Stock Option Plan. See "Management -- Stock Option Plan" and Note 4 of Notes
to the Company's Consolidated Financial Statements.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, "Pro Forma Financial Data" and "Selected Consolidated Historical and
Pro Forma Financial Data" included elsewhere in this Prospectus. The Pro Forma
Statement of Operations Data for the year ended December 31, 1995 and for the
three months ended March 31, 1996 and the Pro Forma Balance Sheet Data as of
March 31, 1996 reflect the results of operations and consolidated financial
position of the Company and its subsidiaries as if (i) the acquisitions of
MidTex and the Reid Center, (ii) the issuance by the Company of shares, and
options and warrants to purchase shares, of Class A Common Stock ("Class A
Common Stock") and Class B Common Stock ("Class B Common Stock") of the Company
after March 31, 1996, (iii) the Reclassification, (iv) the exercise of
outstanding stock options or warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering and (v) the Offering and
the application of the estimated net proceeds therefrom by the Company, had
occurred, in the case of the Statement of Operations Data, on January 1, 1995,
and, in the case of the Balance Sheet Data, on March 31, 1996.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------------------------------------------------- ---------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED
YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------- ------------ ------------
1991 1992 1993 1994(1) 1995 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total
revenues.... $ 235 $ 2,540 $ 3,198 $ 15,689 $ 20,692 $ 4,933 $ 5,454 $38,716 $ 10,449
Contribution
from
operations... 232 2,537 355 2,739 3,668 802 823 6,858 1,697
Income (loss)
from
operations... (736) 910 (960) (220) (6,463)(2) 55 104 3,311 912
Interest
expense..... 7 -- -- 294 1,115 110 232 -- --
Income (loss)
before
income
taxes....... (742) 940 (915) (376) (7,442) (14) (100) 3,456 945
Net income
(loss)...... (742) 940 (915) (477) (7,442) (14) (100) 2,001 581
Earnings
(loss) per
share....... $ $ $ $ $ $ $ $ $
Number of
shares used
in per share
computa-
tion(3).....
OPERATING DATA:
Beds under
contract
(end of
period)..... -- -- 282 1,155 1,478 1,135 1,486 3,093 3,101
Contracted
beds in
operation
(end of
period)..... -- -- 282 1,155 1,135 1,135 1,251 2,750 2,866
Average
occupancy
based on
contracted
beds in
operation(4)... -- -- -- 92.1% 98.9% 96.9% 94.0% 91.8% 91.2%
</TABLE>
MARCH 31, 1996
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.................... $ 1,727 $ 6,595
Total assets....................... 8,213 39,350
Long-term debt, including current
portion.......................... 8,503 53
Stockholders' equity (deficit)..... (3,377) 34,158
- ------------
(1) Includes operations purchased by the Company on March 31, 1994.
(2) The 1995 loss from operations includes a $6.6 million impairment loss
resulting from a writedown of goodwill. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared to Year Ended December
31, 1994."
(3) 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.
(4) For any applicable facilities, includes reduced occupancy during the
start-up phase. See "Business -- Facility Management Contracts." For the
year ended December 31, 1993, occupancy did not commence until December
1993.
6
RISK FACTORS
ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, WHICH CAN AFFECT THE COMPANY'S CURRENT POSITION AND FUTURE PROSPECTS,
IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN CONNECTION
WITH ANY INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
HISTORY OF LOSSES
The Company incurred net losses of $915,000, $477,000 and $7.4 million for
the years ended December 31, 1993, 1994 and 1995, respectively, and a net loss
of $100,000 for the three-month period ended March 31, 1996. For the year ended
December 31, 1995, the net loss includes an impairment loss of $6.6 million
related to a writedown of goodwill in connection with the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 121. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1995 Compared to Year Ended December 31,
1994." No assurance can be given that the Company will not continue to incur
losses in future periods.
ABSENCE OF COMBINED OPERATING HISTORY
As a result of the Company's acquisitions of the Reid Center and
substantially all the assets of MidTex (the "Acquisitions"), the number of beds
under the Company's management has almost doubled since December 31, 1995. Prior
to the Acquisitions, the Reid Center was operated as a nonprofit organization,
and substantially all the MidTex employees were employed by the City of Big
Spring, Texas. Consequently, no assurance can be given that the Company will be
able to successfully integrate the operations and personnel of the Reid Center
and MidTex with those of the Company on a profitable basis, and the pro forma
financial information of the Reid Center and MidTex may not be indicative of the
future financial condition or performance of those entities when combined with
the Company. See "Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General." The
inability of the Company to successfully integrate the businesses and operations
of the Reid Center and MidTex could have a material adverse effect on the
Company's financial condition and results of operations.
REVENUE AND PROFIT GROWTH DEPENDENT ON EXPANSION
The internal growth of the Company will depend on its ability to obtain
additional management contracts for privatized correctional and detention
facilities. The Company's ability to obtain new contracts will depend on the
extent to which federal, state and local governmental agencies turn to the
private sector in general and the Company in particular for the management of
new or existing facilities or the rehabilitation or expansion of existing
facilities. Additionally, since contracts to operate existing public facilities
have historically not been offered to private operators, the Company's growth
rate will generally be heavily dependent on the construction and operation of
new correctional and detention facilities. Because correctional and detention
services are essential public services, governmental agencies (and, in many
states, state legislatures as well) will have to be persuaded that privatization
will result in high-quality services at less cost than that which the agencies
themselves could provide. The Company's ability to obtain new contracts also
will depend on the extent to which the Company is able to secure awards in
competition with other private-sector providers. Factors that will affect the
Company's ability to compete effectively in bidding against other providers will
include (i) the price and other terms of the Company's bids, (ii) the financial
ability of the Company to make capital investments or post bonds or other credit
support which may be required and (iii) particularly in the case of secure adult
facilities, the extent to which the Company is perceived as a credible, reliable
alternative to other providers, including the two companies now holding the
major share of contracts for currently privatized facilities. Prior to 1995, the
Company had limited success in obtaining new management contracts, and the
Company's success for the most part was confined to contracts for management of
pre-release centers. No assurance can be given that the Company will be able to
obtain additional contracts to develop or operate new facilities on favorable
terms.
7
ACQUISITION RISKS
The Company's business strategy includes growth through acquisitions. This
strategy presents risks that, singly or in any combination, could materially
adversely affect the Company's business and financial performance. These risks
include the possibility of the adverse effect of acquisitions on existing
operations of the Company, the diversion of management attention and resources
to acquisitions, the dependence on retaining key personnel, the contingent and
latent risks associated with the past operations of, and other unanticipated
problems arising in, acquired businesses and the possible adverse earnings
effects resulting from the amortization of goodwill and other intangible assets.
For example, in 1995 the Company recognized an impairment loss of $6.6 million
to write down goodwill associated with the purchase of Eclectic Communications,
Inc. and a related company (collectively, "Eclectic") in March 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994." The success of the Company's acquisition strategy
will depend on the extent to which it is able to acquire, successfully absorb
and profitably operate additional businesses, and no assurance can be given that
the Company's strategy will succeed. In addition, no assurance can be given that
the Company can acquire additional businesses at prices and on terms the Company
deems reasonable. In this regard, the Company likely will be competing with
other potential acquirers, some of which are larger and have greater resources
than the Company, and the cost of acquiring businesses could increase
materially. Moreover, no assurance can be given that the Company will be able to
obtain financing for acquisitions on terms the Company deems acceptable.
FACILITY OCCUPANCY LEVELS AND CONTRACT DURATION
A substantial portion of the Company's revenues are generated under
facility management contracts that specify a rate per day per inmate ("per diem
rate"), while a substantial portion of the Company's cost structure is fixed.
Under a per diem rate structure, a decrease in occupancy rates would cause a
decrease in revenues and profitability. The Company is, therefore, dependent on
governmental agencies to supply the Company's facilities with a sufficient
number of inmates to meet and exceed the facilities' break-even design
capacities, and in most cases such governmental agencies are under no obligation
to do so. Moreover, because many of the Company's facilities have inmates
serving relatively short sentences or only the last three to six months of their
sentences, the high turnover rate of inmates requires a constant influx of new
inmates from the relevant governmental agencies to provide sufficient
occupancies to achieve profitability. A failure of a governmental agency to
supply sufficient occupancies for any reason may cause the Company to forego
revenues and income. Moreover, occupancy rates during the "start-up" phase when
facilities are first opened typically result in capacity underutilization for a
one-to three-month period after the facilities first receive inmates. As a
result, as the Company opens or begins operating new facilities under new
contracts, there may be a delay in reaching sufficient occupancies to meet the
break-even level of the facilities' design capacities, and the Company may incur
operating losses at such new facilities until these occupancy levels are
reached.
The Company's facility management contracts typically have terms ranging
from one to five years, and renewal is at the option of the contracting
governmental agency. No assurance can be given that any agency will exercise a
renewal option in the future. Additionally, contracting governmental agencies
typically may terminate a facility contract without cause by giving the Company
adequate written notice. Any such termination could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Facility Management Contracts."
FIXED REVENUE STRUCTURE
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. If, as a result of inflation or
other causes, the Company experiences increases in personnel costs (the largest
component of facility management expense) or other operating expenses at rates
faster than increases, if any, in per diem fees, then the Company's results of
operations would be adversely affected.
8
POSSIBLE LOSS OF LEASE RIGHTS
The site of the Airpark Unit (397 beds) and the Flightline Unit (560 beds)
of the Big Spring Facilities (1,305 beds) (the "Airpark / Flightline Site") is
part of a larger tract of land (the "Larger Tract"), which was formerly part of
a United States Air Force base conveyed to the City of Big Spring (the "City")
by the United States government in 1978. The document conveying the Larger Tract
to the City (the "Conveyance") contains certain restrictive covenants relating
to the use of the Larger Tract that apply to the City and its lessees and any
successors and assigns to the ownership of the Larger Tract. These restrictive
covenants include provisions generally requiring use of the Larger Tract for
public airport purposes unless otherwise consented in writing by the Federal
Aviation Administration (the "FAA"), requiring certain maintenance of facilities
on the Larger Tract and requiring the availability of the Larger Tract for use
by federal aircraft. The Conveyance also permits the United States government to
use the Larger Tract in the case of a national emergency and permits the FAA to
be furnished portions of the Larger Tract and any structures located thereon for
use in construction, operation or maintenance of facilities for air traffic
control activities. The Conveyance further provides that, at the option of the
grantor, title to the Larger Tract would revert to the grantor upon any breach
of the provisions of the Conveyance, following notice of breach by the FAA and a
60-day grace period to cure any such breach.
The FAA reviewed the operating agreement and the related agreements between
the City and the Company which permit the Company to assume the operation of the
Big Spring Facilities and advised the City in writing that it has no objections
to the execution thereof by the parties thereto. While the Company believes that
(i) the City is in substantial compliance with the terms of the Conveyance, and
(ii) even if not in substantial compliance, the FAA is aware of (and has not
objected to) all past and present uses of the Larger Tract by the City and its
lessees, the FAA could assert that such uses of the Larger Tract violate the
Conveyance. In addition, the City has used and leased, and may in the future use
or lease, other portions of the Larger Tract for other purposes with respect to
which the Company is not involved and may not be aware. The continued compliance
by the City of Big Spring (or its successors or assigns or other lessees) with
the terms of the Conveyance is not within the control of the Company, and any
breach by the City (or its successors or assigns or other lessees) could result
in reversion of title of all or a portion of the Larger Tract to the United
States government. The agreements between the Company and the City do not give
the Company recourse against the City in the case of such a reversion. In
addition, the Company does not have any assurances from the FAA that it would
give effect to the Company's lease rights in the event of such a reversion.
Accordingly, in the case of a reversion of the Airpark / Flightline Site, or in
any case in which the United States government or the FAA has superior rights to
use the Airpark / Flightline Site, the continued ability of the Company to lease
and use the Airpark / Flightline Site could be subject to the discretion of the
United States government or the FAA. The inability of the Company to continue to
operate the Airpark/Flightline Site would have a material adverse effect on the
Company's financial condition and results of operations.
BUSINESS CONCENTRATION
Contracts with the FBOP, the California Department of Corrections ("CDC")
and the United States Marshals Service (the "U.S. Marshals Service") account for
substantially all the Company's revenues. The loss of, or a significant decrease
in, business from one or more of these governmental agencies would have a
material adverse effect on the Company's financial condition and results of
operations.
CONTRACTS SUBJECT TO GOVERNMENT FUNDING
The Company's facility management contracts are subject to either annual or
bi-annual governmental appropriations. A failure by a governmental agency to
receive such appropriations could result in termination of the contract by such
agency or a reduction of the management fee payable to the Company. In addition,
even if funds are appropriated, delays in payments may occur which could
negatively affect the Company's cash flow. See "Business -- Facility Management
Contracts." Furthermore, in certain cases the development and construction of
facilities to be managed by the Company are subject to obtaining permanent
facility financing. Such financing currently may be obtained through a variety
of means,
9
including the sale of tax-exempt bonds or other obligations or direct government
appropriation. The sale of tax-exempt bonds or other obligations may be
adversely affected by changes in applicable tax laws or adverse changes in the
market for such securities. See "Business -- Facility Design, Construction and
Finance."
GOVERNMENT REGULATION: OVERSIGHT, AUDITS AND INVESTIGATIONS
The Company's business is highly regulated by a variety of governmental
authorities which continuously oversee the Company's business and operations.
For example, the contracting governmental agency typically assigns full-time,
on-site personnel to institutional facilities to monitor the Company's
compliance with contract terms and applicable regulations. Failure by the
Company to comply with contract terms or regulations could expose it to
substantial penalties, including the loss of a management contract. In addition,
changes in existing regulations could require the Company to modify
substantially the manner in which it conducts business and, therefore, could
have a material adverse effect on the Company.
Additionally, the Company's contracts give the contracting agency the right
to conduct audits of the facilities and operations managed by the Company for
the agency, and such audits occur routinely. An audit involves a governmental
agency's review of the Company's compliance with the prescribed policies and
procedures established with respect to the facility. The Company also may be
subject to investigations as a result of an audit, an inmate's complaint or
other causes.
ACCEPTANCE OF PRIVATIZED CORRECTIONAL AND DETENTION FACILITIES
Management of correctional and detention facilities by private entities has
not achieved acceptance by many governmental agencies. Some sectors of the
federal government and some state governments are legally unable to delegate
their traditional management responsibilities for correctional and detention
facilities to private companies. The operation of correctional and detention
facilities by private entities is a relatively new concept, is not widely
understood and has encountered resistance from certain groups, such as labor
unions, local sheriff's departments and groups that believe correctional and
detention facility operations should be conducted only by governmental agencies.
Such resistance may cause a change in public and government acceptance of
privatized correctional facilities. In addition, changes in political parties in
any of the markets in which the Company operates could result in significant
changes in elected officials' previously established views of privatization in
such markets.
OPPOSITION TO FACILITY LOCATION AND ADVERSE PUBLICITY
The Company's success in obtaining new awards and contracts may depend in
part upon its ability to locate land that can be leased or acquired on
economically favorable terms by the Company or other entities working with the
Company in conjunction with the Company's proposal to construct and/or manage a
facility. Some locations may be in or near populous areas and, therefore, may
generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. The Company's business is subject to public
scrutiny. In addition to possible negative publicity about privatization in
general, an escape, riot or other disturbance at a Company-operated facility or
another privately operated facility, or placement of one or more notorious
offenders or criminal or violent actions by inmates or residents at one of the
Company-operated institutional or pre-release facilities may result in publicity
adverse to the Company and its industry, which could materially adversely affect
the Company's business.
POTENTIAL LEGAL LIABILITY
The Company's management of correctional, detention and pre-release
facilities exposes it to potential third-party claims or litigation by inmates
or other persons for personal injury or other damages resulting from contact
with Company-operated facilities, programs, personnel or inmates, including
damages arising from an inmate's escape or from a disturbance or riot at a
Company-operated facility. In addition, certain of the Company's correctional,
detention and pre-release centers (including certain of the Company's non-secure
facilities) contain a high-risk population, many of whom have been convicted of
or charged with violent offenses. As a result, certain inmates or residents at
Company-operated facilities could pose risks to
10
the public at large for which it may be alleged that the Company should be held
liable. Moreover, the Company's management contracts generally require the
Company to indemnify the governmental agency against any damages to which the
governmental agency may be subject in connection with such claims or certain
liability risks faced by the Company, including personal or bodily injury, death
or property damage to a third party if the Company is found to be negligent.
Insurance is a pre-requisite for obtaining and maintaining the Company's
management contracts. While insurance is currently readily available to the
Company, there can be no assurance that insurance will continue to be available
on commercially reasonable terms or will be adequate to cover all potential
claims. See "Business -- Insurance." In addition, the Company is involved in
certain litigation matters resulting from the normal course of operations at its
facilities. See "Business -- Litigation."
COMPETITION
The Company competes with a number of companies, including, but not limited
to, Corrections Corporation of America ("CCA"), Wackenhut Corrections
Corporation ("WHC") and U.S. Corrections Corporation ("USCC"). At December 31,
1995, CCA and WHC accounted for more than 70% of the privatized secure adult
beds under contract in the United States, according to the 1995 Census.
Therefore, certain competitors of the Company are larger and may have greater
resources than the Company. The Company also competes in some markets with small
local companies that may have better knowledge of the local conditions and may
be better able to gain political and public acceptance. Although certain states
require substantial capital investments in new projects, other states may allow
potential competitors to enter the Company's business without substantial
capital investment or previous experience in the management of correctional and
detention facilities. In addition, the Company may compete in some markets with
governmental agencies that operate correctional and detention facilities. The
Company believes its industry is subject to consolidation on both a national and
a regional scale. Other companies having growth objectives similar to the
Company's objectives may enter the industry. These entrants may have greater
financial resources than the Company to finance acquisition and internal growth
opportunities. Consequently, the Company may encounter significant competition
in its efforts to achieve its growth strategy. See "Business -- Competition."
ECONOMIC RISKS ASSOCIATED WITH DEVELOPMENT ACTIVITIES
When the Company is engaged to act as project manager for the design and
construction of a facility, the Company typically acts as the primary contractor
and subcontracts with other parties that act as the general contractors. As
primary contractor, the Company is subject to the various risks of construction
(including shortages of labor and materials, work stoppages, labor disputes and
weather interference) which could cause construction delays, and the Company is
subject to the risk that the general contractor will be unable to complete
construction at the budgeted costs or to fund any excess construction costs.
Under such contracts the Company is ultimately liable for all late delivery
penalties and cost overruns.
DEPENDENCE ON EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The Company depends greatly on the efforts of its executive officers and
key personnel to obtain new contracts, to make acquisitions and to manage the
Company's operations. The loss or unavailability of any of the Company's
executive officers could have an adverse effect on the Company. The Company's
ability to perform under current and new contracts will depend, in part, on its
ability to attract and retain additional qualified senior executives and
operating personnel. The Company currently has a search underway for a chief
operating officer. There is significant competition for qualified facility
administrators, managers, counselors and other key personnel, and no assurance
can be given that the Company will be successful in recruiting or training a
sufficient number of officers or employees of the requisite caliber to enable
the Company to operate its business and implement its growth strategy as
planned. See "Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of a substantial number of shares of Common Stock in the public
market following the Offering, or the perception that such sales could occur,
could have an adverse effect on the market price of the
11
Common Stock. Upon completion of the Offering, 6,265,398 shares of Common Stock
will be outstanding, and 978,109 shares will be issuable upon exercise of
outstanding warrants and stock options. The 3,500,000 shares of Common Stock
sold in the Offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares purchased by an "affiliate" of the Company (as that
term is defined under the Securities Act), which will be subject to the resale
limitations of Securities Act Rule 144. Substantially all the remaining
3,743,507 outstanding shares of Common Stock (including shares issuable upon
exercise of outstanding options and warrants) held by the Company's current
stockholders will be "restricted securities" (within the meaning of Rule 144)
and, therefore, will not be eligible for sale to the public unless they are sold
in transactions registered under the Securities Act or pursuant to an exemption
from Securities Act registration, including pursuant to Rule 144. The Company
has agreed to provide holders of 3,437,726 of these shares (including shares
issuable upon exercise of outstanding options and warrants) with certain rights
to have their shares registered under the Securities Act for public resale. See
"Certain Relationships and Related Party Transactions -- Registration Rights
Agreement." The Company intends to file a registration statement on Form S-8
under the Securities Act to register 880,000 shares of Common Stock reserved or
to be available for issuance pursuant to the Stock Option Plan.
The Company and persons who will beneficially own in the aggregate
3,556,393 shares of Common Stock (including shares issuable upon exercise of
outstanding options and warrants) upon completion of the Offering, including the
Company's directors and executive officers, have agreed not to offer or sell any
shares of Common Stock prior to the expiration of 180 days following the date of
this Prospectus without the prior written consent of Dillon, Read & Co. Inc.
("Dillon Read"), subject to certain exceptions. See "Underwriting."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiation
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the Offering.
See "Underwriting" for the factors that will be considered in determining the
initial public offering price. Application has been made for quotation of the
Common Stock on the Nasdaq National Market, but no assurance can be given that
an active trading market for the Common Stock will develop or, if developed,
continue after the Offering. The market price of the Common Stock after the
Offering may be subject to significant fluctuations from time to time in
response to numerous factors, including variations in the reported periodic
financial results of the Company, changing conditions in the economy in general
or in the Company's industry in particular and unfavorable publicity affecting
the Company or its industry. In addition, stock markets generally, and the stock
prices of competitors in the Company's industry, experience significant price
and volume volatility from time to time which may affect the market price of the
Common Stock for reasons unrelated to the Company's performance.
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $ in the pro forma net tangible book value per share of
their investment. In the event the Company issues additional Common Stock in the
future, including Common Stock that may be issued in connection with future
acquisitions, purchasers of Common Stock in the Offering may experience further
dilution in the net tangible book value per share of the Common Stock. See
"Dilution."
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") will authorize the Board of Directors to issue, without
stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. See
"Description of Capital Stock -- Preferred Stock."
12
POTENTIAL ADVERSE EFFECTS OF CONTROL OF COMPANY BY EXISTING STOCKHOLDERS
Simultaneously with the completion of the Offering, certain current
stockholders of the Company (the "Applicable Stockholders"), who will
beneficially own in the aggregate approximately 44.7% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 36.8% of the
outstanding Common Stock if the Underwriters exercise their over-allotment
option in full), will enter into a stockholders agreement. The agreement will
provide that the Applicable Stockholders agree to vote all shares of Common
Stock owned by them to elect three directors out of a five-member Board of
Directors of the Company. The stockholders agreement will provide that the
number of directors may only be increased by vote of a majority of the Board of
Directors. Consequently, the Applicable Stockholders, through their Common Stock
holdings and representation on the Board of Directors of the Company, which will
initially include a majority of directors designated by the Applicable
Shareholders, will be able to exercise significant influence over the policies
and direction of the Company. The stockholders agreement will terminate upon the
first to occur of (i) four years from the date of the completion of the Offering
or (ii) the Applicable Stockholders collectively owning less than 25% of the
outstanding Common Stock. The stockholders agreement will also terminate as to
any Applicable Stockholder upon such stockholder owning less than 5% of the
outstanding Common Stock. See "Certain Relationships and Related Party
Transactions -- Stockholders Agreement" and "Principal and Selling
Stockholders."
13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,023,103 shares of
Common Stock offered by the Company hereby are estimated to be approximately $ ,
assuming an initial public offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any of the net proceeds from the sale of Common Stock
by the Selling Stockholders.
Of the net proceeds received by the Company, approximately $ will be used
to repay all the Company's borrowings outstanding under a credit agreement dated
July 3, 1996 (the "1996 Credit Facility") and a short-term convertible note
dated July 3, 1996 and issued by the Company to the lender for the 1996 Credit
Facility (the "Convertible Bridge Note"). Any remaining proceeds will be used
for working capital and general corporate purposes.
The Convertible Bridge Note has an outstanding principal amount of $6.0
million, bears interest at 9.5% per annum and matures December 30, 1996. If not
then paid and the conversion date is not extended, the Convertible Bridge Note
and any accrued interest thereon will convert into Common Stock at a conversion
rate of $5.64 per share. The Company used the proceeds of the Convertible Bridge
Note to finance a portion of the MidTex acquisition.
As of July 15, 1996, the outstanding indebtedness under the 1996 Credit
Facility totaled $28.3 million, of which $3.875 million will be due within one
year of the date of this Prospectus and the balance will be due in subsequent
installments with a final maturity date of December 31, 2002. At July 15, 1996,
the weighted average interest rate on the debt outstanding under the 1996 Credit
Facility was approximately 10.0%. The Company used borrowings under the 1996
Credit Facility to refinance outstanding borrowings under a credit agreement
dated March 14, 1995, as amended (the "1995 Credit Facility"), to finance a
portion of the MidTex acquisition and for working capital. The Company used
borrowings under the 1995 Credit Facility for consolidation of various prior
debt facilities, expansion funding for new projects, the repurchase of shares of
Common Stock from a former officer of the Company, the acquisition of the Reid
Center and working capital purposes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
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 Company expects to enter into
a new revolving credit facility that will contain restrictions on payment of
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
14
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of March 31, 1996, (ii) on a pro forma consolidated basis to give
effect to the Acquisitions and the issuance by the Company of shares, and
options and warrants to purchase shares, of Class A Common Stock and Class B
Common Stock after March 31, 1996 and (iii) on such pro forma basis as adjusted
for the Reclassification, the exercise of outstanding stock options or warrants
relating to the shares of Common Stock to be sold by the Selling Stockholders in
the Offering and the sale of the 3,023,103 shares of Common Stock offered by the
Company hereby at an assumed offering price of $ per share (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company) and the application of the net proceeds therefrom. See "Use of
Proceeds." As of or prior to the completion of the Offering, the Company will
effect the Reclassification, whereby each share of Class A Common Stock and
Class B Common Stock will be reclassified into one share of Common Stock. This
table should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto and "Pro Forma Financial Data" included
elsewhere in this Prospectus.
MARCH 31, 1996
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(DOLLARS IN THOUSANDS)
Long-term debt, including current portion:
1995 Credit Facility............... $ 8,450 $ -- $ --
1996 Credit Facility............... -- 28,826 --
Other.............................. 53 53 53
---------- --------- -----------
Total long-term debt,
including current
portion.................... 8,503 28,879 53
---------- --------- -----------
Convertible Bridge Note................. -- 6,000 --
Stockholders' equity:
Preferred Stock, $.001 par value,
10,000,000 shares authorized pro
forma as adjusted, none issued and
outstanding....................... -- -- --
Common stock:
Class A Common Stock, $.001 par
value, 9,000,000 shares
authorized historical and pro
forma, 3,189,385 shares issued
and outstanding historical and
3,226,792 shares issued and
outstanding pro forma(1)... 3 3 --
Class B Common Stock, $.001
par value, 3,000,000 shares
authorized historical and
pro forma, none issued and
outstanding historical and
277,441 shares issued and
outstanding pro forma(2)... -- -- --
Common Stock, $.001 par value,
50,000,000 shares
authorized pro forma as
adjusted, 6,265,397 shares
issued and
outstanding(3)............. -- -- 6
Additional paid-in capital......... 6,984 8,085 44,516
Retained deficit................... (7,761) (7,761) (7,761)
Treasury stock (555,000 shares of
Class A Common Stock, at cost).... (2,603) (2,603) (2,603)
---------- --------- -----------
Total stockholders' equity
(deficit).................. (3,377) (2,276) 34,158
---------- --------- -----------
Total capitalization..... $ 5,126 $32,603 $34,211
========== ========= ===========
- ------------
(1) Par value decreased from $.01 to $.001 on July 3, 1996. Excludes 112,062
shares (historical) and 134,312 shares (pro forma) of Class A Common Stock
reserved for issuance upon exercise of outstanding stock options and
warrants.
(2) The number of authorized shares of Class B Common Stock increased from
1,000,000 to 3,000,000 and par value decreased from $.01 to $.001 on July 3,
1996. Excludes 717,500 shares (historical) and 1,106,859 shares (pro forma)
of Class B Common Stock reserved for issuance upon exercise of outstanding
stock options and warrants.
(3) Excludes 353,498 shares of Common Stock reserved for issuance after
completion of the Offering upon exercise of outstanding stock options
granted under the Stock Option Plan and 624,611 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options and
warrants not included under the Stock Option Plan. See "Management -- Stock
Option Plan" and Note 4 of Notes to the Company's Consolidated Financial
Statements.
15
DILUTION
The deficit in the pro forma net tangible book value of the Common Stock as
of March 31, 1996 (pro forma for the Acquisitions) was $(3,455,000), or
approximately $ per share. Pro forma net tangible book value (deficit) per share
represents the amount of the Company's total tangible assets less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding. Pro forma net tangible book value (deficit) dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering and the pro forma net tangible book value
(deficit) per share of Common Stock immediately after completion of the
Offering. After giving effect to the sale by the Company of the 3,023,103 shares
of Common Stock offered hereby at the initial public offering price of $ per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value (deficit) of the Company as of March 31, 1996 would have been $ , or
approximately $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an immediate
dilution in pro forma net tangible book value of $ per share to new investors in
the Offering.
The following table illustrates this per share dilution:
Public offering price per share......... $
Pro forma net tangible book value
(deficit) per share before
the Offering.......................... $
Increase per share attributable to new
investors.............................
---------
Pro forma net tangible book value per
share after the Offering..............
----------
Dilution per share to new investors..... $
==========
The following table sets forth, on an unaudited pro forma basis at March
31, 1996, the difference between the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by the existing holders of Common Stock and by the new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company at the initial public offering price of $ per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... % $ % $
New investors...........................
-------- ------- ----------- -------
Total.............................. % $ %
======== ======= =========== =======
</TABLE>
The foregoing table excludes 353,498 shares of Common Stock reserved for
issuance after completion of the Offering upon exercise of outstanding stock
options granted under the Stock Option Plan and 624,611 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options and warrants
not included under the Stock Option Plan. See "Management -- Stock Option Plan"
and Note 4 of Notes to the Company's Consolidated Financial Statements.
16
PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1996 and the unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 1995 and for the three months
ended March 31, 1996, reflect the consolidated financial position and results of
operations, respectively, of the Company and subsidiaries as if (i) the
Acquisitions, (ii) the issuance by the Company of shares, and options and
warrants to purchase shares, of Class A Common Stock and Class B Common Stock
after March 31, 1996, (iii) the Reclassification, (iv) the exercise of
outstanding stock options and warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering and (v) the Offering and
the application of the estimated net proceeds therefrom, had occurred, in the
case of the balance sheet, on March 31, 1996, and, in the case of the statements
of operations, on January 1, 1995. These statements do not purport to be
indicative of the consolidated results of operations of the Company that might
have been obtained had these events actually then occurred or of the Company's
future results.
The pro forma condensed consolidated financial statements are based on
certain assumptions and estimates which are subject to change.
17
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
REID PRO FORMA PRO FORMA FOR OFFERING
THE COMPANY MIDTEX CENTER ADJUSTMENTS THE ACQUISITIONS ADJUSTMENTS
----------- ------- ------ ----------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............. $ 632 $ 537 $ 429 $ (429)(1) $ 2,424 $ 923(12)
1,000 (2) 685(13)
255 (3)
Receivables, net...................... 3,133 2,693 379 (379)(1) 5,826 --
Other current assets.................. 582 667 41 (41)(1) 1,249 --
----------- ------- ------ ----------- -------- -----------
Total current assets........... 4,347 3,897 849 406 9,499 1,608
Property and equipment, net:
Prepaid facility use.................. -- -- -- 22,072 (4) 22,072 --
Other................................. 2,222 22,245 1,016 (22,235)(5) 4,522 --
1,274 (6)
Other assets............................ 1,644 5 -- -- 1,649 --
----------- ------- ------ ----------- -------- -----------
Total assets........................ $ 8,213 $26,147 $1,865 $ 1,517 $ 37,742 $ 1,608
=========== ======= ====== =========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 2,596 $ 1,838 $ 149 $ (95)(1) $ 4,488 $ --
Current portion of capital lease
obligations......................... -- 1,224 -- (1,224)(7) -- --
Current portion of long-term debt..... 24 -- 4 (4)(1) 3,149 (3,125)(12)
3,125 (2)
----------- ------- ------ ----------- -------- -----------
Total current liabilities...... 2,620 3,062 153 1,802 7,637 (3,125)
Long-term capital lease obligations..... -- 15,435 -- (15,435)(7) -- --
Other long-term liabilities............. 491 -- -- 160 (8) 651 --
Long-term debt, excluding current
portion............................... 8,479 -- -- 15,175 (2) 25,730 (25,701)(12)
2,076 (9)
Convertible bridge note................. -- -- -- 6,000 (2) 6,000 (6,000)(12)
Stockholders' equity (deficit) (3,377) 7,650 1,712 (7,650)(10) (2,276) 35,749 (12)
1,101 (3) 685 (13)
(1,712)(11)
----------- ------- ------ ----------- -------- -----------
Total liabilities and
stockholders' equity......... $ 8,213 $26,147 $1,865 $ 1,517 $ 37,742 $ 1,608
=========== ======= ====== =========== ======== ===========
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
ASSETS:
Current assets:
Cash and cash equivalents............. $ 4,032
Receivables, net...................... 5,826
Other current assets.................. 1,249
--------
Total current assets........... 11,107
Property and equipment, net:
Prepaid facility use.................. 22,072
Other................................. 4,522
Other assets............................ 1,649
--------
Total assets........................ $ 39,350
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 4,488
Current portion of capital lease
obligations......................... --
Current portion of long-term debt..... 24
--------
Total current liabilities...... 4,512
Long-term capital lease obligations..... --
Other long-term liabilities............. 651
Long-term debt, excluding current
portion............................... 29
Convertible bridge note................. --
Stockholders' equity (deficit) 34,158
--------
Total liabilities and
stockholders' equity......... $ 39,350
========
See accompanying notes to unaudited pro forma
condensed consolidated balance sheet.
18
CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Records the adjustment to eliminate assets not acquired and liabilities not
assumed in the acquisition of the Reid Center.
(2) Reflects the increase in long-term debt of $24.3 million, of which $23.3
million in borrowings relates to financing the MidTex acquisition and $1.0
million in borrowings is for working capital purposes and is reflected as
an increase to cash.
(3) Records the increase to equity for (i) the value of stock options granted
($846,000) and (ii) the proceeds upon the issuance of 90,331 shares to
existing shareholders ($255,000), both in connection with the financing for
the MidTex Acquisition.
(4) Reflects an allocation of $22.1 million of the purchase price to property
and equipment for the Company's prepaid right to use the three detention
facilities retained by the City of Big Spring for 19, 20 and 23 years,
respectively, plus three five-year extensions.
(5) Records a reduction in net property and equipment of $22.2 million due to
the elimination of capital leases related to the three detention facilities
(see Note 7 below).
(6) Reflects the increase in property and equipment of $1.3 million, based on
management's estimate of the fair market value of the Reid Center facility.
(7) Records the elimination of capital leases of $1.2 million (current) and
$15.4 million (long-term) resulting from the MidTex acquisition.
(8) Records an increase in other liabilities of $160,000 for amounts owed to a
consultant of the Reid Center resulting from the transaction.
(9) Reflects the increase in long-term debt of $2.1 million for borrowings
related to financing the acquisition of the Reid Center.
(10) Records the elimination of net assets of MidTex prior to the acquisition.
(11) Records the elimination of net assets of the Reid Center prior to
acquisition.
(12) Records the sale of 3,023,103 shares of Common Stock, par value $.001 per
share, at $ per share, net of estimated aggregate offering expenses of $3.5
million, the use of $34.8 million of the net proceeds thereof to repay
outstanding indebtedness, and the use of the remaining proceeds of $923,000
as an increase to cash.
(13) Records the proceeds on exercise of stock options and warrants by certain
Selling Stockholders.
Reference is made to Note 7 of Notes to the Company's Consolidated
Financial Statements for a summary of the consideration paid and estimated fair
market value of the assets acquired and liabilities assumed related to the
MidTex and Reid Center acquisitions.
19
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------
REID PRO FORMA PRO FORMA FOR OFFERING
THE COMPANY MIDTEX CENTER ADJUSTMENTS THE ACQUISITIONS ADJUSTMENTS
----------- ------- ------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 20,692 $14,682 $ 3,342 $ -- $ 38,716 $ --
Operating expenses.................... 16,351 9,007 3,562 164 (1) 30,611 --
1,527 (2)
Depreciation and amortization......... 673 682 71 (203)(3) 1,247 --
24 (4)
----------- ------- ------- ----------- -------------------- -----------
Contribution from operations... 3,668 4,993 (291) (1,512) 6,858 --
General and administrative expenses... 3,531 1,527 -- (284)(5) 3,247 300(10)
(1,527)(2)
Impairment loss on long-lived assets.. 6,600 -- -- (6,600)(6) -- --
----------- ------- ------- ----------- -------------------- -----------
Income (loss) from operations......... (6,463) 3,466 (291) 6,899 3,611 (300)
Interest expense...................... 1,115 1,456 -- 329 (7) 3,109 (3,109)(11)
209 (8)
Interest income....................... (136) (9) -- -- (145) --
----------- ------- ------- ----------- -------------------- -----------
Income (loss) before
provision for income taxes... (7,442) 2,019 (291) 6,361 647 2,809
Provision for income taxes............ -- -- -- 388 (9) 388 1,067(12)
----------- ------- ------- ----------- -------------------- -----------
Net income (loss)..................... $ (7,442) $ 2,019 $ (291) $ 5,973 $ 259 $ 1,742
=========== ======= ======= =========== ==================== ===========
Earnings (loss) per share............. $ $
=========== ====================
Number of shares used in per share
computation (thousands).............
=========== ====================
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
Revenues................................ $ 38,716
Operating expenses...................... 30,611
Depreciation and amortization........... 1,247
----------------
Contribution from operations... 6,858
General and administrative expenses..... 3,547
Impairment loss on long-lived assets.... --
----------------
Income (loss) from operations........... 3,311
Interest expense........................ --
Interest income......................... (145)
----------------
Income (loss) before
provision for income taxes... 3,456
Provision for income taxes.............. 1,455
----------------
Net income (loss)....................... $ 2,001
================
Earnings (loss) per share............... $
================
Number of shares used in per share
computation (thousands)...............
================
See accompanying notes to unaudited pro forma
condensed consolidated statements of operations.
20
CORNELL CORRECTIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------
REID PRO FORMA PRO FORMA OFFERING
THE COMPANY MIDTEX CENTER ADJUSTMENTS FOR THE ACQUISITIONS ADJUSTMENTS
----------- ------ ------ ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 5,454 $4,157 $ 838 $ -- $ 10,449 $ --
Operating expenses...................... 4,554 2,816 743 54 (1) 8,492 --
325 (2)
Depreciation and amortization.. 77 203 17 (45)(3) 260 --
8 (4)
----------- ------ ------ ----------- -------------------- -----------
Contribution from operations............ 823 1,138 78 (342) 1,697 --
General and administrative expenses..... 719 325 -- (9)(5) 710 75 (10)
(325)(2)
----------- ------ ------ ----------- -------------------- -----------
Income (loss) from operations.. 104 813 78 (8) 987 (75)
Interest expense........................ 232 426 -- 182 (7) 893 (893)(11)
53 (8)
Interest income......................... (28) (5) -- -- (33) --
----------- ------ ------ ----------- -------------------- -----------
Income (loss) before provision for
income taxes.......................... (100) 392 78 (243) 127 818
Provision for income taxes.............. -- -- -- 53 (9) 53 311 (12)
----------- ------ ------ ----------- -------------------- -----------
Net income (loss)....................... $ (100) $ 392 $ 78 $ (296) $ 74 $ 507
=========== ====== ====== =========== ==================== ===========
Earnings (loss) per share............... $ $
=========== ====================
Number of shares used in per share
computation (thousands)...............
=========== ====================
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
Revenues................................ $ 10,449
Operating expenses...................... 8,492
Depreciation and amortization.. 260
----------------
Contribution from operations............ 1,697
General and administrative expenses..... 785
----------------
Income (loss) from operations.. 912
Interest expense........................ --
Interest income......................... (33)
----------------
Income (loss) before provision for
income taxes.......................... 945
Provision for income taxes.............. 364
----------------
Net income (loss)....................... $ 581
================
Earnings (loss) per share............... $
================
Number of shares used in per share
computation (thousands)...............
================
See accompanying notes to unaudited pro forma
condensed consolidated statements of operations.
21
CORNELL CORRECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) Records adjustments to operating expenses to reflect annual payments in
lieu of taxes to the City of Big Spring, Texas resulting from the
acquisition of substantially all the assets of MidTex.
(2) Records reclassification of MidTex's general and administrative expenses to
operating expenses.
(3) Records adjustments to depreciation and amortization as follows for MidTex:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
and amortization expense.............. $ (682) $ (203)
Amortization of prepaid facility use
costs................................. 479 158
-------- --------------
$ (203) $ (45)
======== ==============
(4) Records adjustments to depreciation resulting from a decrease in the
estimated useful lives of the Reid Center assets and an increase in the
depreciable basis in connection with the allocation of purchase price
thereof.
(5) Records adjustments to general and administrative expenses as follows for
MidTex:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- --------------
(DOLLARS IN THOUSANDS)
To reduce general and administrative
expense for the compensation of
MidTex's executives, including a
bonus, which is nonrecurring.......... $ (349) $ (25)
Cost of management advisory services
consulting agreement with MidTex's
executives............................ 65 16
-------- --------------
$ (284) $ (9)
======== ==============
(6) Records adjustments to eliminate the one-time nonrecurring writedown of
goodwill made in connection with the Company's adoption of SFAS No. 121.
See Note 2 of Notes to the Company's Consolidated Financial Statements.
(7) Records additional interest expense on the bank borrowings incurred to
consummate the MidTex acquisition based on an average interest rate of 10%
on average total borrowings of $17.8 million and $24.3 million for the year
ended December 31, 1995, and for the three months ended March 31, 1996,
respectively. The assumed weighted average borrowings by MidTex for the
year ended December 31, 1995 were reduced by the cost of a new facility for
MidTex which was placed into service during MidTex's 1995 fiscal year.
(8) Records additional interest expense on the bank borrowings incurred to
consummate the Reid Center acquisition based on an average interest rate of
10% on average total borrowings of $2.1 million for the year ended December
31, 1995 and for the three months ended March 31, 1996.
(9) Records adjustments to the consolidated pro forma provision for income
taxes. There was no historical provision for income taxes for MidTex or the
Reid Center because they were exempt from income taxes.
(10) Records adjustments to increase general and administrative expenses of
$300,000 for the year ended December 31, 1995, and $75,000 for the three
months ended March 31, 1996, to reflect estimated cost increases associated
with the Company becoming publicly held.
(11) Reflects a reduction in interest expense of $3.1 million for the year ended
December 31, 1995, and $893,000 for the three months ended March 31, 1996,
as a result of the repayment in full of borrowings outstanding under the
1996 Credit Facility and under the Convertible Bridge Note from the net
proceeds of the Offering.
(12) Records adjustments to record income tax effects of the foregoing
adjustments.
Reference is made to Note 7 of Notes to the Company's Consolidated
Financial Statements for a summary of the consideration paid and estimated fair
market value of the assets acquired and liabilities assumed related to the
MidTex and Reid Center acquisitions.
22
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected consolidated financial data for the Company set forth below
with respect to the Statement of Operations Data and Balance Sheet Data as of
and for the five years ended December 31, 1995 is derived from the consolidated
financial statements of the Company, which statements have been audited by
Arthur Andersen LLP, independent public accountants, and of which the statements
relating to 1993, 1994 and 1995 are included elsewhere in this Prospectus. The
selected financial data with respect to the Statement of Operations Data and
Balance Sheet Data as of and for the three month periods ended March 31, 1995
and 1996 is derived from the unaudited consolidated financial statements of the
Company which, in the opinion of management of the Company, reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of such data. The data for the three months ended March 31,
1996 is not necessarily indicative of the results that may be expected for the
entire year. The pro forma financial data of the Company as of and for the year
ended December 31, 1995 and the three months ended March 31, 1996 is derived
from the pro forma financial statements of the Company that appear elsewhere in
this Prospectus. The pro forma Statement of Operations Data gives effect to (i)
the Acquisitions, (ii) the issuance by the Company of shares, and options and
warrants to purchases shares, of Class A Common Stock and Class B Common Stock
after March 31, 1996, (iii) the Reclassification, (iv) the exercise of
outstanding stock options and warrants relating to the shares of Common Stock to
be sold by the Selling Stockholders in the Offering, and (v) the Offering and
the application of the estimated net proceeds therefrom to the Company, as if
such events had occurred on January 1, 1995. The pro forma Balance Sheet Data as
of March 31, 1996 gives effect to such events as if they had occurred on March
31, 1996. The pro forma financial information does not purport to represent what
the Company's results of operations or financial position actually would have
been had these events, in fact, occurred on the date or at the beginning of the
period indicated, nor are they intended to project the Company's results of
operations or financial position for any future date or period. 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 Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------
---------------------------------------------------------------------------
THREE MONTHS
ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31,
----------------------------------------------------- -------------------- ------------
1991 1992 1993 1994(1) 1995 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Occupancy fees................... $ -- $ -- $ 107 $ 15,389 $ 20,594 $ 4,930 $ 5,084 $ 37,229
Development fees and other
income......................... 235 2,540 3,091 300 98 3 370 1,487
--------- --------- --------- --------- --------- --------- --------- ------------
Total revenues............... 235 2,540 3,198 15,689 20,692 4,933 5,454 38,716
Operating expenses................. -- -- 2,827 12,315 16,351 4,027 4,554 30,611
Depreciation and amortization...... 3 3 16 635 673 104 77 1,247
--------- --------- --------- --------- --------- --------- --------- ------------
Contribution from operations....... 232 2,537 355 2,739 3,668 802 823 6,858
General and administrative
expenses......................... 968 1,627 1,315 2,959 3,531 747 719 3,547
Impairment loss on long-lived
assets........................... -- -- -- -- 6,600(2) -- -- --
--------- --------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations...... (736) 910 (960) (220) (6,463) 55 104 3,311
Interest expense................... 7 -- -- 294 1,115 110 232 --
Interest income.................... (1) (30) (45) (138) (136) (41) (28) (145)
--------- --------- --------- --------- --------- --------- --------- ------------
Income (loss) before income
taxes............................ (742) 940 (915) (376) (7,442) (14) (100) 3,456
Provision for income taxes(3)...... -- -- -- 101 -- -- -- 1,455
--------- --------- --------- --------- --------- --------- --------- ------------
Net income (loss).................. $ (742) $ 940 $ (915) $ (477) $ (7,442) $ (14) $ (100) $ 2,001
========= ========= ========= ========= ========= ========= ========= ============
Earnings (loss) per share.......... $ $ $ $ $ $ $ $
========= ========= ========= ========= ========= ========= ========= ============
Number of shares used in per share
computation(4)...................
OPERATING DATA:
Beds under contract (end of
period).......................... -- -- 282 1,155 1,478 1,135 1,486 3,093
Contracted beds in operation (end
of period)....................... -- -- 282 1,155 1,135 1,135 1,251 2,750
Average occupancy based on
contracted beds in
operation(5)..................... -- -- -- 92.1% 98.9% 96.9% 94.0% 91.8%
BALANCE SHEET DATA:
Working capital (deficit).......... $ (293) $ 812 $ 810 $ 2,015 $ 1,525 $ 1,812 $ 1,727
Total assets....................... 44 1,300 2,048 13,218 7,854 13,912 8,213
Long-term debt..................... -- -- -- 3,447 7,649 5,025 8,503
Stockholders' equity (deficit)..... (289) 896 1,085 6,754 (3,277) 6,740 (3,377)
</TABLE>
THREE
MONTHS
ENDED
MARCH 31,
---------
1996
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Occupancy fees................... $10,079
Development fees and other
income......................... 370
---------
Total revenues............... 10,449
Operating expenses................. 8,492
Depreciation and amortization...... 260
---------
Contribution from operations....... 1,697
General and administrative
expenses......................... 785
Impairment loss on long-lived
assets........................... --
---------
Income (loss) from operations...... 912
Interest expense................... --
Interest income.................... (33)
---------
Income (loss) before income
taxes............................ 945
Provision for income taxes(3)...... 364
---------
Net income (loss).................. $ 581
=========
Earnings (loss) per share.......... $
=========
Number of shares used in per share
computation(4)...................
OPERATING DATA:
Beds under contract (end of
period).......................... 3,101
Contracted beds in operation (end
of period)....................... 2,866
Average occupancy based on
contracted beds in
operation(5)..................... 91.2%
BALANCE SHEET DATA:
Working capital (deficit).......... $ 6,595
Total assets....................... 39,350
Long-term debt..................... 53
Stockholders' equity (deficit)..... 34,158
- ------------
(1) Includes operations purchased by the Company on March 31, 1994.
(2) The impairment loss on long-lived assets relates to a writedown of goodwill.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- Year Ended December 31,
1995 Compared to Year Ended December 31, 1994."
(3) Although the Company incurred a loss for financial reporting purposes for
the year ended December 31, 1994, a provision was recognized for taxable
income resulting principally from adding back nondeductible amortization of
goodwill to the loss for financial reporting purposes. There was no
provision for income taxes for the year ended December 31, 1993 because the
Company was organized as a partnership prior to March 31, 1994.
(4) 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.
(5) For any applicable facilities, includes reduced occupancy during the
start-up phase. See "Business -- Facility Management Contracts." For the
year ended December 31, 1993, occupancy did not commence until December
1993.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in March 1994 as the successor to a partnership
co-founded by David M. Cornell, the Company's Chairman, Chief Executive Officer
and President. In March 1994, the Company acquired Eclectic, which began
developing non-secure pre-release facilities in California in 1977. The
acquisition of Eclectic added 11 privatized institutional and pre-release
facilities with an aggregate design capacity of 979 beds. The following table
sets forth the number of facilities under contract or award at the end of the
periods shown.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1993 1994 1995 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Contracts (1)........................... 1 16 19 22
Facilities in operation................. 1 13 12 14
Design capacity of facilities in
operation............................. 302 1,281 1,347 1,499
Beds under contract (end of period)..... 282 1,155 1,478 1,486
Contracted beds in operation (end of
period)............................... 282 1,155 1,135 1,251
Average occupancy based on contracted
beds in operation(2).................. -- 92.1% 98.9% 94.0%
</TABLE>
- ------------
(1) Consists of facilities in operation, facilities under development and
facilities for which awards have been obtained.
(2) For any applicable facilities, includes reduced occupancy during the
start-up phase. See "Business -- Facility Management Contracts." For the
year ended December 31, 1993, occupancy did not commence until December
1993.
During 1996, the Company has added the management of 2,002 beds through
opening or contracting to open four new facilities (387 beds) and the
Acquisitions (1,615 beds). As of July 15, 1996, the Company has 24 contracts to
operate 20 private correctional, detention and pre-release facilities with an
aggregate design capacity of 3,349 beds. Of these facilities, 18 are currently
in operation (3,114 beds) and two are under development (235 beds). One of the
two facilities under development is scheduled to commence operations during the
third quarter of 1996, and the other is scheduled to commence operations during
the first quarter of 1997. In addition, as of June 30, 1996, the Company has
submitted written bids to operate eight new projects with an aggregate design
capacity of over 3,200 beds in response to governmental agencies' pending
Requests For Proposals ("RFPs").
The Company derives substantially all its revenues from operating
correctional, detention and pre-release facilities for federal and state
governmental agencies in the United States. Revenues for operation of
correctional, detention and pre-release facilities are recognized on a per diem
rate based upon the number of occupant days for the period. In addition,
contracts for seven facilities provide for direct reimbursement by the
contracting governmental agency of facility rent and certain types of insurance.
The Company incurs all facility operating expenses, except for certain debt
service and lease payments with respect to two facilities for which the Company
has only a management contract. The Company owns two facilities, the Peter A.
Leidel Community Corrections Center (the "Leidel Center") and the Reid Center,
both located in Houston, Texas. In connection with the acquisition of
substantially all the assets of MidTex, and as part of the purchase price
therefor, the Company prepaid a majority of the facility use cost of the Big
Spring Facilities through at least the year 2030. See "Risk Factors -- Possible
Loss of Lease Rights."
Facility payroll and related taxes constitute the majority of operating
expenses. Other operating expenses consist of food, insurance, medical services,
supplies and maintenance and other general operating expenses. General and
administrative expenses consist primarily of salaries of the Company's corporate
and administrative personnel who provide senior management, accounting, finance,
personnel and other services and costs of developing new contracts.
24
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving residents or inmates. Residents or inmates are
typically assigned to a newly opened facility on a structured basis over a
one-to three-month period. The Company may incur operating losses at new
facilities until break-even occupancy levels are reached. Quarterly results can
be substantially affected by the timing of the commencement of operations as
well as development and construction of new facilities and by expenses incurred
by the Company (including the cost of options to purchase or lease proposed
facility sites and the cost of engaging outside consultants and legal experts
related to submitting responses to RFPs).
Working capital requirements generally increase immediately prior to the
Company commencing management of a new facility as the Company incurs start-up
costs and purchases necessary equipment and supplies before facility management
revenue is realized.
RESULTS OF OPERATIONS
The Company's historical operating results reflect that the Company has
expanded its business since 1993 from correctional, detention and pre-release
facility development and consulting into operation of correctional, detention
and pre-release facilities. Material fluctuations in the Company's results of
operations are principally the result of the timing and effect of acquisitions
and the level of development activity conducted by the Company and occupancy
rates at Company-operated facilities. The Company's acquisitions to date have
been accounted for using the purchase method of accounting, whereby the
operating results of the acquired businesses have been reported in the Company's
operating results since the date of acquisition.
The Company earned its first occupancy fee revenue in December 1993 upon
the opening of the Donald W. Wyatt Federal Detention Facility of Central Falls,
Rhode Island (the "Wyatt Facility"). The Company's operations grew significantly
with the March 1994 acquisition of Eclectic. See " -- General." The operations
of Eclectic were included in the Company's results of operations for nine months
in 1994 and a full twelve months in 1995. The Company's acquisition of the Reid
Center in May 1996 and MidTex in July 1996 will significantly increase 1996
revenues over 1995 and have a greater impact in 1997 once such operations are
included in the Company's reported results of operations for a full year.
The Company's contribution from operations as a percentage of revenues will
fluctuate depending on the relative mix of operating contracts among the
Company's three areas of operational focus. See "Business -- General." Since
non-secure pre-release facilities involve contracts with a fewer number of beds
than secure institutions, fluctuations in the occupancy levels in such
facilities have a more significant impact on their contribution margins.
The following table sets forth for the periods indicated the percentages of
total revenue represented by certain items in the Company's historical
consolidated statement of operations.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses...................... 88.4 78.5 79.0 81.6 83.5
Depreciation and amortization........... 0.5 4.0 3.3 2.1 1.4
--------- --------- --------- --------- ---------
Contribution from operations............ 11.1 17.5 17.7 16.3 15.1
General and administrative expenses..... 41.1 18.9 17.1 15.1 13.2
Impairment loss on long-lived assets.... -- -- 31.9 -- --
--------- --------- --------- --------- ---------
Income (loss) from operations........... (30.0) (1.4) (31.3) 1.2 1.9
Interest expense (income)............... (1.4) 1.0 4.7 1.5 3.7
--------- --------- --------- --------- ---------
Loss before income taxes................ (28.6) (2.4) (36.0) (0.3) (1.8)
Provision for income taxes.............. 0.0 0.6 0.0 0.0 0.0
--------- --------- --------- --------- ---------
Net loss................................ (28.6) (3.0) (36.0) (0.3) (1.8)
========= ========= ========= ========= =========
</TABLE>
25
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
TOTAL REVENUES. Total revenues increased by 10.6% to $5.5 million for the
three months ended March 31, 1996 from $4.9 million for the three months ended
March 31, 1995. The increase in occupancy fees of $154,000, or 3.1%, was due
principally to the opening of two new pre-release facilities during the first
quarter of 1996. Revenues were lower than expected as a result of lower than
anticipated occupancy levels at the Wyatt Facility and certain pre-release
facilities. The increase in development fees and other income for the three
months ended March 31, 1996 to $370,000 from $3,000 for the three months ended
March 31, 1995 was due to the reversal of a $206,000 reserve for a receivable
relating to 1994 operations of the Wyatt Facility and the recognition of
development fees attributable to the opening of the two new facilities.
OPERATING EXPENSES. Operating expenses increased by 13.1% to $4.6 million
for the three months ended March 31, 1996 from $4.0 million for the three months
ended March 31, 1995. This increase is principally attributable to the opening
of two new pre-release facilities during the first quarter of 1996. As a
percentage of revenues, operating expenses increased to 83.5% from 81.6% The
increase in operating expenses as a percentage of revenues is principally due to
incurring fixed operating costs while experiencing lower occupancy during
start-up at one of the new pre-release facilities and reduced occupancy at the
Wyatt Facility during the first quarter of 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
26.0% to $77,000 for the three months ended March 31, 1996 from $104,000 for
three months ended March 31, 1995. The decrease was primarily due to a reduction
in goodwill amortization of approximately $124,000 resulting from the writedown
of goodwill during 1995, offset in part by an accounting adjustment in the first
quarter of 1995 to adjust depreciation expense in prior periods.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased by
2.6% to $823,000 for the three months ended March 31, 1996 from $802,000 for the
three months ended March 31, 1995. As a percentage of revenues, contribution
from operations decreased to 15.1% from 16.3% due to incurring fixed operating
costs while experiencing lower occupancy during start-up at one of the new
pre-release facilities and reduced occupancy at the Wyatt Facility during the
first quarter of 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by 3.7% to $719,000 for the three months ended March 31, 1996 from
$747,000 for the three months ended March 31, 1995. As a percentage of revenues,
general and administrative expenses decreased to 13.2% from 15.1% due
principally to spreading fixed costs over a larger revenue base.
INTEREST. Interest expense, net of interest income, increased to $204,000
for the three months ended March 31, 1996 from $69,000 for the three months
ended March 31, 1995. The increase in net interest expense was principally due
to borrowings under the Company's 1995 Credit Facility related to the Company's
purchase of outstanding stock in November 1995 and to finance the construction
and development of the two new pre-release facilities which opened during the
first quarter of 1996.
INCOME TAXES. The Company did not recognize any provision for income taxes
due to a taxable loss in both periods.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUES. Total revenues increased 31.9% to $20.7 million for the
year ended December 31, 1995 from $15.7 million for the year ended December 31,
1994. The revenue increase was due principally to the recognition of occupancy
fees for a full 12 months in 1995 related to the Eclectic acquisition versus the
recognition of nine months in 1994. Additionally, an increase in occupancy fees
of approximately $1.1 million was attributable to the Wyatt Facility principally
as a result of a higher occupancy and per diem rate in 1995 compared to 1994.
OPERATING EXPENSES. Operating expenses increased 32.8% to $16.4 million for
the year ended December 31, 1995 from $12.3 million for the year ended December
31, 1994. The increase in operating expenses was due principally to the
recognition of operating expenses of Eclectic for a full 12 months in
26
1995. As a percentage of revenues, operating expenses increased to 79.0% from
78.5% principally for the same reason.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
6.0% to $673,000 for the year ended December 31, 1995 from $635,000 for the year
ended December 31, 1994. The increase was due principally to recognizing 12
months of goodwill amortization in 1995 as compared to nine months of goodwill
amortization in 1994 resulting from the acquisition of Eclectic, offset in part
by an accounting adjustment in the first quarter of 1995 to adjust depreciation
expense in prior periods.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased 33.9%
to $3.7 million for the year ended December 31, 1995 from $2.7 million for the
year ended December 31, 1994. As a percentage of revenues, contribution from
operations increased to 17.7% from 17.5%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.3% to $3.5 million for the year ended December 31, 1995 from $3.0
million for the year ended December 31, 1994. The increase in general and
administrative expenses was principally due to the addition of the operations of
Eclectic and an increase in RFP and development costs. As a percentage of
revenues, general and administrative expenses decreased to 17.1% from 18.9% due
principally to spreading fixed costs over a larger revenue base.
IMPAIRMENT LOSS. Pursuant to SFAS No. 121, the Company recognized an
impairment loss of $6.6 million at December 31, 1995 to write down the goodwill
attributable to the purchase of Eclectic. At the time of the acquisition, the
Company anticipated that operations under, and the cash flows resulting from,
certain of Eclectic's management contracts would be expanded shortly thereafter;
however, these expansions did not materialize. Consequently, after estimating
the fair value of Eclectic's long-lived assets as of December 31, 1995 on the
basis of the present value of management's estimated future cash flows from
Eclectic's contracts as they currently exist, the impairment loss represents the
amount necessary to reduce the carrying amounts of those assets to their fair
value. As a result of the recognition of the impairment loss, future goodwill
amortization is expected to be reduced by approximately $500,000 annually.
INTEREST. Interest expense, net of interest income, increased to $979,000
for the year ended December 31, 1995 from $156,000 for the year ended December
31, 1994. The increase resulted from the expensing of debt issuance costs and
commitment fees of $472,000 associated with the 1995 Credit Facility, the
incurrence of $4.0 million of debt and other long-term obligations in connection
with the acquisition of Eclectic and increased borrowings under the 1995 Credit
Facility to purchase treasury stock.
INCOME TAXES. There was no provision for income taxes for the year ended
December 31, 1995 due to a taxable loss. The Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994, even though the
Company incurred a loss for financial reporting purposes in 1994, principally
because certain goodwill amortization contributing to the loss for financial
reporting purposes was not deductible for income tax purposes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues increased 390.6% to $15.7 million for the year ended
December 31, 1994 from $3.2 million for the year ended December 31, 1993. The
revenue increase was principally due to the recognition of occupancy fees for
nine months of operations in 1994 for the facilities added as part of the
Eclectic acquisition in March 1994. Additionally, because the Wyatt Facility did
not begin operations until December 1993, Wyatt Facility occupancy fees for 1994
increased by approximately $3.5 million as compared to 1993. For the year ended
December 31, 1993, there were $3.0 million of procurement and preopening
revenues included in development fees and other income related to the
procurement and preopening activities of the Wyatt Facility.
OPERATING EXPENSES. Operating expenses increased 335.6% to $12.3 million
for the year ended December 31, 1994 from $2.8 million for the year ended
December 31, 1993. The increase in operating expenses was principally due to the
addition of the operations of Eclectic and to a full year of operating costs of
the Wyatt Facility. As a percentage of revenues, operating expenses decreased to
78.5% from 88.4% due principally to spreading fixed costs over a larger revenue
base.
27
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$635,000 for 1994 from $16,000 in 1993. The increase was due to recognizing nine
months of goodwill amortization and depreciation in 1994 resulting from the
Eclectic acquisition.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased to
$2.7 million for 1994 from $355,000 for 1993. As a percentage of revenues,
contribution from operations increased to 17.5% from 11.1% principally due to
the addition of the operations of Eclectic in March 1994 and the inclusion of a
full year of operations of the Wyatt Facility.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 125.0% to $3.0 million for the year ended December 31, 1994 from $1.3
million for the year ended December 31, 1993. The increase was principally due
to the addition of the operations of Eclectic. As a percentage of revenues,
general and administrative expenses decreased to 18.9% from 41.1% due
principally to spreading fixed costs over a larger revenue base.
INTEREST. Interest expense was $294,000 for the year ended December 31,
1994 compared to no interest expense for the year ended December 31, 1993 due to
the incurrence of indebtedness related to the Eclectic acquisition. Interest
income increased to $138,000 for the year ended December 31, 1994 from $45,000
for the year ended December 31, 1993 due to the assumption of certain
interest-bearing receivables from the CDC in connection with the Eclectic
acquisition.
INCOME TAXES. As described above, the Company recognized a provision for
income taxes of $101,000 for the year ended December 31, 1994. There was no
provision for income taxes for the year ended December 31, 1993 because the
Company was organized as a partnership prior to March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary capital requirements are for working
capital, start-up costs related to new operating contracts, furniture, fixtures,
and equipment, supply purchases, new facility renovations and acquisitions. Some
of the Company's management contracts have required the Company to make
substantial initial expenditures of cash in connection with the opening or
renovating of a facility. Many initial expenditures subsequently 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 increased to $1.7 million at
March 31, 1996 from $1.5 million at December 31, 1995. This increase was
principally due to financings under the 1995 Credit Facility for the purchase
and construction of a new pre-release facility that opened during the first
quarter of 1996. A portion of the construction costs were accrued as a current
liability at December 31, 1995. The Company's working capital decreased to $1.5
million at December 31, 1995 from $2.0 million at December 31, 1994. The
decrease was principally due to an increase in accounts payable and accrued
liabilities to record incurred construction and development costs for the two
new pre-release facilities that opened during the first quarter of 1996.
EXISTING CREDIT FACILITIES. The Company's primary financing has been
provided under its 1995 Credit Facility, which the Company entered into on March
14, 1995. In connection with the acquisition of substantially all the assets of
MidTex, the Company entered into the 1996 Credit Facility and issued the
Convertible Bridge Note. The Convertible Bridge Note has an outstanding
principal amount of $6.0 million, bears interest at 9.5% per annum and matures
December 30, 1996. If not then paid and the conversion date is not extended, the
Convertible Bridge Note and any accrued interest thereon will convert into
Common Stock at a conversion rate of $5.64 per share. The Company used the
proceeds of the Convertible Bridge Note to finance a portion of the MidTex
acquisition. As of July 15, 1996, the outstanding indebtedness under the 1996
Credit Facility totaled $28.3 million, of which $3.875 million will be due
within one year of the date of this Prospectus and the balance will be due in
subsequent installments with a final maturity date of December 31, 2002. The
Company used borrowings under the 1995 Credit Facility for (i) consolidation of
various prior debt facilities, (ii) expansion funding for new projects, (iii)
the repurchase of shares of Common Stock from a former officer of the Company,
(iv) the acquisition of the Reid Center and (v) working capital purposes. The
Company used borrowings under the 1996 Credit Facility to refinance
28
outstanding borrowings under the 1995 Credit Facility, to finance a portion of
the MidTex acquisition and for working capital.
USE OF PROCEEDS. The Company will utilize the net proceeds from the
Offering to retire borrowings under the 1996 Credit Facility and the Convertible
Bridge Note. See "Use of Proceeds." Therefore, immediately following the
consummation of the Offering, the Company will have no significant debt.
CAPITAL EXPENDITURES. Management of the Company anticipates that the
capital requirements during the third and fourth quarters of 1996 for a
pre-release facility scheduled to commence operations during the third quarter
of 1996 will be approximately $500,000 and will be used for building renovations
and purchases of furniture and equipment. Capital expenditures for the three
months ended March 31, 1996 were $388,000 and related to completion of
construction and purchase of furniture and equipment for the two newly opened
pre-release facilities, and for normal replacement of furniture and equipment at
various facilities. Capital expenditures for the year ended December 31, 1995
were $1.2 million and related to the purchase and construction costs for the two
new pre-release facilities which opened during the first quarter of 1996 and
miscellaneous facility renovations and equipment. Capital expenditures for the
year ended December 31, 1994 were $167,000. The 1994 capital expenditures were
for furniture and equipment replacements at various facilities.
CASH USED IN OPERATING ACTIVITIES. The Company had net cash used in
operating activities of $1.2 million for the year ended December 31, 1995
primarily due to an increase in occupancy fees receivable and from debt issuance
costs related to the 1995 Credit Facility. The net cash used in operating
activities of $224,000 for the three months ended March 31, 1996 was primarily
due to a loss from operations. Management of the Company believes the retirement
of all its outstanding debt from the net proceeds of the Offering and the cash
flows anticipated to be generated from operations, including recent
acquisitions, will result in future cash flows from operations sufficient to
meet the Company's current operating needs. The Company is currently negotiating
with certain financial institutions to provide a new credit facility (the "New
Credit Facility") upon completion of the Offering. The New Credit Facility,
together with cash provided from operations, is anticipated to provide
sufficient liquidity to meet the Company's general financing requirements over
the next 24 months. It is not anticipated that the New Credit Facility will
provide sufficient financing to finance construction costs related to future
institutional contract awards or significant future acquisitions. The Company
anticipates obtaining separate sources of financing to finance such activities.
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 increases, if any, in per diem fees, thereby resulting in a
substantial adverse effect on the Company's results of operations.
29
BUSINESS
GENERAL
The Company is one of the leading providers of privatized correctional,
detention and pre-release services in the United States. The Company was
incorporated in Delaware on March 31, 1994, and is the successor to (i) The
Cornell Cox Group, L.P., a Delaware limited partnership formed in 1991 (the
"Partnership") that began developing institutional correctional and detention
facilities in Massachusetts and Rhode Island in 1991, and (ii) Eclectic, which
began developing pre-release facilities in California in 1977. The Company has
rapidly expanded its operations through acquisitions and internal growth and is
currently developing or operating facilities in California, Texas, Rhode Island,
Utah and North Carolina. As of July 15, 1996, the Company has 24 contracts to
operate 20 private correctional, detention and pre-release facilities with an
aggregate design capacity of 3,349 beds. Of these facilities, 18 are currently
in operation (3,114 beds) and two are under development (235 beds).
The Company provides to governmental agencies the integrated development,
design, construction and operation of facilities within three areas of
operational focus: (i) secure institutional correctional and detention services,
(ii) non-secure pre-release correctional services and (iii) juvenile
correctional and detention services. Institutional correctional and detention
services primarily consist of the operation of secure adult incarceration
facilities. Non-secure pre-release correctional services primarily consist of
providing pre-release and halfway house programs for adult inmates serving the
last three to six months of their sentences and preparing for re-entry into
society at large. The Company is currently developing and constructing a 160-bed
juvenile short-term correctional and detention facility scheduled to commence
operations in the first quarter of 1997. At the facilities it operates, the
Company generally provides secure incarceration and non-secure residential
services, institutional food services, certain transportation services, general
education programs (such as high school equivalency and English as a second
language programs), health care (including medical, dental and psychiatric
services), work and recreational programs and chemical dependency and substance
abuse programs. Additional services provided in the Company's pre-release
facilities typically include life skills and employment training and job
placement assistance. Juvenile services provided by the Company will include
medical, educational and counseling programs tailored to meet the special needs
of juveniles.
ACQUISITIONS HISTORY
In March 1994, the Company acquired Eclectic, the operator of 11 privatized
institutional and pre-release facilities in California with an aggregate design
capacity of 979 beds. Consideration for the acquisition of Eclectic was $10.0
million, consisting of $6.0 million in cash, $3.3 million of subordinated
indebtedness and $0.7 million of other long-term obligations.
In May 1996, the Company acquired the Reid Center, a 310-bed pre-release
facility located in Houston, Texas, for approximately $2.0 million. Included in
the acquisition were the Reid Center facility property and buildings, the
equipment, inventory and supplies used in the operation of the Reid Center
facility and the assignment of the Reid Center's contract with the Texas
Department of Criminal Justice ("TDCJ"). Following the consummation of the
acquisition, approximately 100 employees of the Reid Center became employees of
the Company. The Company believes that the Reid Center is the largest single
facility pre-release center in Texas and that its acquisition enhances the
Company's position as one of the leaders in providing pre-release services.
In July 1996, the Company completed the acquisition of substantially all
the assets of Midtex, the operator of the Big Spring Facilities, for an
aggregate purchase price of approximately $22.7 million. The City of Big Spring
has an Intergovernmental Agreement (the "IGA") with the FBOP to house up to
1,305 inmates at the Big Spring Facilities, and, as part of the acquisition,
MidTex assigned to the Company its rights under an operating agreement with the
City of Big Spring (the "Big Spring Operating Agreement") to manage the Big
Spring Facilities. 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. See "Risk Factors -- Possible Loss of Lease
Rights." The IGA has an indefinite term, although it may be
30
terminated or modified by the FBOP upon 90 days' written notice. Following
consummation of the MidTex acquisition, approximately 250 employees of the City
of Big Spring and MidTex became employees of the Company. The MidTex acquisition
more than doubled the number of institutional facility beds managed by the
Company, and the Company believes that the acquisition provides a basis for
continued expansion of the Company's institutional area of operational focus.
INDUSTRY AND MARKET
There is a growing trend in the United States toward privatization of
governmental correctional and detention services and functions. Generally, this
trend results from continuing pressures faced by governments to control costs
and improve service efficiency as a result of the rapidly growing inmate
population in the United States. Further, as a result of the number of crimes
committed each year and the corresponding number of arrests, incarceration costs
generally grow faster than other parts of government budgets. In an attempt to
address these pressures, governmental agencies are increasingly privatizing new
facilities.
According to reports issued by the BJS, the number of adult inmates in
United States federal and state prison facilities increased from 503,601 at
December 31, 1985 to 1,104,074 at June 30, 1995, an increase of more than 119%.
According to the 1995 Census, the design capacity of privately managed adult
correctional and detention facilities in the United States increased from 26
facilities with a design capacity of 10,973 beds at December 31, 1989 to 92
facilities with a design capacity of 57,609 beds at December 31, 1995. By
year-end 1995, according to the 1995 Census, numerous counties, various agencies
of the federal government and 20 states had awarded management contracts to
private companies. According to the 1995 Census, privatized facilities include
(i) correctional facilities operated for the FBOP and detention facilities
operated for the Immigration and Naturalization Service ("INS") and U.S.
Marshals Service, (ii) state prisons, pre-release correctional facilities,
intermediate sanction facilities, work program facilities and state jail
facilities operated for state agencies and (iii) city jail and transfer
facilities operated for local agencies. Even after such growth, according to the
1995 Census, less than five percent of adult inmates in United States
correctional and detention facilities were housed in privately-managed
facilities. There are also many privatized juvenile offender facilities. The
Company believes that the market for juvenile services is also growing rapidly
because of an increasing population of teenagers and an escalation of crime
rates and incidents of mental health problems among that population. In
addition, the Company believes that there is a growing trend toward
privatization of juvenile services by governmental agencies.
AREAS OF OPERATIONAL FOCUS
INSTITUTIONAL. The Company currently operates six facilities (2,165 beds)
that provide secure institutional correctional and detention services for
incarcerated adults. These facilities consist of: the three Big Spring
Facilities, medium and minimum security facilities operated primarily for the
FBOP; the Wyatt Facility, a medium and maximum security unit operated primarily
for the U.S. Marshals Service in Central Falls, Rhode Island; and two minimum
security facilities in California operated for the CDC.
The Company operates the Big Spring Facilities 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 INS and the U.S. Marshals Service also use
the facilities. Inmates include detainees held by the INS, adjudicated inmates
held by the INS who will be deported after serving their sentences and
adjudicated inmates held for the FBOP. These facilities are equipped with an
interactive satellite link to INS courtroom facilities and judges that should
allow processing of a high volume of INS detainees, while reducing the time,
effort and expense incurred in transporting inmates to offsite courtrooms.
The Wyatt Facility in Central Falls opened in 1993 and primarily houses
federal inmates awaiting adjudication under federal criminal charges. In
addition, the Wyatt Facility houses certain other inmates under a contract with
the Suffolk County, Massachusetts, Sheriff's Department. The Company's
California facilities house primarily inmates sentenced by the State of
California, most of whom are non-violent offenders with sentences of up to two
years.
31
Under its contracts, the Company provides a variety of programs and
services at its institutional adult incarceration 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.
NON-SECURE PRE-RELEASE. The Company's business historically centered around
the operation of non-secure pre-release facilities. The Company currently
operates or has contracts to operate 13 facilities (with an aggregate design
capacity of 1,024 beds) that provide non-secure pre-release correctional
services. Of these facilities, six are operated primarily for the FBOP, five are
operated primarily for the CDC, one is operated for the TDCJ and one will be
operated for the North Carolina Department of Corrections (the "NCDC"). Most
residents of these facilities are or will be serving the last three to six
months of their sentences and preparing for re-entry into society at large.
At its pre-release facilities, the Company typically provides non-secure
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 inmates at the FBOP
pre-release facilities in California, Utah and Texas are on home confinement;
monitoring is primarily done by required check-ins and by unscheduled visits to
places of residence and employment.
JUVENILE SERVICES. Eclectic historically operated juvenile facilities for
the INS, the FBOP and certain counties in the State of California. The Company
is currently developing and constructing a 160-bed juvenile short-term
correctional and detention facility for the State of Utah in Salt Lake City. The
facility is scheduled to commence operations during the first quarter of 1997.
The facility will primarily house pre-adjudicated juvenile detainees and
juveniles awaiting placement in long-term correctional facilities. The Salt Lake
City juvenile facility will include an interactive satellite link to juvenile
courtroom facilities and judges that should allow processing of a high volume of
juvenile detainees, while reducing the time, effort and expense incurred in
transporting detainees to offsite courtrooms. The Company intends to pursue
additional contract awards to provide juvenile detention and correctional
services, including contracts for specialized rehabilitation programs and
services for juveniles such as military style boot camps, wilderness programs
and secure education and training centers.
OPERATING STRATEGIES
The Company's objective is to enhance its position as one of the leading
providers of private correctional, detention and pre-release services. The
Company is commited to the following operating strategies:
PURSUE DIVERSE MARKETS. The Company intends to continue to diversify its
business within three areas of operational focus. Historically, the Company
primarily provided pre-release services and believes that it has a long-standing
reputation as an effective manager of such facilities. However, after giving
effect to the Company's acquisition of substantially all the assets of MidTex in
July 1996, a majority of the Company's facility capacity and revenues will be
concentrated in the institutional correctional and detention service area. In
addition, the Company is currently developing a juvenile correctional and
detention facility and intends to pursue additional contracts to provide
juvenile correctional and detention services. The Company believes that, by
being a diversified provider of services, the Company will be able to compete
for more types of contract awards and adapt to changes in demands within its
industry for varying categories of services.
DELIVER COST EFFECTIVE AND QUALITY MANAGEMENT PROGRAMS. The Company intends
to position itself as a low cost, high quality provider of services in all its
markets. The Company will focus on improving operating performance and
efficiency through standardization of practices, programs and reporting
procedures, efficient staffing and attention to productivity standards. The
Company also emphasizes quality of services by providing trained personnel and
effective programs designed to meet the needs of contracting governmental
agencies.
32
PROVIDE INNOVATIVE SERVICES. The Company intends to implement specialized
and innovative services to address unique needs of governmental agencies and
certain segments of the inmate population. For example, certain facilities of
the Company are equipped with interactive satellite links to courtrooms and
judges that should reduce the time, effort and expense related to transporting
inmates to offsite courtrooms. The Company also intends to actively pursue
contracts to provide services for specialized segments of the inmate population
categorized by age (such as services for aging inmates or juvenile offenders),
medical status, gender or security needs.
GROWTH STRATEGIES
The Company expects the growth in privatization of correctional, detention
and pre-release facilities by governmental agencies to continue in the
foreseeable future. By expanding the number of beds under contract, the Company
should be able to increase economies of scale and purchasing power and qualify
to be considered for additional contract awards. The Company will seek to
increase revenues by pursuing the following growth strategies:
BID FOR NEW CONTRACT AWARDS. The Company will selectively pursue
opportunities to obtain contract awards for new privatized facilities. As of
June 30, 1996, the Company has submitted written bids to operate eight new
projects with an aggregate design capacity of over 3,200 beds. Awards for these
projects should be made by the applicable governmental agencies by the end of
1996. The Company is also currently considering five additional projects with an
aggregate design capacity of over 3,600 beds for which it may submit written
bids before the end of 1996.
INCREASE BED CAPACITY OF EXISTING FACILITIES. The Company has the potential
for substantial capacity expansion at certain existing facilities with modest
capital investment. As a result, the Company intends to pursue expansion of such
facilities by obtaining awards of additional or supplemental contracts to
provide services at these facilities.
PURSUE STRATEGIC ACQUISITIONS. The Company believes that the private
correctional and detention industry is consolidating. The Company believes that
the larger, better capitalized providers will acquire smaller providers that are
typically too undercapitalized to pursue the industry's growth opportunities.
The Company intends to pursue selective acquisitions of other operators or
developers of private correctional and detention facilities in institutional,
pre-release and juvenile areas of operational focus to enhance its position in
its current markets, to acquire operations in new markets and to acquire
operations that will broaden the types of services which the Company can
provide. The Company believes there are opportunities to eliminate costs through
consolidation and coordination of the Company's current and subsequently
acquired operations. As a public company, the Company will increase its access
to capital markets, allowing the Company to use various combinations of its
Common Stock, cash and debt financing to make additional acquisitions. The
Company has in the past engaged in preliminary discussions with several other
companies managing private correctional and detention facilities concerning the
acquisition of all or a portion of their operations, but no agreements have been
reached with respect to any such possible acquisitions. The timing, size and
success of the Company's acquisition program efforts and the associated
potential capital commitments are not predictable.
33
FACILITIES
As of July 15, 1996, the Company operates 18 facilities and has been
awarded contracts to operate two additional facilities currently under
development. In addition to providing management services, the Company has been
involved in the development, design and construction of many of these
facilities. The facilities currently under development are the Durham, North
Carolina facility, which is scheduled to commence operations during the third
quarter of 1996, and the Salt Lake City juvenile facility, which is scheduled to
commence operations during the first quarter of 1997. The following table
summarizes certain additional information with respect to contracts and
facilities under operation by the Company as of July 15, 1996:
<TABLE>
<CAPTION>
PRINCIPAL DESIGN
CONTRACTING CAPACITY INITIAL COMMENCEMENT
GOVERNMENT (NO. OF CONTRACT OF CURRENT TERM RENEWAL
FACILITY NAME AND LOCATION AGENCY BEDS)(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4)
- ------------------------------------- ------------- -------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
SECURE INSTITUTIONAL CORRECTIONAL AND
DETENTION FACILITIES:
Baker Community Correctional Facility CDC 288 1987 7/92 5 None
Baker, California(5)
City of Big Spring Correctional FBOP (6) 397 (6) (6) (6) (6)
Center --
Airpark Unit
Big Spring, Texas
City of Big Spring Correctional FBOP (6) 560 (6) (6) (6) (6)
Center --
Flightline Unit
Big Spring, Texas
City of Big Spring Correctional FBOP (6) 348 (6) (6) (6) (6)
Center --
Interstate Unit
Big Spring, Texas
Donald W. Wyatt Federal Detention U.S. 302 1992 11/93 5 One
Facility of Central Falls Marshals Five-Year
Central Falls, Rhode Island (5) Service (7)
Leo Chesney Community Correctional CDC 270 1988 4/93 5 None
Facility
Live Oak, California(5)
NON-SECURE PRE-RELEASE FACILITIES:
Ben A. Reid Community TDCJ 310 1996 1/96 1 1/2 One
Correctional Center Unspecified
Houston, Texas Term
Durham Facility NCDC 75 1996 6/96 5 One
Durham, North Carolina Five-Year
El Monte Facility FBOP 52 1993 4/93 (8) (8)
El Monte, California(5)
Inglewood Men's Center CDC 53 1982 7/94 3 None
Inglewood, California(5)
Inglewood Women's Center CDC 27 1984 7/92 4 1/2 None
Inglewood, California(5)
Marvin Gardens Facility CDC 42 1981 7/94 3 None
Los Angeles, California(5)
Oakland Facility FBOP (9) 61 1981 9/93 (10) (10)
Oakland, California(5)
Peter A. Leidel Community FBOP 94 1996 1/96 1 1/2 Three
Correctional Center One-Year
Houston, Texas
Salt Lake City Facility FBOP (9) 58 1995 12/95 2 Three
Salt Lake City, Utah One-Year
San Diego Facility FBOP 50 1984 11/95 2 Three
San Diego, California(5) One-Year
San Francisco -- Indiana Street CDC 96 1990 7/94 3 None
Facility
San Francisco, California(5)
San Francisco -- Taylor Street FBOP (11) 81 1984 2/96 2 Three
Facility One-Year
San Francisco, California(5)
Santa Barbara Facility CDC (12) 25 1977 7/94 3 None
Santa Barbara, California(5)
JUVENILE FACILITY:
Salt Lake City Juvenile Detention State of 160 1996 6/96 3 None
Center Utah (13)
Salt Lake City, Utah
</TABLE>
(NOTES ON FOLLOWING PAGE)
34
- ------------
(1) Design capacity is based on the physical space available presently, or with
minimal additional expenditure, for inmate or residential beds in
compliance with relevant regulations and contract requirements. In certain
cases, the management contract for a facility provides for a different
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 government
agency for any reason upon the required notice to the Company. See "Risk
Factors -- Facility Occupancy Levels and Contract Duration."
(4) Except as otherwise noted, the renewal option, if any, is at the discretion
of the contracting government agency.
(5) Facility is accredited by the American Correctional Association.
(6) The City of Big Spring, Texas entered into the IGA with the FBOP for an
indefinite term (until modified or terminated) with respect to the three
Big Spring Facilities. The Airpark Unit began operation in February 1991,
the Flightline Unit began operation in February 1995, and the Interstate
Unit began operation in May 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 will manage the three Big Spring
Facilities for the City of Big Spring.
(7) The U.S. Marshals Service entered into an intergovernmental agreement with
the Central Falls Detention Facility Corporation ("DFC") in August 1991 for
an indefinite term (until modified or terminated) with respect to the Wyatt
Facility. The DFC, in turn, entered into a Professional Management
Agreement with the Company for the Company to operate this facility
effective November 1993 for a term of five years, with one five-year
renewal option. In addition, pursuant to a contract between the DFC and the
Suffolk County, Massachusetts Sheriff's Department, entered into in March
1996, Massachusetts state inmates are housed under the Company's management
at this facility.
(8) The current contract term was less than one year, with an original
termination date of September 1993; the FBOP has exercised three of its
four one-year renewal options.
(9) In addition to its contract with the FBOP with respect to these facilities,
the Company has contracts with the Administrative Office of the United
States Courts, Pretrial Services ("Pretrial Services") to provide beds at
these facilities.
(10) The current contract term was two years, with an original termination date
of August 1995; the FBOP has exercised the first of its three one-year
renewal options.
(11) In addition to its contract with the FBOP with respect to this facility,
the Company has contracts with Pretrial Services and with the City of San
Francisco to provide beds at this facility.
(12) In addition to its contract with the CDC with respect to this facility, in
March 1996 the Company entered into a contract with the FBOP, with a term
of two years and three one-year renewal options, to provide beds at this
facility.
(13) Utah Department of Human Services, Division of Youth Corrections.
FACILITY MANAGEMENT CONTRACTS
The Company is compensated on the basis of the number of inmates 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 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 inmates
to meet the facilities' design capacities, and in most cases such governmental
agencies are under no obligation to do so. Moreover, because many of the
Company's facilities have inmates serving relatively short sentences or only the
last three to six months of their sentences, the high turnover rate of inmates
requires a constant influx of new inmates from the relevant governmental
agencies to provide sufficient occupancies to achieve profitability. Occupancy
rates during the start-up phase when facilities are first opened typically
result in capacity underutilization for 30 to 90 days. After a management
contract has been awarded, the Company incurs facility start-up costs consisting
principally of initial employee training, travel and other direct expenses
incurred in connection with the contract. These costs vary by contract and can
range between $30,000 and $1.0 million. See "Risk Factors -- Facility Occupancy
Levels and Contract Duration."
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 contract because
appropriations have not been made to a governmental agency, although no
assurance can be given that the
35
governmental agencies will continue to receive appropriations in all cases. See
"Risk Factors -- Contracts Subject to Government Funding."
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 renewal options under the Company's
management contracts have been exercised. However, 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. See "Risk Factors -- Facility Occupancy
Levels and Contract Duration."
MARKETING
The Company's principal customers are the federal and state governmental
agencies responsible for correctional, detention and pre-release services. These
governmental agencies generally procure these services from the private sector
by issuing an RFP to which a number of companies may respond. Most of the
Company's activities in the area of securing new business are expected to be in
the form of responding to RFPs. As part of the Company's process of responding
to RFPs, management of the Company meets with appropriate personnel from the
requesting agency to best determine the agency's distinct needs. If the Company
believes that the project complies with its business strategy, the Company will
submit a written response to the RFP. When responding to RFPs, the Company
incurs costs, typically ranging from $10,000 to $75,000 per proposal, to
determine the prospective client's distinct needs and prepare a detailed
response to the RFP. The preparation of a response to an RFP typically takes
from five to 10 weeks. In addition, the Company may incur substantial costs to
(i) acquire options to lease or purchase land for a proposed facility and (ii)
engage outside consulting and legal expertise related to a particular RFP.
A typical RFP requires bidders to provide detailed information, including,
but not limited to, descriptions of the following: the services to be provided
by the bidder, the bidder's experience and qualifications, and the price at
which the bidder is willing to provide the services requested by the agency
(which services may include the renovation, improvement or expansion of an
existing facility or the planning, design and construction of a new facility).
Based on proposals received in response to an RFP, the governmental agency will
award a contract; however, the governmental agency does not necessarily award a
contract to the lowest bidder. In addition to costs, governmental agencies also
consider experience and qualifications of bidders in awarding contracts.
The marketing process for obtaining facility management contracts consists
of several critical events. These include issuance of an RFP by a governmental
agency, submission of a response to the RFP by the Company, the award of the
contract by a governmental agency and the commencement of construction or
operation of the facility. The Company's experience has been that a substantial
period of time may elapse from the initial inquiry to receipt of a new contract,
although, as the concept of privatization has gained wider acceptance, the
length of time from inquiry to the award of contract has shortened. The length
of time required to award a contract is also affected, in some cases, by the
need to introduce enabling legislation. The bidding and award process for an RFP
typically takes from three to nine months. Generally, if the facility for which
an award has been made must be constructed, the Company's experience has been
that management of a newly constructed facility typically commences between 12
and 24 months after the governmental agency's award.
36
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.
As of June 30, 1996, the Company has submitted written bids for operating
eight new projects with an aggregate design capacity of over 3,200 beds. Awards
for these projects should be made by the applicable governmental agencies by the
end of 1996. The Company is also currently considering five additional projects
with an aggregate design capacity of over 3,600 beds for which it may submit
written bids before the end of 1996.
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 each proposed site. The Company may incur significant
expenses in responding to such opposition and there can be no assurance of
success. In addition, the Company may choose not to bid in response to an RFP or
may determine to withdraw a bid if legal action or other forms of opposition are
anticipated.
OPERATIONS
Pursuant to the terms of its management contracts, the Company is
responsible for the overall operation of its facilities, including staff
recruitment, general administration of the facilities, security and supervision
of the offenders and facility maintenance. The Company also provides a variety
of rehabilitative and educational programs at many of its facilities. Inmates at
most facilities managed by the Company may receive basic education through
academic programs designed to improve inmate literacy levels (including English
as a second language programs) and the opportunity to acquire General Education
Development certificates. At many facilities, the Company also offers vocational
training to inmates who lack marketable job skills. In addition, the Company
offers life skills, transition planning programs that provide inmates 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 inmates 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. 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 ACA standards, which are the industry's
most widely accepted correctional standards, describe specific objectives to be
accomplished and cover such areas as administration, personnel and staff
training, security, medical and health care, food service, inmate supervision
and physical plant requirements. Currently, 12 of the Company's facilities are
accredited by the ACA and the Company intends to seek ACA accreditation for
certain of its other facilities.
Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programmatic
and fiscal audits; facility inspections; regular review of logs, reports and
files; and strict maintenance of personnel standards, including an active
training program. The requirements for training at the Company meet and often
exceed ACA standards. 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 correctional officers undergo
an initial 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.
37
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 has
consulted on and/or managed: (i) the development, design, and construction of
the 302-bed Wyatt Facility in Central Falls, Rhode Island; (ii) the development,
design and construction of a 1,140-bed multi-purpose, multi-jurisdictional
detention center in Plymouth, Massachusetts; (iii) the development of the
288-bed facility in Baker California; (iv) the development of the 270-bed
facility in Live Oak, California; and (v) the development, design, and
construction of the 160-bed Salt Lake City Juvenile Detention Facility in Salt
Lake City, Utah. Currently, the Company operates all of the facilities it has
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
number of guards or correctional officers 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. Of the 20 facilities the Company operates or has contracted to operate,
two are funded using one of the above-described financing methods, two are owned
by the Company and 16 are leased. Of the 16 leased facilities, three (the Big
Spring facilities) are operated under long-term leases ranging from 34 to 38
years including renewal options at the discretion of the Company. As part of the
purchase price for the MidTex acquisition, the Company prepaid a majority of the
facility costs related to the Big Spring Facilities through at least the year
2030. See "Risk Factors -- Possible Loss of Lease Rights."
The Company has in the past worked with placement agents to obtain
financing for construction of facilities. 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 or when required to
make such an investment to secure a contract for developing a facility.
COMPETITION
The Company competes with a number of companies, including, but not limited
to, CCA, WHC and USCC. At December 31, 1995, CCA and WHC accounted for more than
70% of the privatized secure adult
38
beds under contract in the United States, according to the 1995 Census.
Therefore, certain competitors of the Company are larger and may have greater
resources than the Company. 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. See "Risk Factors -- Competition."
EMPLOYEES
At March 31, 1996, the Company had 286 full-time employees and 75 part-time
employees. After giving effect to the Acquisitions, at July 15, 1996, the
Company had approximately 630 full-time employees. Of such full-time employees,
25 were employed at the Company's corporate and administrative offices in
Houston, Texas and Ventura, California. The remainder of the employees work at
the Company's facilities. The Company employs management, administrative and
clerical, security, educational and counseling services, health services and
general maintenance personnel. The Company believes its relations with its
employees are good. From time to time, collective bargaining efforts have begun
at certain of the Company's facilities, although to date, none of the efforts
has been successful. The Company expects such collective bargaining efforts to
continue.
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 $5 million 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. There can be no assurance that the aggregate
amount and types of the Company's insurance are adequate to cover all risks it
may incur or that insurance will continue to be available in the future on
commercially reasonable terms.
The Company's contracts and the statutes of certain states in which the
Company operates typically require the maintenance of insurance by the Company.
The Company's contracts provide that, in the event that the Company does not
maintain such insurance, the contracting agency may terminate its agreement with
the Company. The Company believes that it is in compliance in all material
respects with respect to these requirements.
LITIGATION
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, inmate
privileges. In the opinion of management, 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.
39
PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas
and an administrative office in Ventura, California. The Company also leases
space for 16 of the facilities it is currently operating or developing. In
connection with the acquisition of MidTex, and as part of the purchase price,
the Company prepaid a majority of the facility costs related to the Big Spring
Facilities through at least the year 2030. For information concerning lease
rights relating to a portion of the Big Spring Facilities, see "Risk Factors --
Possible Loss of Lease Rights."
The Company owns two facilities, the Leidel Center and the Reid Center,
both located in Houston, Texas. The Company is not required to lease space at
the Wyatt Facility, which is owned by the DFC, or the Salt Lake City juvenile
facility, which is owned by the County of Salt Lake and leased to the State of
Utah. For a list of the locations of each facility, see " -- Facilities."
40
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth the names, ages (as of June 30, 1996) and
positions of the Company's directors, the person nominated to become a director
of the Company upon completion of the Offering, the Company's executive officers
and certain other key employees of the Company:
NAME AGE POSITION
- ----------------------------- --- -------------------------------------------
David M. Cornell............. 61 Chairman of the Board, President and
Chief Executive Officer (1)
Marvin H. Wiebe, Jr.......... 48 Vice President (1)
Steven W. Logan.............. 34 Chief Financial Officer, Treasurer and
Secretary (1)
Charles J. Haugh............. 57 Executive Director of Facilities
Joseph Ponte................. 49 Executive Facility Director
Laura Shol................... 41 Director of Community Corrections
Antonio Medellin............. 52 Executive Facility Administrator
Irwin F. Roberts............. 58 Executive Facility Administrator
Jose L. Valencia............. 50 Executive Facility Administrator
Richard T. Henshaw III....... 57 Director
Peter A. Leidel.............. 40 Director
Campbell A. Griffin, Jr...... 66 Director (2)
Tucker Taylor................ 56 Director (2)
- ------------
(1) Executive officer of the Company.
(2) Appointment will become effective upon completion of the Offering.
DAVID M. CORNELL co-founded a predecessor of the Company in 1991 and has
been the Chairman and Chief Executive Officer of the Company since its founding.
Previously, Mr. Cornell was Operations Manager -- Special Projects for the
Bechtel Group and Chief Financial Officer of its wholly owned subsidiary, Becon
Construction Company, from 1983 to 1990. Prior to joining the Bechtel Group, Mr.
Cornell served as President and Director of Tenneco Financial Services Inc., an
investment advisory firm, from 1981 to 1982. He also served as Executive Vice
President of Philadelphia Life Insurance Company and President of its
subsidiary, Philadelphia Life Asset Management Company from 1972 to 1981.
MARVIN H. WIEBE, JR., has been Vice President of the Company since the
Company acquired Eclectic in 1994 and was previously Vice President --
Administration and Finance, Vice President -- Secure Detention and Chief
Financial Officer of Eclectic, where he was employed for 11 years. Prior to
joining Eclectic, Mr. Wiebe served as Executive Director and Business
Administrator of Turning Point of Central California, Inc., a nonprofit provider
of correctional and substance abuse programs from 1975 to 1984. Mr. Wiebe has
served as President of the International Community Corrections Association
("ICCA") and as an auditor for the ACA Commission on Accreditation for
Corrections and is a member of the ICCA, the California Probation Parole &
Correctional Association and the ACA.
STEVEN W. LOGAN has been Chief Financial Officer, Treasurer and Secretary
of the Company since 1993. From 1984 to 1993, Mr. Logan served in various
positions with Arthur Andersen LLP, Houston, most recently as an Experienced
Manager in the Enterprise Group, a group specializing in emerging, high-growth
companies which Mr. Logan helped form in Houston in 1987. Mr. Logan is a
certified public accountant.
CHARLES J. HAUGH has been Executive Director of Facilities of the Company
since the Company acquired MidTex in July 1996. From 1988 to July 1996, Mr.
Haugh was Vice President of MidTex and Executive Director of Facilities of Big
Spring Correctional Center. Prior to joining MidTex, Mr. Haugh was involved in
consulting for correctional organizations as President of CJH Cortech, Inc. for
a year. From 1963 to 1988, Mr. Haugh served in numerous capacities for the FBOP,
including Special Assistant to
41
Director Administrator of Correctional Services Branch, Associate Warden, Chief
Correctional Supervisor and Correctional Officer. Mr. Haugh has been an auditor
for the ACA and is on the Board of Directors of various local organizations.
JOSEPH PONTE has served as the Executive Facility Director of the Wyatt
Facility since its opening in 1993. Mr. Ponte served as the Assistant Director
for Institutions and Operations for the Rhode Island Department of Corrections
from 1991 to 1993 and in various positions at facilities managed by the
Massachusetts Department of Corrections from 1969 to 1991, including
Superintendent, Director of Staff Development and Director of Operations.
LAURA SHOL has been Director of Community Corrections of the Company since
June 1996 and was Senior Regional Administrator of Eclectic from 1986 to June
1996. From 1982 to 1986, Ms. Shol was a Facility Director for Eclectic. Prior to
joining Eclectic, Ms. Shol was a Program Director with the Salvation Army, Inc.
ANTONIO MEDELLIN has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. From April 1996 until July 1996,
he was a Facility Director and Administrator of MidTex. From 1971 to April 1996,
Mr. Medellin served in numerous capacities for the FBOP, including Associate
Warden, Executive Assistant, Captain, Lieutenant, Counselor and Correctional
Officer.
IRWIN F. ROBERTS has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. Mr. Roberts was a Facility
Director and Administrator of MidTex from 1992 to July 1996 and was Chief of
Security at Big Spring Correctional Center from 1991 to 1992. From 1988 to 1991,
Mr. Roberts served as a Correctional Program Specialist and a Security Officer
with the United States Navy, and, from 1967 to 1988, he served in numerous
positions for the FBOP, including Captain, Lieutenant and Counselor.
JOSE L. VALENCIA has been Executive Facility Administrator of the Company
since the Company acquired MidTex in July 1996. From April 1996 to July 1996,
Mr. Valencia was a Facility Director and Administrator of MidTex. From 1976 to
April 1996, he served in numerous capacities for the FBOP, including Affirmative
Action Administrator, Associate Warden, Assistant Correctional Services
Administrator, Unit Manager, Correctional Supervisor and Correctional Officer.
RICHARD T. HENSHAW III has been a director of the Company since March 1994.
Mr. Henshaw has been a Senior Vice President of Charterhouse Group
International, Inc. ("Charterhouse"), a private investment firm specializing
in leveraged buy-out acquisitions, since 1991. Prior thereto, Mr. Henshaw was a
Senior Vice President of The Bank of New York.
PETER A. LEIDEL has been a director of the Company and its predecessor
since May 1991. Mr. Leidel is a partner of Dillon Read Venture Partners III,
L.P. and Concord Partners II, L.P. ("Concord II"), both private venture
capital funds managed by Dillon Read. Mr. Leidel is a Senior Vice President of
Dillon Read where he has been employed since 1983. Mr. Leidel is a director of
Willbros Group, Inc. and seven private companies.
CAMPBELL A. GRIFFIN, JR. will become a director of the Company effective
upon the completion of the Offering. Mr. Griffin joined the law firm of Vinson &
Elkins L.L.P. in 1957 and was a partner from 1968 to 1992. He was a member of
the Management Committee of Vinson & Elkins L.L.P. from 1981 to 1990 and the
Managing Partner of the Dallas office from 1986 to 1989. From 1991 to 1993, Mr.
Griffin served as an Adjunct Professor of Administrative Science at William
Marsh Rice University and, from 1993 to 1995, he was a Councilman for the City
of Hunters Creek Village. Mr. Griffin has been a director of various local
organizations and is an arbitrator for the New York Stock Exchange and the
National Association of Securities Dealers and a member of the American, Texas
and Houston Bar Associations.
TUCKER TAYLOR will become a director of the Company effective upon
completion of the Offering. Mr. Taylor has been Chief Operating Officer of
Columbia/HCA Healthcare System since 1994. From 1992 to 1994, he was Executive
Vice President for Marketing, Sales and Strategic Planning at Medical Care
America and, from 1990 to 1991, he served at Emery Worldwide as Senior Vice
President of Marketing.
42
Prior to joining Emery Worldwide, Mr. Taylor worked as a Marketing and Planning
Consultant from 1982 to 1990 and at Federal Express Corporation from 1974 to
1982. Mr. Taylor currently serves on the Board of Directors of SuperShuttle.
Upon completion of the Offering, there will be two committees of the Board
of Directors: an Audit Committee and a Compensation Committee. The initial
members of the Audit Committee will be Mr. Leidel and Mr. Taylor. The Audit
Committee will recommend the appointment of indpendent public accountants to
conduct audits of the Company's financial statements, review with the
independent accountants the plan and results of the auditing engagement, approve
other professional services provided by the independent accountants and evaluate
the independence of the accountants. The Audit Committee will also review the
scope and results of procedures for internal auditing of the Company and the
adequacy of the Company's system of internal accounting controls. The initial
members of the Compensation Committee will be Mr. Griffin and Mr. Henshaw. The
Compensation Committee will approve, or in some cases recommend to the Board,
remuneration arrangements and compensation plans involving the Company's
directors, executive officers and certain other employees and consultants whose
compensation exceeds specified levels. The Compensation Committeee will also act
on the granting of stock options, including under the Stock Option Plan. The
members of the Audit and Compensation Committees will not be employees of the
Company.
DIRECTOR COMPENSATION
Directors who are employees of the Company will not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") and who is elected or appointed on or
after completion of the Offering will receive a fee of $1,000 for attendance at
each Board of Directors meeting and $500 for each committee meeting (unless held
on the same day as a Board of Directors meeting). Individuals who first become
Nonemployee Directors on or after completion of the Offering will receive a
grant of nonqualified options to purchase 15,000 shares of Common Stock under
the Stock Option Plan. Such options will vest 25% on the date of grant and the
remainder ratably over three years with a term of 10 years and a per share
exercise price equal to the fair market value of a share of Common Stock at the
date of grant (the initial public offering price in the Offering in the case of
Messrs. Griffin and Taylor). All directors are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof and for other expenses incurred in their capacity as directors.
43
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth certain summary
information concerning the compensation paid or accrued by the Company during
the year ended December 31, 1995 to the Company's chief executive officer and
the other executive officer of the Company whose combined salary and bonus from
the Company during such period exceeded $100,000 (collectively, the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ------------------
---------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(2) UNDERLYING OPTIONS COMPENSATION(3)
- ---------------------------------------- ---------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C>
David M. Cornell........................ $ 125,000 $ -- 137,110(4) $ 3,750
Chairman of the Board, President and
Chief Executive Officer
Marvin H. Wiebe, Jr..................... 90,500 82,475(5) -- 7,726(6)
Vice President
</TABLE>
- ------------
(1) Other annual compensation for each named executive officer during 1995 did
not exceed the lesser of $50,000 or 10% of the annual compensation earned by
such individual.
(2) The bonus amounts shown were paid in 1996 for the year ended December 31,
1995.
(3) The amounts shown represent contributions by the Company under its 401(k)
Profit Sharing Plan and Company and payments of life insurance premiums.
(4) In November 1995, the Company granted options to purchase Class B Common
Stock (nonvoting, nondividend stock that will convert on a one-for-one basis
into Common Stock as of or prior to the completion of the Offering as part
of the Reclassification) to all of its stockholders, including Mr. Cornell,
based on each stockholder's equity interest in the Company, as adjusted by
agreement among certain stockholders. Each stockholder receiving options,
including Mr. Cornell, agreed to exercise such options on December 31, 1996
unless, on or prior to that date, the Company has repaid in full a certain
loan obtained by the Company under the 1996 Credit Facility. See "Certain
Relationships and Related Party Transactions -- Certain Equity
Transactions."
(5) Excludes $59,750 representing Mr. Wiebe's portion of an annual fixed
installment payment relating to the Eclectic acquisition.
(6) Mr. Wiebe elected, pursuant to his employment agreement with the Company, to
use a portion of the bonus he earned during the year ended December 31, 1995
to purchase Class A Common Stock at 90% of the fair market value of the
Class A Common Stock, as determined by the Board of Directors. The amount
includes the dollar value of the difference between the price paid by Mr.
Wiebe for the Class A Common Stock and the fair market value of the Class A
Common Stock, as determined by the Board of Directors.
Effective June 1, 1996, the Board of Directors of the Company approved
annual salaries of $200,000 and $130,000 for Mr. Cornell and Mr. Logan,
respectively, with respective bonuses of up to $50,000 and up to $20,000,
payable at the recommendation of the Compensation Committee and subject to the
discretion of a majority of the Nonemployee Directors.
44
OPTION GRANTS. The following table contains certain information concerning
options granted to the named executive officers during the year ended December
31, 1995.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL APPRECIATION
OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ---------------------
NAME GRANTED(1) IN 1995 PER SHARE(2) DATE 5%(3) 10%(3)
- ---------------------------------------- ---------- --------------- ------------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
David M. Cornell........................ 137,110 68% $ 2.00 10/31/2002 $ 172,500 $437,000
Marvin H. Wiebe, Jr..................... -- -- -- -- -- --
</TABLE>
- ------------
(1) See Note 4 to the Summary Compensation Table.
(2) Prior to the Offering, there was no public market for Common Stock and,
therefore, the exercise price of the options was based upon the estimated
fair market value of the underlying Class B Common Stock as of the date of
grant as determined by the Board of Directors.
(3) Calculated based upon the indicated rates of appreciation, compounded
annually, from the date of grant to the end of the option term. Actual
gains, if any, on stock option exercises and Common Stock holdings are
dependent on the actual performance of the Common Stock. There can be no
assurance that the amounts reflected in this table will be achieved.
1995 YEAR-END OPTION HOLDINGS. The following table summarizes the number
and value of the unexercised options to purchase Common Stock held by the named
executive officers at December 31, 1995. Neither of the named executive officers
exercised any stock options during 1995. The Company does not have any
outstanding stock appreciation rights or shares of restricted stock.
1995 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK UNDERLYING UNEXERCISED
VALUE OF UNEXERCISED
OPTIONS HELD AT DECEMBER 31, IN-THE-MONEY OPTIONS
1995 HELD AT DECEMBER 31, 1995
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David M. Cornell........................ 137,110(1) -- $ 0(2) --
Marvin H. Wiebe, Jr..................... -- -- -- --
</TABLE>
- ------------
(1) See Note 4 to the Summary Compensation Table.
(2) The exercise price of the options was based on the estimated fair market
value of the underlying Class B Common Stock as of November 1, 1995 as
determined by the Board of Directors of the Company. The Company believes
that the value of the Company remained constant between November 1, 1995 and
December 31, 1995 and that the value per share of Class B Common Stock at
December 31, 1995 equaled the per share exercise price of Mr. Cornell's
options.
EMPLOYMENT AGREEMENT
The Company entered into a three-year employment agreement with Mr. Wiebe
on March 31, 1994 in connection with the Company's acquisition of Eclectic.
Pursuant to the employment agreement, Mr. Wiebe serves as Vice President of the
Company (or in such executive office as the Company determines) for a base
salary of $90,500. In addition, under the employment agreement, Mr. Wiebe
receives a profit sharing bonus, an annual fixed installment payment of $50,000
through 1998 relating to the Eclectic acquisition and monthly interest of 0.5%
of the remaining unpaid annual fixed installment payments. Mr. Wiebe may use up
to 50% of his profit sharing bonus to purchase shares of Common Stock at a price
equal to 90% of the fair market value of such stock and may use up to 50% of his
remaining unpaid annual fixed installment
45
payment to purchase shares of Common Stock in an initial public offering at a
price equal to 90% of the initial issue price per share of Common Stock in the
offering. Additionally, the employment contract provides that Mr. Wiebe may
participate in certain employee benefit plans of the Company, including
medical/dental plans, insurance plans, vacation, company automobile and expense
reimbursement. In the event Mr. Wiebe's employment is terminated prior to March
31, 1997, under certain circumstances he may be entitled under his employment
contract to receive up to the full amount he had a right to receive under the
employment agreement had his employment not been terminated.
STOCK OPTION PLAN
The Stock Option Plan was approved by the Board of Directors and
stockholders of the Company effective as of May 15, 1996. The objectives of the
Plan are to (i) attract, retain and motivate certain key employees, Nonemployee
Directors and consultants who are important to the success and growth of the
business of the Company and (ii) to create a long-term mutuality of interest
between such persons and the stockholders of the Company by granting options to
purchase Common Stock.
The Company has reserved 880,000 shares of Common Stock for issuance in
connection with the Stock Option Plan, which will be administered by the
Compensation Committee of the Board of Directors. Pursuant to the Stock Option
Plan, the Company may grant (i) Non-Qualified Stock Options (as defined therein)
or Incentive Stock Options (as defined therein) to key employees and (ii)
Non-Qualified Stock Options to eligible Nonemployee Directors and consultants.
See "Management -- Director Compensation." The exercise price and vesting terms
for the options shall be determined by the Compensation Committee and shall be
set forth in an option agreement. The exercise price will be at least 100% of
fair market value of the Common Stock on the date of grant in the case of
Incentive Stock Options and Non-Qualified Stock Options that are intended to be
performance-based under Section 162(m) of the Internal Revenue Code, and the
exercise price of any other Non-Qualified Stock Options shall be at least equal
to the par value of the Common Stock. Non-Qualified Stock Options will be
exercisable for not more than ten years, and Incentive Stock Options may be
exercisable for up to ten years except as otherwise provided in the Stock Option
Plan. The Compensation Committee may provide that an optionee may pay for shares
upon exercise of an option: (i) in cash; (ii) in already-owned shares of Common
Stock; (iii) by agreeing to surrender then exercisable options equivalent in
value; (iv) by payment through a cash or margin arrangement with a broker; (v)
in shares otherwise issuable upon exercise of the option; or (vi) by such other
medium or by any combination of (i), (ii), (iii), (iv) or (v) as authorized by
the Compensation Committee. In the event of certain extraordinary transactions,
including a merger, consolidation, a sale or transfer of all or substantially
all assets or an acquisition of all or substantially all the Common Stock,
vesting on such options will generally be accelerated.
As of July 15, 1996, options to purchase 543,358 shares of Common Stock had
been granted under the Stock Option Plan, of which 219,860 had been exercised,
323,498 were outstanding and 12,500 were exercisable. The Stock Option Plan will
terminate on May 15, 2006.
OFFICER AND DIRECTOR LIABILITY
Pursuant to the Company's Certificate of Incorporation and under Delaware
law, directors of the Company are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director derived an improper personal benefit. Under
the Certificate of Incorporation, the Company will indemnify the officers and
directors of the Company to the full extent permitted under the Delaware General
Corporation Law (the "DGCL").
In accordance with Delaware law, the Company intends to enter into
indemnification agreements with its officers and directors, pursuant to which it
will agree to pay certain expenses, including attorney's fees, judgments, fines
and amounts paid in settlement incurred by such officers and directors in
connection with certain actions, suits or proceedings. These agreements will
require officers and directors to repay the amount of any expenses if it shall
be determined that they were not entitled to indemnification.
The Company maintains liability insurance for the benefit of directors and
officers.
46
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MANAGING UNDERWRITER
Dillon Read is a managing underwriter in the Offering. As of July 10, 1996,
certain private investment partnerships managed by Dillon Read, and persons
related to Dillon Read, owned 44.2% of the shares of Common Stock of the Company
(assuming the exercise of their options, but not the options or warrants of
other persons, into shares of Common Stock). See " -- Certain Equity
Transactions," " -- Registration Rights Agreement," "Principal and Selling
Stockholders" and "Underwriting." Additionally, Mr. Leidel, a director of the
Company and its predecessors since May 1991, is a Senior Vice President of
Dillon Read and a partner of Dillon Read Venture Partners III, L.P. and Concord
II, both private venture capital funds managed by Dillon Read. See "Management
- -- Directors, Executive Officers and Other Key Employees."
CERTAIN EQUITY TRANSACTIONS
As of or prior to the completion of the Offering, all shares of Class A
Common Stock and Class B Common Stock will be reclassified as Common Stock
pursuant to the Reclassification. Prior to the Reclassification, Class B Common
Stock did not provide holders thereof the right to vote or to receive dividends.
ROLL-UP TRANSACTION. On March 31, 1994, in connection with the
reorganization of the Company from a partnership to a corporation, the Company
issued an aggregate of 2,100,376 shares of the Company's common stock (which was
reclassified as Class A Common Stock on March 8, 1995 pursuant to an amendment
to the Company's charter) to the following individuals and entities: (i) an
aggregate of 900,376 shares to Concord Partners ("Concord"), Concord II, Concord
Partners Japan Limited ("Concord Japan"), Lexington Partners III, L.P.
("Lexington III"), Lexington Partners IV, L.P. ("Lexington IV"), and Dillon
Read, as agent (collectively with Concord, Concord II, Concord Japan, Lexington
III and Lexington IV, the "Concord Investors"), in exchange for an aggregate of
500,375 Series A Preferred Units in the Partnership and all of the stock owned
by the Concord Investors in CCG Holding Company, Inc. (which, in turn, owned
400,000 Series A Preferred Units in the Partnership); (ii) 600,000 shares to
Norman R. Cox, Jr., a former officer of the Company, in exchange for all of the
stock owned by Mr. Cox in NRC, Inc. (which, in turn, owned 600,000 Common Units
in the Partnership); and (iii) 600,000 shares to David M. Cornell in exchange
for all of the stock owned by Mr. Cornell in Mayo, Inc. (which, in turn, owned
600,000 Common Units in the Partnership).
CAPITAL INVESTMENTS. On March 31, 1994, the Company issued an aggregate of
1,088,009 shares of the Company's common stock (which was reclassified as Class
A Common Stock on March 8, 1995 pursuant to an amendment to the Company's
charter) for an aggregate purchase price of approximately $6.5 million to the
following entities: (i) an aggregate of 768,790 shares to Charterhouse Equity
Partners II, L.P. ("CEP II") and a related party; (ii) an aggregate of 239,474
shares to certain of the Concord Investors; and (iii) 79,745 shares to another
institutional investor.
STOCK REPURCHASE. On November 1, 1995, in connection with the financing of
the repurchase of 555,000 shares of Class A Common Stock from Mr. Cox (the
"Stock Repurchase"), the Company issued options to purchase an aggregate of
555,000 shares of Class B Common Stock at an exercise price of $2.00 per share
(the "Repurchase Options") pursuant to stock option agreements (the "Stock
Option Agreements") to the Concord Investors (129,682 shares), CEP II (87,466
shares), David M. Cornell (137,110 shares), Jane B. Cornell (32,669 shares),
Steven W. Logan (50,000 shares), certain other investors and the financial
institution providing the financing for the Stock Repurchase. Simultaneously,
the Company, and each of the holders of Repurchase Options entered into an
investors agreement dated November 1, 1995 (the "Investors Agreement") pursuant
to which each of the holders of Repurchase Options (excluding the financial
institution) agreed to exercise all of its Repurchase Options on December 31,
1996 unless, on or prior to that date, the Company has repaid in full the loan
the Company had obtained to finance the Stock Repurchase. The Company assigned
its rights under the Stock Option Agreements, including its right to receive
payment, to the financial institution providing the Repurchase Transaction
financing. Additionally, pursuant to the Investors Agreement, if any holder of
Repurchase Options (excluding the financial
47
institution) fails to exercise its Repurchase Options as required by the
Investors Agreement, such holder's Repurchase Options would automatically be
assigned to Concord II and CEP II ratably in accordance with their respective
ownership interests in the Company, and Concord II and CEP II would be required
to exercise such Repurchase Options.
OPTION EXERCISE AND INDEBTEDNESS OF MANAGEMENT. On July 8, 1996, Mr.
Cornell and Mr. Logan exercised options to purchase 137,110 and 82,750 shares
consisting of both Class A Common Stock and Class B Common Stock for aggregate
exercise prices of $274,220 and $180,638, respectively. In connection with such
exercise, Mr. Cornell and Mr. Logan each issued a promissory note in favor of
the Company for the respective exercise amounts. The promissory notes have terms
of four years and bear interest at the applicable short-term federal rate as
prescribed by Internal Revenue Service regulations. The maturity of the
promissory notes will be accelerated upon certain events, including termination
of employment. The notes are full recourse and collateralized by the shares
received upon the exercise of the options.
MIDTEX ACQUISITION FINANCING. In connection with the financing of the
acquisition of substantially all the assets of MidTex, the Company entered into
the 1996 Credit Facility and issued the Convertible Bridge Note. As a condition
to funding, the 1996 Credit Facility required the Concord Investors to purchase
at least $200,000 of Class B Common Stock. On July 9, 1996, certain of the
Concord Investors purchased an aggregate of 90,331 shares of Class B Common
Stock for $254,733 (or $2.82 per share). As a condition to the Convertible
Bridge Note, the financial institution, the Company, Concord II and CEP II
entered into a put agreement dated as of July 3, 1996 (the "Put Agreement").
Pursuant to the Put Agreement, Concord II and CEP II each agreed, upon
conversion of the Convertible Bridge Note into shares of Common Stock (the
"Conversion Stock"), to purchase its pro rata share of the Conversion Stock from
the financial institution at $5.64 per share, and the financial institution
agreed to sell such shares to Concord II and CEP II. Additionally, the Company,
Concord II and CEP II entered into an extension agreement dated as of July 3,
1996 (the "Extension Agreement") pursuant to which, if the Company and the
financial institution agree to extend the date of the conversion of the
Convertible Bridge Note beyond December 30, 1996, Concord II and CEP II agree to
a deferral of up to three months of their rights and obligations under the Put
Agreement. In consideration for their agreement under the Extension Agreement,
if an extension occurs, the Company has agreed to grant to each of Concord II
and CEP II options to purchase the number of shares of Class B Common Stock
equal to the product of 15,055 and 10,037, respectively, and the number of
calendar months, up to three, of the extension at an exercise price of $2.82 per
share. The Company issued options to CEP II to purchase 60,221 shares of Class B
Common Stock at $2.82 per share in consideration for entering into the Put
Agreement.
INCENTIVE STOCK OPTIONS. Effective July 9, 1996, the Company granted to
each of Mr. Cornell and Mr. Logan Incentive Stock Options for the purchase of
126,124 shares of Class B Common Stock, vesting one third on each of December 31
of 1996, 1997 and 1998, with a term of 10 years and a per share exercise price
of $4.86 per share.
REGISTRATION RIGHTS AGREEMENT
The Company and certain stockholders, optionholders and warrantholders of
the Company, including the Concord Investors, CEP II, Mr. Cornell, Ms. Cornell
and Mr. Logan, are parties to a registration rights agreement dated as of March
31, 1994, as amended (the "Registration Rights Agreement"). The Registration
Rights Agreement provides demand registration rights upon a request (subject to
a maximum of two registrations in total under clauses (i) and (ii) below and a
maximum of one registration under clause (i) below) of (i) certain stockholders
holding at least 50% of the shares of Common Stock (or other securities of the
Company) subject to the agreement (the "Registrable Securities"), if the request
occurs prior to March 31, 1997, (ii) holders of Registrable Securities holding
at least 15% of the outstanding Registrable Securities, if the request occurs
after March 31, 1997 or (iii) holders of at least 50% of the shares of Common
Stock issued upon exercise of warrants granted in March 1995 and July 1996 to
the financial institution in connection with the 1995 Credit Facility and the
1996 Credit Facility (the"Warrant Shares"), if such request occurs upon the
expiration of the six-month period immediately following the consummation of an
initial public offering of shares of Common Stock by the Company in which fewer
than 75% of the
48
Warrant Shares are sold. Under the Registration Rights Agreement, upon such
request the Company is required to use its best efforts to file a registration
statement under the Securities Act to register Registrable Securities held by
the requesting holders and any other stockholders who are parties to the
Registration Rights Agreement and who desire to sell Registrable Securities
pursuant to such registration statement. In addition, subject to certain
conditions and limitations, the Registration Rights Agreement provides that
holders of Registrable Securities may participate in any registration by the
Company of equity securities pursuant to a registration statement under the
Securities Act on any form other than Form S-4 or Form S-8. The Registration
Rights Agreement provides that the number of shares of Registrable Securities
that must be registered on behalf of such participating holders of Registrable
Securities is subject to limitation if the managing underwriter determines that
market conditions require such a limitation. The stockholders who are party to
the Registration Rights Agreement have waived their rights with respect to the
Offering to the extent they are not selling shares of Common Stock pursuant to
the Offering.
The registration rights conferred by the Registration Rights Agreement are
transferable to transferees of the Registrable Securities covered thereby. The
Registration Rights Agreement contains no termination provision, although
securities cease to be Registrable Securities upon the earlier of (i) being
disposed pursuant to an effective registration statement, (ii) being transferred
so that subsequent disposition of such securities does not require registration
or qualification of such securities under the Securities Act or any state
securities law and (iii) ceasing to be outstanding. After completion of the
Offering, 3,437,726 shares of Common Stock (including shares issuable upon
exercise of outstanding options and warrants) were subject to the Registration
Rights Agreement.
Under the Registration Rights Agreement, the Company is required to pay all
expenses incurred in complying with the agreement, except for underwriter fees,
discounts or commissions and fees or expenses of counsel to the selling security
holders (other than one counsel for the selling security holders as a group).
Under the Registration Rights Agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the agreement.
STOCKHOLDERS AGREEMENT
Simultaneously with the completion of the Offering, the Applicable
Stockholders (which include the Concord Investors, CEP II and Mr. Cornell) will
enter into an Amended and Restated Stockholders Agreement (the "Stockholders
Agreement"). Upon completion of the Offering, the Applicable Stockholders will
beneficially own in the aggregate approximately 44.7% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 36.8% of the
outstanding Common Stock if the Underwriters exercise their over-allotment
option in full). The Stockholders Agreement will provide that the Applicable
Stockholders agree to vote all shares of Common Stock owned by them to elect
three directors of the Company (one nominee of each of the Concord Investors,
CEP II and David M. Cornell) to a Board of Directors initially consisting of
five members. The Stockholders Agreement will provide that the number of
directors may only be increased by vote of a majority of the Board of Directors.
Consequently, the Applicable Stockholders, through their Common Stock holdings
and representation on the Board of Directors of the Company, which will
initially include a majority of directors designated by the Applicable
Stockholders, will be able to exercise significant influence over the policies
and direction of the Company. The Stockholders Agreement will terminate upon the
first to occur of (i) four years from the date of completion of the Offering or
(ii) the Applicable Stockholders collectively owning less than 25% of the
outstanding Common Stock. The Stockholders Agreement will also terminate as to
any Applicable Stockholder upon such stockholder owning less than 5% of the
oustanding Common Stock.
49
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date hereof
and as adjusted to reflect the sale of securities offered hereby (assuming the
Underwriters' over-allotment option is not exercised), based on information
obtained from the persons named below, with respect to the "beneficial
ownership" (as defined for purposes of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of shares of Common Stock and outstanding warrants
and options to purchase shares of Common Stock by (i) each stockholder known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock ("Significant Stockholders"), (ii) each director and executive officer of
the Company and each person nominated to become a director of the Company upon
completion of the Offering, (iii) all executive officers and directors of the
Company as a group and (iv) other Selling Stockholders. Outstanding warrants and
options to purchase shares of Common Stock represent shares that may be acquired
within 60 days after the date hereof pursuant to the exercise of options or
warrants; such shares are also included in the total number of shares
beneficially owned in the following table. Unless otherwise stated, all the
addresses are in care of the Company, 4801 Woodway, Suite 400W, Houston, Texas
77056.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING(1)
--------------------------------------- ----------------------------
OUTSTANDING NUMBER OF OUTSTANDING
OPTIONS AND SHARES OPTIONS AND
NAME AND ADDRESS TOTAL NUMBER WARRANTS PERCENT OFFERED TOTAL NUMBER WARRANTS
- ---------------------------------------- ------------ ------------ ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Concord Partners, L.P. and Concord
Partners II, L.P.; et. al(1)(2)....... 1,359,863 129,682 44.2% -- 1,359,863 129,682
535 Madison Avenue
New York, NY 10022
Charterhouse Equity Partners II, L.P.... 916,477 147,687 29.6 -- 916,477 147,687
c/o Charterhouse Group
International, Inc.(1)(3)
535 Madison Avenue
New York, NY 10022
Internationale Nederlanden (U.S.)
Capital Corporation................... 485,500 485,500 14.1 250,000 235,500 235,500
135 E. 57th St.
New York, NY 10022
David M. Cornell(4)..................... 762,110 -- 25.8 62,500 578,275 --
Jane B. Cornell(4)...................... 242,669 32,669 8.1 121,335 121,334 32,669
Richard T. Henshaw III(5)............... -- -- -- -- -- --
Peter A. Leidel(6)...................... -- -- -- -- -- --
Campbell A. Griffin, Jr.(7)............. -- -- -- -- 3,750 3,750
Tucker Taylor(7)........................ -- -- -- -- 3,750 3,750
Steven W. Logan......................... 117,500 13,750 4.0 -- 117,500 13,750
Marvin H. Wiebe, Jr..................... 8,407 3,750 * -- 8,407 3,750
All executive officers and directors as
a group (seven persons)(8)............ 888,017 17,500 29.9 62,500 711,682 25,000
Other Selling Stockholders:
Rauscher Pierce Refsnes, Inc............ 43,062 43,062 1.4 43,062 -- --
1001 Fannin, Suite 700
Houston, Texas 77002
</TABLE>
NAME AND ADDRESS PERCENT
- ---------------------------------------- -------
Concord Partners, L.P. and Concord
Partners II, L.P.; et. al(1)(2)....... 21.3%
535 Madison Avenue
New York, NY 10022
Charterhouse Equity Partners II, L.P.... 14.3
c/o Charterhouse Group
International, Inc.(1)(3)
535 Madison Avenue
New York, NY 10022
Internationale Nederlanden (U.S.)
Capital Corporation................... 3.6
135 E. 57th St.
New York, NY 10022
David M. Cornell(4)..................... 9.2
Jane B. Cornell(4)...................... 1.9
Richard T. Henshaw III(5)............... --
Peter A. Leidel(6)...................... --
Campbell A. Griffin, Jr.(7)............. *
Tucker Taylor(7)........................ *
Steven W. Logan......................... 1.9
Marvin H. Wiebe, Jr..................... *
All executive officers and directors as
a group (seven persons)(8)............ 11.3
Other Selling Stockholders:
Rauscher Pierce Refsnes, Inc............ --
1001 Fannin, Suite 700
Houston, Texas 77002
(NOTES ON FOLLOWING PAGE)
50
- ------------
* Less than one percent.
(1) If the Underwriters' over-allotment option is exercised, certain Concord
Investors and CEP II will sell up to 313,630 and 211,370 shares of Common
Stock, respectively.
(2) Includes 187,114 shares (19,114 of which would be received upon exercise of
options) held by Concord, 646,993 shares (60,639 of which would be received
upon exercise of options) held by Concord II, 127,839 shares (11,982 of
which would be received upon exercise of options) held by Concord Japan,
each of which is a private venture capital fund managed by Dillon Read. Also
includes 60,249 shares (6,154 of which would be received upon exercise of
options) held by Lexington III, 2,435 shares (175 of which would be received
upon exercise of options) held by Lexington IV, each of which is a private
investment fund for certain Dillon Read affiliated persons, managed by
Dillon Read, and 335,233 shares (31,618 of which would be received upon
exercise of options) held by Dillon Read as agent for certain affiliated
persons.
(3) Includes 914,986 shares (147,687 of which would be received upon exercise of
options) held by CEP II and 1,491 shares held by a party related to CEP II.
The general partner of CEP II is CHUSA Equity Investors II, L.P., whose
general partner is Charterhouse Equity II, Inc., a wholly owned subsidiary
of Charterhouse. As a result of the foregoing, all of the shares of Common
Stock held by CEP II and a party related to CEP II would, for purposes of
Section 13(d) of the Securities Exchange Act of 1934, as amended, be deemed
to be beneficially owned by Charterhouse.
(4) Includes 210,000 shares prior to the Offering and 88,665 shares after the
Offering over which Jane B. Cornell, the former wife of David M. Cornell,
has sole investment power and, pursuant to a voting agreement, over which
Mr. Cornell has sole voting power. The voting agreement will not apply to
shares being sold by Ms. Cornell.
(5) Mr. Henshaw is Senior Vice President of Charterhouse. He disclaims any
beneficial ownership of the shares beneficially owned by Charterhouse.
(6) Mr. Leidel is a Senior Vice President of Dillon Read and a partner of
Concord II. He disclaims any beneficial ownership of the shares held by
Concord, Concord II or Concord Japan. Dillon Read, as agent for Mr. Leidel,
holds 1,238 shares (116 of which would be received upon exercise of
options). Mr. Leidel does not have voting or investment power with respect
to such shares.
(7) Mr. Griffin and Mr. Taylor will each receive options to purchase 15,000
shares of Common Stock upon completion of the Offering, 3,750 of which will
be immediately vested.
(8) Excludes shares of which Mr. Henshaw and Mr. Leidel disclaim beneficial
ownership. See notes 5 and 6.
51
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Offering, the Company's authorized capital stock
will consist of 50,000,000 shares of Common Stock, par value $.001 per share,
and 10,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). Upon completion of the Offering, the Company will have
outstanding 6,265,398 shares of Common Stock and no shares of Preferred Stock,
and the Company will have outstanding options or warrants to purchase an
additional 978,109 shares of Common Stock. The following summary is qualified in
its entirety by reference to the Certificate of Incorporation, which is filed as
an exhibit to the registration statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders of
a majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive rights
and is not convertible, redeemable or assessable or entitled to the benefits of
any sinking fund. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy" for information
regarding dividend policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and limitations prescribed by law, the Board
of Directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares, to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any action or vote by the holders of
Common Stock.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction
that some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock. The Board of Directors does not currently
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the rules of any market on
which the Company's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISIONS
The Company is a Delaware corporation and will become subject to Section
203 of the DGCL upon the completion of the Offering. In general, Section 203
prevents an "interested stockholder" of a Delaware corporation (defined
generally as a person owning 15% or more of the corporation's outstanding voting
stock) from engaging in a "business combination" (as defined therein) with that
corporation for three years following the date such person became an interested
stockholder unless: (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder (the "initial
transaction") or approved the business
52
combination; (ii) as a result of the initial transaction, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time that transaction commenced (excluding, for purposes of
determining the number of shares outstanding, stock owned by directors who are
also officers of the corporation and stock owned by employee stock plans that do
not provide employees with the rights to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) following the initial transaction, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above also do not
apply, among other things, to certain business combinations proposed following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors. Section 203
will not apply to transactions between the Company and the Concord Investors.
OTHER MATTERS
The DGCL authorizes Delaware corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. The duty of
care requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors are accountable to corporations and their stockholders for monetary
damages for conduct constituting gross negligence in the exercise of their duty
of care. Delaware law enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors of the Company to the Company or
its stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability for
(i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the DGCL or (iv) any transaction from which the director derived an
improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. The Certificate of Incorporation and the Company's Bylaws provide
indemnification to the Company's officers and directors and certain other
persons with respect to certain matters, and the Company will enter into
agreements with each of its directors providing for indemnification with respect
to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board or at least two directors of the Company. The
Certificate of Incorporation provides that the number of directors will be no
greater than 13 and no fewer than three.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
53
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, 6,265,398 shares of Common Stock will
be outstanding and 978,109 shares will be issuable upon exercise of outstanding
warrants and stock options. The 3,500,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (as that term is defined under the Securities Act), which will be
subject to the resale limitations of Rule 144 under the Securities Act.
Substantially all of the remaining 3,743,507 outstanding shares of Common Stock
(including shares issuable upon exercise of outstanding options and warrants),
which are held by the Company's current stockholders, will be "restricted
securities" (within the meaning of Rule 144) and, therefore, will not be
eligible for sale to the public unless they are sold in transactions registered
under the Securities Act or pursuant to an exemption from registration,
including pursuant to Rule 144. The Company has entered into a Registration
Rights Agreement with certain of its existing stockholders, which provide such
stockholders with certain rights to have their shares of Common Stock registered
under the Securities Act, in order to permit the public sale of such shares. See
"Certain Relationships and Related Party Transactions -- Registration Rights
Agreement."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a minimum of two years (including the holding
period of any prior owner, except an affiliate) has elapsed since the later of
the date of acquisition of the restricted securities from the issuer or from an
affiliate of the issuer, a person (or persons whose shares of Common Stock are
aggregated), including persons who may be deemed affiliates of the Company,
would be entitled to sell within any three-month period a number of shares of
Common Stock that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (i.e., 62,654 shares immediately after completion of the
Offering) and (ii) the average weekly trading volume during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are
also subject to certain provisions as to the manner of sale, notice requirements
and the availability of current public information about the Company. In
addition, under Rule 144(k), if a period of at least three years (including the
holding period of any prior owner, except an affiliate) has elapsed since the
later of the date restricted securities were acquired from the Company or the
date they were acquired from an affiliate of the Company, a stockholder who is
not an affiliate of the Company at the time of sale and has not been an
affiliate for at least three months prior to the sale would be entitled to sell
shares of Common Stock in the public market immediately without compliance with
the foregoing requirements under Rule 144. The foregoing summary of Rule 144 is
not intended to be a complete description thereof. The Commission has proposed
an amendment to Rule 144 that would shorten the three- and two-year holding
periods described above to two years and one year, respectively.
The Company and persons who will beneficially own in the aggregate
3,556,393 shares of Common Stock (including shares issuable upon exercise of
outstanding options and warrants) upon the completion of the Offering, including
the Company's directors and executive officers, have agreed that they will not
sell, contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of the Common Stock or any securities
convertible into or exchangeable for Common Stock or warrants or other rights to
purchase Common Stock or permit the registration of any shares of Common Stock,
prior to the expiration of 180 days following the date of this Prospectus,
without the prior written consent of Dillon Read, subject to certain exceptions.
See "Underwriting."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 880,000 shares of Common Stock reserved or to be
available for issuance pursuant to the Stock Option Plan. Shares of Common Stock
issued pursuant to such plan after the effective date of such registration
statement generally will be available for sale in the open market by holders who
are not affiliates of the Company and, subject to the volume and other
limitations of Rule 144, by holders who are affiliates of the Company.
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made of the effect, if any, that future sales of
Common Stock or the availability of shares for future sale will have on the
market price prevailing from time to time. Following the Offering, sales of
substantial amounts of Common Stock in the public market or otherwise, or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock.
54
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock which each has severally
agreed to purchase from the Company and the Selling Stockholders, subject to the
terms and conditions specified in the Underwriting Agreement, are as follows:
UNDERWRITER NUMBER OF SHARES
- ---------------------------------------- ----------------
Dillon, Read & Co. Inc..................
Equitable Securities Corporation........
----------------
Total.............................. 3,500,000
================
The Managing Underwriters are Dillon, Read & Co. Inc. and Equitable
Securities Corporation ("Equitable Securities").
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby if any Underwriter defaults in its
obligation to purchase such shares and if the aggregate obligations of the
Underwriters so defaulting do not exceed ten percent of the shares offered
hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not to exceed $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $ per share on sales to certain other dealers. The offering of the
shares of Common Stock is made for delivery when, as and if accepted by the
Underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of the shares. After the shares are released
for sale to the public, the public offering price, the concession and the
reallowance may be changed by the Managing Underwriters.
Certain stockholders of the Company have granted to the Underwriters an
option for 30 days from the date of the Underwriting Agreement to purchase up to
an additional 525,000 shares of Common Stock from them at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise such option only to cover
over-allotments made of the shares in connection with this Offering. To the
extent the Underwriters exercise this option, each of the Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares proportionate to such Underwriter's initial commitment.
The Company, each of its directors and officers and certain of its
stockholders have agreed that they will not sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
the Common Stock or any securities convertible into or exchangeable for Common
Stock or warrants or other rights to purchase Common Stock, for a period of 180
days after the date of this Prospectus, without the prior written consent of
Dillon Read, except for (i) the registration and sale of shares of Common Stock
pursuant to the Offering, (ii) the issuance of shares of Common Stock by the
Company upon the purchase of outstanding warrants or the exercise of outstanding
options, provided that the Company shall have obtained an agreement
substantially to the effect set forth in this paragraph from each such person to
whom such shares of Common Stock are issued and (iii) the grant of options and
other rights by the Company to purchase up to an aggregate of 306,642 shares of
Common Stock to the Company's employees, officers and directors pursuant to the
Stock Option Plan, provided that the Company
55
shall have obtained an agreement substantially to the effect set forth in this
paragraph from each such employee, officer and director of the Company to whom
such options and rights are granted.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including any liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Immediately prior to the Offering, certain private investment partnerships
managed by Dillon Read, and persons related to Dillon Read, owned an aggregate
of 44.2% of the outstanding shares of Common Stock (assuming the exercise of
their options, but not the options or warrants of other persons, into shares of
Common Stock). Immediately after the consummation of the Offering, such persons
will beneficially own an aggregate of 21.3% of the Common Stock (assuming the
exercise of their options, but not the options or warrants of other persons,
into shares of Common Stock). See "Principal and Selling Stockholders" and
"Certain Relationships and Related Party Transactions -- Managing Underwriter."
In addition, Mr. Leidel, a Senior Vice President of Dillon Read, has been a
member of the Board of Directors of the Company and its predecessor since May
1991. See "Management -- Directors, Executive Officers and Other Key Employees,"
"Principal and Selling Stockholders" and "Certain Relationships and Related
Party Transactions -- Managing Underwriter."
Under Rule 2720 (the "Rule") of the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD"), when an NASD member
participates in the distribution of an affiliated company's equity securities
for which a bona fide independent market does not exist, the price at which
those equity securities are distributed to the public can be no higher than that
recommended by a "qualified independent underwriter" within the meaning of the
Rule. Since the Company may be deemed to be an affiliate of Dillon Read under
the Rule, the Offering is being conducted in accordance with the applicable
provisions of the Rule. Equitable Securities has agreed to act as a "qualified
independent underwriter" within the meaning of the Rule with respect to the
Offering. Accordingly, in such capacity, Equitable Securities has, in accordance
with Section (c)(3)(A) of the Rule, exercised the usual standards of "due
diligence" in respect of the preparation of this Prospectus and the Registration
Statement of which this Prospectus is a part. The price per share of Common
Stock set forth on the cover page of this Prospectus is not higher than that
recommended by Equitable Securities in its capacity as a "qualified independent
underwriter."
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiation among the Company, the Selling Stockholders and
the Managing Underwriters. Factors considered in determining the initial public
offering price were prevailing market conditions, the state of the Company's
development, recent financial results of the Company, the future prospects of
the Company and its industry, market valuations of securities of companies
engaged in activities deemed by the Managing Underwriters to be similar to those
of the Company and other factors deemed relevant. Consideration was also given
to the general state of the securities market, the market conditions for new
issues of securities and the demand for similar securities of comparable
companies.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
At the request of the Company, the Underwriters have reserved up to 200,000
of the shares of Common Stock offered hereby for sale at the initial public
offering price to certain employees of the Company and certain other persons
designated by the Company who have expressed an interest in purchasing Common
Stock. The number of shares of Common Stock available to the general public will
be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not purchased by such persons will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
In connection with the Company's MidTex acquisition, Equitable Securities
received a customary investment banking fee. Rauscher Pierce Refsnes, Inc. has
in the past provided investment banking and other financial advisory services to
the Company, for which it received customary fees.
56
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby by the Company are being passed upon for the Company by Baker &
Botts, L.L.P., Houston, Texas. Wade H. Whilden, a partner of Baker & Botts,
L.L.P., owns options to purchase 50,000 shares of Common Stock. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York.
EXPERTS
The audited financial statements included in this Prospectus and the
Registration Statement on Form S-1 of which this Prospectus is a part (the
"Registration Statement") have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports appearing herein and elsewhere
in the Registration Statement, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. Upon completion of the Offering, the Company will be
subject to the informational requirements of the Exchange Act, and in accordance
therewith, will be required to file periodic reports and other information with
the Commission. Such information can be inspected without charge after the
Offering at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Suite 1400, Northwest Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site (http://www.sec.gov) that will contain all information
filed electronically by the Company with the Commission.
The Company has filed the Registration Statement with the Commission under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
including the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and, with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement, and
each such statement is qualified in all respects by such reference. A copy of
the Registration Statement, including the exhibits and schedules thereto, may be
inspected and copies thereof may be obtained as described in the preceding
paragraph with respect to periodic reports and other information to be filed by
the Company under the Exchange Act.
57
CORNELL CORRECTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBERS
-------
I. CORNELL CORRECTIONS, INC.
Report of Independent Public F-2
Accountants........................
Consolidated Balance Sheets of F-3
Cornell Corrections, Inc. as of
December 31, 1994 and 1995
(Audited), and March 31, 1996
(Unaudited)........................
Consolidated Statements of Operations F-4
of Cornell Corrections, Inc. for
the Years Ended December 31, 1993,
1994 and 1995 (Audited), and for
the Three Months Ended March 31,
1995 and 1996 (Unaudited)..........
Consolidated Statements of F-5
Stockholders' Equity (Deficit) of
Cornell Corrections, Inc. for the
Years Ended December 31, 1993, 1994
and 1995 (Audited), and for the
Three Months Ended March 31, 1995
and 1996 (Unaudited)...............
Consolidated Statements of Cash Flows F-6
of Cornell Corrections, Inc. for
the Years Ended December 31, 1993,
1994 and 1995 (Audited), and for
the Three Months Ended March 31,
1995 and 1996 (Unaudited)..........
Notes to Consolidated Financial F-7
Statements.........................
II. MIDTEX DETENTIONS, INC. AND BIG
SPRING CORRECTIONAL CENTER
Report of Independent Public F-19
Accountants........................
Combined Balance Sheets of MidTex F-20
Detentions, Inc. and Big Spring
Correctional Center as of September
30, 1994 and 1995 (Audited), and
March 31, 1996 (Unaudited).........
Combined Statements of Operations and F-21
Changes in Equity of MidTex
Detentions, Inc. and Big Spring
Correctional Center for the Years
Ended September 30, 1993, 1994 and
1995 (Audited), and for the Six
Months Ended March 31, 1995 and
1996 (Unaudited)...................
Combined Statements of Cash Flows of F-22
MidTex Detentions, Inc. and Big
Spring Correctional Center for the
Years Ended September 30, 1993,
1994 and 1995 (Audited), and for
the Six Months Ended March 31, 1995
and 1996 (Unaudited)...............
Notes to Combined Financial F-23
Statements.........................
III. TEXAS ALCOHOLISM FOUNDATION, INC. and
THE TEXAS HOUSE FOUNDATION, INC.
Report of Independent Public F-27
Accountants........................
Combined Balance Sheets of Texas F-28
Alcoholism Foundation, Inc. and The
Texas House Foundation, Inc. as of
December 31, 1995 (Audited), and
March 31, 1996 (Unaudited).........
Combined Statements of Operations and F-29
Fund Balance of Texas Alcoholism
Foundation, Inc. and The Texas
House Foundation, Inc. for the Year
Ended December 31, 1995 (Audited),
and for the Three Months Ended
March 31, 1995 and 1996
(Unaudited)........................
Combined Statements of Cash Flows of F-30
Texas Alcoholism Foundation, Inc.
and The Texas House Foundation,
Inc. for the Year Ended December
31, 1995 (Audited), and for the
Three Months Ended March 31, 1995
and 1996 (Unaudited)...............
Notes to Combined Financial F-31
Statements.........................
IV. ECLECTIC COMMUNICATIONS, INC.
Report of Independent Public F-34
Accountants........................
Combined Statement of Operations of F-35
Eclectic Communications, Inc. and
International Self-Help Services,
Inc. for the Year Ended March 31,
1994 (Audited).....................
Combined Statement of Stockholders' F-36
Equity of Eclectic Communications,
Inc. and
International Self-Help Services,
Inc. for the Year Ended March 31,
1994 (Audited) ....................
Combined Statement of Cash Flows of F-37
Eclectic Communications, Inc. and
International Self-Help Services,
Inc. for the Year Ended March 31,
1994 (Audited).....................
Notes to Combined Financial F-38
Statements.........................
F-1
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. (formerly Cornell Cox, Inc., a Delaware corporation and
successor to The Cornell Cox Group, L.P., a Delaware limited partnership), and
subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995. 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, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 15, 1996, except as to
Notes 1 and 7, for which the date is
July 16, 1996
F-2
CORNELL CORRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 928 $ 390 $ 632
Restricted cash.................... 279 284 302
Accounts receivable, net........... 2,148 3,436 2,913
Current portion of amount
receivable from the California
Department of Corrections........ 206 216 220
Deferred tax asset................. 266 27 27
Prepaids and other................. 579 187 253
--------- --------- -----------
Total current assets.......... 4,406 4,540 4,347
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $271, $430
and $520, respectively................ 564 1,909 2,222
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $364, $7,467 and
$7,469, respectively............. 7,183 80 78
Amount receivable from the
California Department of
Corrections, noncurrent.......... 731 519 471
Deferred tax asset, noncurrent..... 170 409 409
Deferred costs and other........... 164 397 686
--------- --------- -----------
Total assets.................. $ 13,218 $ 7,854 $ 8,213
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities...................... $ 2,391 $ 2,991 $ 2,596
Current portion of long-term
debt............................. -- 24 24
--------- --------- -----------
Total current liabilities..... 2,391 3,015 2,620
LONG-TERM DEBT, net of current
portion............................... 3,447 7,625 8,479
OTHER LONG-TERM LIABILITIES............. 626 491 491
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Class A common stock, $.01 par
value, 9,000 shares authorized,
3,188, 3,189 and 3,189 shares
issued and outstanding,
respectively..................... 32 32 32
Class B common stock, $.01 par
value, 1,000 shares
authorized, none issued and
outstanding...................... -- -- --
Additional paid-in capital......... 6,941 6,955 6,955
Retained deficit................... (219) (7,661) (7,761)
Treasury stock (555 shares of Class
A Common Stock, at cost).. -- (2,603) (2,603)
--------- --------- -----------
Total stockholders' equity
(deficit).................. 6,754 (3,277) (3,377)
--------- --------- -----------
Total liabilities and
stockholders' equity....... $ 13,218 $ 7,854 $ 8,213
========= ========= ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Occupancy fees..................... $ 107 $ 15,389 $ 20,594 $ 4,930 $ 5,084
Development fees and other
income........................... 3,091 300 98 3 370
--------- --------- --------- --------- ---------
3,198 15,689 20,692 4,933 5,454
OPERATING EXPENSES...................... 2,827 12,315 16,351 4,027 4,554
DEPRECIATION AND AMORTIZATION........... 16 635 673 104 77
--------- --------- --------- --------- ---------
CONTRIBUTION FROM OPERATIONS............ 355 2,739 3,668 802 823
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,315 2,959 3,531 747 719
IMPAIRMENT LOSS ON LONG-LIVED ASSETS.... -- -- 6,600 -- --
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........... (960) (220) (6,463) 55 104
INTEREST EXPENSE........................ -- 294 1,115 110 232
INTEREST INCOME......................... (45) (138) (136) (41) (28)
--------- --------- --------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME
TAXES................................. (915) (376) (7,442) (14) (100)
PROVISION FOR INCOME TAXES.............. -- 101 -- -- --
--------- --------- --------- --------- ---------
NET LOSS................................ $ (915) $ (477) $ (7,442) $ (14) $ (100)
========= ========= ========= ========= =========
LOSS PER SHARE.......................... $ $ $ $ $
========= ========= ========= ========= =========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION...........................
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL COMMON STOCK
PARTNERSHIP $.01 PAR ADDITIONAL RETAINED TOTAL
CAPITAL --------------- PAID-IN EARNINGS TREASURY STOCKHOLDERS'
BALANCE SHARES AMOUNT CAPITAL (DEFICIT) STOCK EQUITY (DEFICIT)
----------- ------ ------ ---------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992........... $ 896 -- $ -- $ -- $ -- $ -- $ --
COMMON PARTNERSHIP UNITS ISSUED AS
COMPENSATION IN LIEU OF SALARY........ 100 -- -- -- -- -- --
ISSUANCE OF SERIES A PREFERRED
PARTNERSHIP UNITS..................... 1,002 -- -- -- -- -- --
ADJUSTMENT OF PRIOR-YEAR DISTRIBUTION
PAYABLE TO ACTUAL..................... 2 -- -- -- -- -- --
NET LOSS................................ (915) -- -- -- -- -- --
----------- ------ ------ ---------- -------- -------- ----------------
BALANCES AT DECEMBER 31, 1993........... 1,085 -- -- -- -- --
ALLOCATION OF JANUARY 1, 1994, TO MARCH
31, 1994 (i.e., PRE-INCORPORATION),
LOSS TO RESPECTIVE PARTNERS'
ACCOUNTS.............................. (258) -- -- -- 258 -- 258
CONVERSION OF PARTNERSHIP INTO CORNELL
CORRECTIONS, INC., A C CORPORATION.... (827) 2,100 21 806 -- -- 827
ISSUANCE OF COMMON STOCK................ -- 1,088 11 6,490 -- -- 6,501
DIRECT COSTS RELATED TO ISSUANCE OF
COMMON STOCK.......................... -- -- -- (355) -- -- (355)
NET LOSS................................ -- -- -- -- (477) -- (477)
----------- ------ ------ ---------- -------- -------- ----------------
BALANCES AT DECEMBER 31, 1994........... -- 3,188 32 6,941 (219) -- 6,754
EXERCISE OF STOCK OPTIONS............... -- 1 -- 3 -- -- 3
PURCHASE OF TREASURY STOCK (694 shares,
at cost).............................. -- -- -- -- -- (2,603) (2,603)
ISSUANCE OF WARRANTS.................... -- -- -- 11 -- -- 11
NET LOSS................................ -- -- -- -- (7,442) -- (7,442)
----------- ------ ------ ---------- -------- -------- ----------------
BALANCES AT DECEMBER 31, 1995........... -- 3,189 32 6,955 (7,661) (2,603) (3,277)
NET LOSS (Unaudited).................... -- -- -- -- (100) -- (100)
----------- ------ ------ ---------- -------- -------- ----------------
BALANCES AT MARCH 31, 1996
(Unaudited)........................... $ -- 3,189 $ 32 $6,955 $ (7,761) $ (2,603) $ (3,377)
=========== ====== ====== ========== ======== ======== ================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (915) $ (477) $ (7,442) $ (14) $ (100)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation........................ 16 271 166 (22) 74
Amortization........................ -- 364 507 126 3
Impairment loss on long-lived
assets............................ -- -- 6,600 -- --
Deferred income taxes............... -- 101 -- -- --
Compensation expense for common and
preferred units issued in lieu of X
salary............................ 100 -- -- -- --
Change in assets and liabilities,
net of effects resulting from
purchase of Eclectic in 1994 --
Accounts receivable............ (465) (1,161) (1,086) (649) 571
Restricted cash................ -- (71) (5) 44 (18)
Other assets................... (49) 779 166 (111) (360)
Accounts payable and accrued
liabilities.................. 386 92 (137) (402) (394)
--------- --------- --------- --------- ---------
Net cash used in operating
activities........................ (927) (102) (1,231) (1,028) (224)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (20) (167) (1,159) (72) (388)
Cash paid to acquire Eclectic, net of
$296 cash acquired.................. -- (5,921) -- -- --
Redemption of commercial paper and
U.S. Treasury notes................. 419 585 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities.............. 399 (5,503) (1,159) (72) (388)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from long-term debt......... -- -- 11,360 4,500 1,875
Payments on long-term debt............ -- (239) (7,158) (3,622) (1,021)
Issuance of common stock.............. 1,002 6,501 3 -- --
Direct costs related to issuance of
common stock........................ -- (355) -- -- --
Proceeds from note payable............ -- 50 -- -- --
Payments on note payable.............. (12) (45) -- -- --
Purchase of treasury stock............ -- -- (2,353) -- --
--------- --------- --------- --------- ---------
Net cash provided by financing
activities........................ 990 5,912 1,852 878 854
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 462 307 (538) (222) 242
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 159 621 928 928 390
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 621 $ 928 $ 390 $ 706 $ 632
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period....... $ 4 $ 293 $ 520 $ 110 $ 232
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Cornell Corrections, Inc. (collectively with its subsidiaries, the
"Company"), a Delaware corporation (formerly named Cornell Cox, Inc.), provides
to governmental agencies the integrated development, design, construction and
management of facilities within three areas of operational focus: (i) secure
institutional correctional and detention services, (ii) non-secure pre-release
correctional services and (iii) juvenile correctional and detention services.
The Company was incorporated on March 31, 1994 as the successor company to
The Cornell Cox Group, L.P. (the "Partnership"), a Delaware limited partnership
formed on April 18, 1991. The capital structure of the Partnership consisted of
common and preferred units. In connection with the Company's March 31, 1994
acquisition of Eclectic Communications, Inc. and a related company
(collectively, "Eclectic"), all Partnership units were converted, on a
one-to-one basis, into shares of common stock of the Company, pursuant to a
roll-up agreement dated March 31, 1994 (see Note 4 for further discussion).
The Company is filing a Registration Statement on Form S-1 for the public
offering (the "Offering") of shares of Common Stock. Among others, the risks
discussed in the Registration Statement indicate that no assurance can be given
that: (i) the Company will not continue to incur losses in future periods; (ii)
the Company will be able to obtain additional contracts to develop or manage new
facilities on favorable terms or retain its existing contracts on the expiration
thereof; (iii) governmental agencies will supply a sufficient number of inmates
to enable the Company to operate profitably; and (iv) the Company will not lose
or experience a significant decrease in business from one of the governmental
agencies for which it performs services. These and other risks are discussed in
more detail in "Risk Factors" elsewhere in this Prospectus.
As of or prior to the completion of the Offering, the Company intends to
effect a reclassification of its equity (the "Reclassification"), whereby each
share of Class A Common Stock, par value $.001 per share ("Class A Common
Stock"), and Class B Common Stock, par value $.001 per share ("Class B Common
Stock"), of the Company will be reclassified into one share of Common Stock, par
value $.001 per share ("Common Stock"), of the Company.
ACQUISITION
Effective March 31, 1994, the Company purchased all outstanding stock of
Eclectic, a California-based operator of residential care and secure
correctional facilities.
Consideration for the Eclectic acquisition was $10 million, consisting of
$6 million in cash, $3.3 million in seller subordinated debt and $0.7 million of
other long-term obligations. In addition, the Company capitalized $334,000 of
costs, primarily advisory and professional fees, directly related to the
Eclectic acquisition. These capitalized costs represent additional purchase
price and, accordingly, are reflected as part of the resulting goodwill. Equity
funding for the Eclectic acquisition was provided by existing and new
institutional investors (collectively, the "Institutional Investors"). The
Eclectic acquisition was accounted for as a purchase, and the accompanying
statement of operations reflects the operating results of Eclectic since the
acquisition date.
F-7
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consideration paid and total net book value of the assets acquired and
liabilities assumed associated with the Eclectic acquisition were as follows (in
thousands):
Current assets....................... $ 2,532
Property and equipment............... 586
Goodwill............................. 7,547
Other assets......................... 1,717
Current liabilities.................. (1,577)
Other liabilities.................... (471)
---------
Net assets acquired.................. $ 10,334
=========
Consideration for net assets
acquired --
Cash paid....................... $ 6,334
Debt issued and other
obligations incurred........... 4,000
---------
$ 10,334
=========
In connection with the Eclectic acquisition, the Company issued 43,062
warrants to a nonaffiliated financial advisor which assisted with the
acquisition. The exercise price per share of these warrants is $7.53. These
warrants are immediately exercisable, expire March 31, 1999 if not exercised,
and contain various provisions including, but not limited to, preemptive,
registration and tag-along rights.
INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended March 31, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted from the unaudited interim financial information. In the
opinion of management of the Company, the unaudited interim financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the respective full years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries and its predecessor Partnership. 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 CASH
In accordance with several contracts, the Company maintains bank accounts
for an equipment replacement fund for the replacement of equipment used in state
programs and a restoration fund for any necessary restorations of the related
facilities. In addition, bank accounts are maintained for inmates at certain of
the Company's facilities. These bank accounts are collectively referred to as
"restricted cash" in the accompanying financial statements.
F-8
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECEIVABLE FROM THE CALIFORNIA DEPARTMENT OF CORRECTIONS
Under certain contracts with the California Department of Corrections
("CDC"), the Company is reimbursed by the CDC for purchases of certain equipment
and leasehold improvements. Such reimbursement is generally received in equal
installments, including interest at rates ranging from 11% to 12%, over periods
of 60 to 120 months. The following summarizes the maturities for each of the
next five years ending December 31 and thereafter (in thousands):
1996................................. $ 216
1997................................. 156
1998................................. 160
1999................................. 129
2000................................. 52
Thereafter........................... 22
---------
$ 735
=========
DEFERRED COSTS
Facility start-up costs, which consist of costs of initial employee
training, travel and other direct expenses incurred in connection with the
opening of new facilities, are capitalized and amortized on a straight-line
basis over the lesser of the initial term of the contract plus renewals or five
years. Direct and incremental development costs 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. Development costs are expensed when the success of obtaining a new
facility project is considered doubtful.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and
repair costs are expensed while renewal and betterment costs are capitalized.
Furniture and equipment are depreciated over their estimated useful lives of one
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.
Property and equipment at December 31, 1994 and 1995, are as follows (in
thousands):
1994 1995
--------- ---------
Leasehold improvements............... $ 540 $ 598
Furniture and equipment.............. 288 407
Construction in progress............. 7 1,334
--------- ---------
835 2,339
Accumulated depreciation............. (271) (430)
--------- ---------
$ 564 $ 1,909
========= =========
Construction in progress at December 31, 1995 represents construction and
development costs attributable to two new facilities that began operating in
early 1996.
GOODWILL
Goodwill represents the total consideration the Company paid to acquire
Eclectic, including additional direct acquisition costs incurred, in excess of
the fair market value of the net tangible assets acquired. Goodwill is being
amortized on a straight-line basis over 15 years, which represents management's
estimation of the related benefit to be derived from the acquired operations. In
March 1995, the Financial
F-9
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of," which was adopted by the Company in
the fourth quarter of 1995. SFAS No. 121 requires that long-lived assets,
including goodwill, be probable of future recovery in their respective carrying
amounts as of each balance sheet date.
Pursuant to SFAS No. 121, the Company recognized an impairment loss of $6.6
million at December 31, 1995 to write down the goodwill attributable to the
purchase of Eclectic. At the time of the acquisition, the Company anticipated
that operations under, and the cash flows resulting from, certain of Eclectic's
management contracts would be expanded shortly thereafter; however, these
expansions did not materialize. Consequently, after estimating the fair value of
Eclectic's long-lived assets as of December 31, 1995 on the basis of the present
value of management's estimated future cash flows from Eclectic's contracts as
they currently exist, the impairment loss represents the amount necessary to
reduce the carrying amounts of those assets to their fair value. As a result of
the recognition of the impairment loss, future goodwill amortization is expected
to be reduced by approximately $500,000 annually.
REVENUE RECOGNITION
Substantially all occupancy fees are derived from contracts with federal
and state government agencies, which pay per diem rates based upon the number of
occupant days for the period. Such revenues are recognized as services are
provided.
Revenues related to development fees are recognized as the services are
provided. Development fees relate to certain procurement and preoperating
activities. Prior to opening a facility, all necessary furniture, fixtures and
equipment ("FF&E") must be procured (i.e., procurement costs). The Company has
historically taken the financial and operational responsibility of purchasing,
receiving, inspecting and installing a facility's FF&E. In addition, the Company
has historically taken the financial and operational responsibility related to
all costs incurred prior to opening a facility (preopening costs) such as
training, stocking of supplies, systems installation, etc. The Company is
ultimately responsible for the completeness and safekeeping of all FF&E and
preopening costs; accordingly, the associated revenues and expenses related to
such services are reflected separately in the accompanying financial statements.
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 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.
BUSINESS CONCENTRATION
Contracts with federal and state governmental agencies account for nearly
all of the Company's revenues.
F-10
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
The Company considers the fair value of all financial instruments not to be
materially different from their carrying values at the end of each fiscal year
based on management's estimate of the Company's ability to borrow funds under
terms and conditions similar to those of the Company's existing debt.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company's 1996 fiscal year. SFAS No.
123 allows the Company to adopt either of two methods for accounting for stock
options. The Company intends to continue to account for its stock-based
compensation plans under Accounting Principles Board, Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with SFAS No. 123,
certain pro forma disclosures will be provided in the notes to the Company's
December 31, 1996 financial statements.
PER SHARE DATA
Per share data is based on the weighted average number of common shares
outstanding for the period. Common shares issuable with stock options and
warrants issued by the Company during the 12 months immediately preceding the
initial filing of the Registration Statement relating to the Offering have been
included in the calculation of the shares used in computing net loss per common
share (for the periods prior to the completion of the Offering) as if these
shares were outstanding for such periods using the treasury stock method.
3. LONG-TERM DEBT:
At December 31, 1994 and 1995, the Company's long-term debt consisted of
the following (in thousands):
1994(1) 1995
--------- ---------
1995 Credit Facility:
Revolving credit................ $ -- 740
Term loan....................... -- 4,000
Multiple-advance term loan...... -- 500
Stock repurchase loan........... -- 2,350
--------- ---------
Total...................... -- 7,590
6% secured subordinated debt(2)(3)... 2,284 --
Bank notes payable, interest at 1% to
1.75% over variable prime
rate(3)............................ 854 --
Other................................ 309 59
--------- ---------
3,447 7,649
Less -- current maturities........... -- 24
--------- ---------
$ 3,447 $ 7,625
========= =========
- ------------
(1) Debt scheduled to mature in 1995 and refinanced under the Company's March
1995 credit facility (the "1995 Credit Facility") has been classified as
long-term based on the terms of the 1995 Credit Facility. Obligations under
the 1995 Credit Facility are secured by liens on substantially all the
Company's assets.
(2) Incurred to former Eclectic stockholders in connection with the Company's
acquisition of Eclectic.
(3) Refinanced under the 1995 Credit Facility.
The Company's 1995 Credit Facility provides up to $15,000,000 in loans
pursuant to four separate facilities consisting of a $2,000,000 revolving credit
facility, a $4,000,000 term loan facility that was used
F-11
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to refinance indebtedness outstanding on December 31, 1994, a $6,650,000
multiple-advance term loan facility that may be used for new and expanded
facilities costs and a $2,350,000 facility that was used by the Company to
repurchase Class A Common Stock in November 1995 as described in Note 4. Loans
under the 1995 Credit Facility bear interest at the designated prime rate plus
the following margins: revolving credit, 1%; term loan, 1.5%; multiple-advance
term loan, 1.75%; and stock repurchase loan, 4.25% through 1996 and increasing
0.5% each quarter thereafter. At December 31, 1995, the designated prime rate
was 8.5%. At the Company's option, the loans (other than the stock repurchase
loan) may bear interest based on the London interbank offered rate ("LIBOR")
plus a margin. Commitment fees equal to 0.5% per annum are payable on the unused
portions of the revolving credit and multiple-advance term loan facilities.
The revolving credit facility will terminate and all amounts outstanding,
if any, thereunder will be due on March 31, 2000. Term loans and
multiple-advance term loans are repayable in installments beginning March 31,
1997 and 1998, respectively, and have a final maturity date of March 31, 2000.
The stock repurchase loan (the "Stock Repurchase Loan") will be due on March 31,
1998 and is subject to a mandatory prepayment of up to $992,000 on December 31,
1996 with the proceeds the Company receives from the mandatory exercise of stock
options described in Note 4.
The 1995 Credit Facility does not permit the payment of cash dividends and
requires the Company to maintain certain earnings, net worth and debt service
covenants.
Scheduled maturities of long-term debt as of December 31, 1995, are as
follows (in thousands):
1996.................................... $ 24
1997.................................... 774
1998.................................... 3,611
1999.................................... 3,240
---------
Total.............................. $ 7,649
=========
Subsequent to December 31, 1995, the Company replaced the existing 1995
Credit Facility (see Note 7).
In connection with the 1995 Credit Facility, the Company issued warrants to
the bank (the "Class B Warrants") to purchase 162,500 shares of its newly
created Class B Common Stock (see Note 4) at a per share exercise price of
$1.00. The Company's management believes the exercise price approximated fair
market value of the Class B Common Stock at the date of grant. The Class B
Warrants have been recorded at approximately $0.05 per share based on their
underlying value as estimated by management. The Class B Warrants expire March
14, 2002 if not exercised.
4. STOCKHOLDERS' EQUITY:
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
In March 1995, the Company redesignated its outstanding common stock as
Class A Common Stock and created a new class of common stock designated as
"Class B Common Stock." Class B Common Stock has no voting rights or rights to
dividends, but is otherwise identical to Class A Common Stock. Under the
Company's Certificate of Incorporation, as amended, on the first to occur of the
closing of an initial public offering of Class A Common Stock or March 14, 2005,
each share of Class B Common Stock automatically will convert into one share of
Class A Common Stock. As described in Note 1, the Company intends to effect the
Reclassification as of or prior to the completion of the Offering, which will
result in the reclassification of each share of Class A Common Stock and Class B
Common Stock into one share of Common Stock.
F-12
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK
Effective November 1, 1995, the Company repurchased 555,000 shares of Class
A Common Stock from a former officer of the Company (the"Stock Repurchase"). The
Stock Repurchase and related expenses were financed with borrowing under the
1995 Credit Facility.
In connection with the Stock Repurchase, the Company issued options to
purchase 555,000 shares of Class B Common Stock (the "Stock Repurchase
Options"), each with an exercise price of $2.00 per share, to certain existing
stockholders and to the lender under the 1995 Credit Facility. Holders of the
Stock Repurchase Options also entered into an investor agreement whereby, if the
Stock Repurchase Loan is still outstanding as of December 31, 1996, the holders
of the Stock Repurchase Options would be required to exercise such options at
that time. The resulting proceeds to the Company would be required to be used to
repay that portion of the outstanding Stock Repurchase Loan. The remaining
balance of the Stock Repurchase Loan matures on March 31, 1998. Any equity
proceeds received by the Company while the Stock Repurchase Loan is outstanding
are required to be utilized to repay any outstanding balance thereon.
In connection with the Stock Repurchase, the Company granted the lender
under the 1995 Credit Facility the right to require the Company to repurchase
("Put Right") options to purchase 31,250 shares of Class B Common Stock for an
aggregate price of $250,000 (i.e., $8.00 per share) upon the first to occur of
(a) the closing of an initial public offering of shares of common equity of the
Company, (b) the repayment by the Company of the Stock Repurchase Loan or (c)
December 31, 1996. Such Put Right shall expire if not exercised by January 2,
1997 by the lender under the 1995 Credit Facility. The Put Right was accrued in
connection with the Stock Repurchase.
PARTNERSHIP CONVERSION
The Company was converted from a partnership to a corporation on March 31,
1994 pursuant to a roll-up agreement, in accordance with which all of the
Partnership units were contributed to the Company on a one-to-one ratio for
shares of common stock of the Company (which were redesignated as shares of
Class A Common Stock in March 1995). On the same date, in connection with the
Eclectic acquisition, 1,088,009 additional shares of common stock of the Company
(which were redesignated as shares of Class A Common Stock in March 1995) were
issued for $6,501,000.
The $258,000 year-to-date net operating loss of the Partnership up to the
March 31, 1994, recapitalization, as discussed above, was allocated to the
respective partners' Partnership accounts.
OPTIONS AND WARRANTS
The following table presents options and warrants issued by the Company
through December 31, 1995:
<TABLE>
<CAPTION>
UNDERLYING PER SHARE NUMBER GRANTED PERCENT VESTED AT
CLASS OF EXERCISE --------------------- DECEMBER 31,
DATE ISSUED STOCK PRICE OPTIONS WARRANTS 1995
- ------------------------------------- ---------------- ---------- -------- --------- ------------------
<S> <C> <C> <C> <C> <C>
November 1, 1993..................... Class A common $ 2.50 40,000 -- 75%
March 31, 1994....................... Class A common 7.53 -- 43,062 100
March 14, 1995....................... Class B common 1.00 -- 162,500 100
July 18, 1995........................ Class A common 2.17 15,000 -- 25
November 1, 1995..................... Class B common 2.00 555,000 -- 100
-------- ---------
Total options/warrants issued
through December 31, 1995..... 610,000 205,562
======== =========
</TABLE>
Options to purchase 1,000 shares of Class A Common Stock were exercised
during 1995. No options or warrants were canceled during 1994 or 1995. Stock
options vest over varying periods currently not exceeding four years.
F-13
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES:
Through March 31, 1994, the Company operated as a partnership and its
losses were allocated to and utilized by the partners. Effective March 31, 1994,
the Company elected C Corporation status. The Company and its subsidiaries file
a consolidated return.
The following is an analysis of the Company's net deferred tax assets as of
December 31, 1994 and 1995 (in thousands):
1994 1995
--------- ---------
Deferred tax assets relating to --
Net operating loss
carryforwards................. $ 220 $ 380
Accelerated depreciation and
amortization of property and
equipment for financial
reporting purposes............ 111 114
Accrued expenses recorded for
financial reporting purposes
and deferred for tax
purposes...................... 190 217
--------- ---------
521 711
Deferred tax liabilities............. -- --
--------- ---------
Net deferred tax asset
before valuation
allowance.................. 521 711
Valuation allowance.................. (85) (275)
--------- ---------
Net deferred tax asset..... $ 436 $ 436
========= =========
The components of the Company's income tax provision for the years ended
December 31, 1994 and 1995, are as follows (in thousands):
1994 1995
--------- ---------
Current provision.................... $ -- $ --
Deferred provision................... 101 --
--------- ---------
Tax provision.............. $ 101 $ --
========= =========
A reconciliation of taxes at the federal statutory rate with the income
taxes recorded by the Company is presented below (in thousands):
1994 1995
--------- ---------
Computed taxes at statutory rate of
34 percent........................... $ (128) $ (2,530)
Amortization of goodwill not
deductible........................... 124 2,356
1994 first quarter loss reported in
Partnership tax return............... 88 --
State income taxes, net of federal
benefit.............................. 35 --
Change in valuation allowance........ -- 190
Other................................ (18) (16)
--------- ---------
$ 101 $ --
========= =========
As of December 31, 1995, the Company has a net operating loss ("NOL")
carryforward for income tax purposes of approximately $1,000,000 available to
offset future taxable income. This carryforward will expire beginning 2008.
As discussed in Note 4, the Partnership's fiscal 1994 first quarter
operating loss of $258,000 (i.e., prior to the Eclectic acquisition and related
roll-up of the Partnership and incorporation of the Company) was allocated to
the respective partners' accounts. Accordingly, such operating loss is excluded
for purposes of computing the Company's 1994 taxable income.
F-14
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the Company operated as a partnership prior to March 31, 1994, and
since the Partnership was not a taxpaying entity, federal income taxes have not
been provided prior to March 31, 1994, since such taxes, if any, were payable by
the partners on their total income or loss from all sources.
6. 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, 1993, 1994 and 1995, was approximately $33,000, $1,667,000 and
$2,244,000, respectively. As of December 31, 1995, the Company had the following
rental commitments under noncancelable operating leases (in thousands):
For the year ending December 31 --
1996............................ $ 2,119
1997............................ 1,369
1998............................ 998
1999............................ 520
2000............................ 198
Thereafter...................... 35
---------
$ 5,239
=========
Eclectic leases certain administrative and program facilities under
operating lease agreements with related entities that are partially owned by
officers of Eclectic. Total lease payments applicable to such leases are
approximately $823,000 annually.
401(K) PLAN
The Company has a defined contribution 401(k) plan. The Company's matching
contribution represents 50 percent of a participant's contribution, up to the
first six percent of the participant's salary. The Company can also make
additional discretionary contributions. For the years ended December 31, 1993,
1994 and 1995, the Company recorded $0, $100,000 and $139,000, respectively, of
contribution expense.
OTHER
The Company is subject to certain claims and disputes arising in the normal
course of the Company's business. In the opinion of the Company's management,
uninsured losses, if any, resulting from the ultimate resolution of these
matters will not have a material adverse impact on the Company's financial
position or results of operations.
The 1995 Credit Facility discussed in Note 3 requires the Company to
maintain key person life insurance on the chief executive officer in the amount
of $2 million.
7. SUBSEQUENT EVENTS:
ACQUISITIONS
In May 1996, the Company acquired a 310-bed facility located in Houston,
Texas ("Reid Center"), previously operated by Texas Alcoholism Foundation, Inc.,
and The Texas House Foundation, Inc. (collectively, "Texas House"). In July
1996, the Company completed the acquisition of substantially all the assets of
MidTex Detentions, Inc. ("MidTex"), a private correctional center operator for
the Federal Bureau of Prisons ("FBOP"), operating three facilities in Central
Texas with a capacity of 1,305 beds (the "Big Spring Facilities"). Total
consideration for these acquisitions was approximately $26,222,000. The
acquisitions were financed primarily through borrowings under the 1996 Credit
Facility and the Convertible Bridge Note (see below). In connection with the
MidTex acquisition, the Company entered into various
F-15
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements for the use of the facilities and the payment of $216,000 (annual
payments in lieu of taxes) per year for approximately the next 35 years.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions are as follows (in thousands):
MIDTEX REID CENTER
------- -----------
Cash paid............................... $22,700 $ 1,986
Transaction costs....................... 1,446 90
------- -----------
Total purchase price.......... $24,146 $ 2,076
======= ===========
Net assets acquired --
Cash............................... $ 537 $ --
Receivables, net................... 2,693 --
Other current assets............... 667 --
Property and equipment............. 22,082 2,290
Other assets....................... 5 --
Accounts payable and accrued
liabilities...................... (1,838) (14)
Obligations to consultant.......... -- (200)
------- -----------
$24,146 $ 2,076
======= ===========
The site of the Airpark Unit and the Flightline Unit of the Big Spring
Facilities is part of a larger tract of land (the "Larger Tract"), which was
formerly part of a United States Air Force base conveyed to the City of Big
Spring (the "City") by the United States government in 1978. The document
conveying the Larger Tract to the City (the "Conveyance") contains certain
restrictive covenants relating to the use of the Larger Tract that apply to the
City and its lessees and any successors and assigns to the ownership of the
Larger Tract. The Conveyance provides that, at the option of the grantor, title
to the Larger Tract would revert to the grantor upon any breach of the
provisions of the Conveyance, following notice of breach by the Federal Aviation
Association ("FAA") and a 60-day grace period to cure any such breach. The
continued compliance by the City (or its successors or assigns or other lessees)
with the terms of the Conveyance is not within the control of the Company, and
any breach by the City (or its successors or assigns or other lessees) could
result in reversion of title of all or a portion of the Larger Tract to the
United States government. The FAA reviewed the operating agreement and the
related agreements between the City and the Company which permit the Company to
assume the operation of the Big Spring Facilities and advised the City in
writing that it has no objection to the execution thereof by the parties
thereto. See "Risk Factors -- Possible Loss of Lease Rights."
CREDIT FACILITIES
In conjunction with the acquisition of MidTex, the 1995 Credit Facility was
replaced with a new credit facility in July 1996 (the "1996 Credit Facility").
The 1996 Credit Facility provides up to $35,000,000 in loans pursuant to
four separate facilities consisting of a $2,500,000 revolving credit facility, a
$23,200,000 term loan facility that has been used to finance a portion of the
Mid-Tex acquisition costs, a $6,950,000 multiple-advance term loan facility that
may be used for new and expanded facilities costs and a $2,350,000 facility that
was used to refinance the stock repurchase loan described in Note 3. Loans under
the 1996 Credit Facility bear interest at a designated prime rate plus the
following margins: revolving credit, 1%; term loan, 1.5%; multiple-advance term
loan, 1.75%; and stock repurchase loan, 4.25% through 1996 and increasing 0.5%
each quarter thereafter. At the Company's option, the loans (other than the
stock repurchase loan) may bear interest at LIBOR plus a
F-16
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
margin. Commitment fees equal to 0.5% per annum are payable on the unused
portions of the revolving credit and multiple-advance term loan facilities.
The revolving credit facility will terminate and all amounts, if any,
outstanding thereunder will be due on June 29, 2001. Term loans and
multiple-advance loans are repayable in quarterly installments beginning in
December 1996 and March 1998, respectively, and have a final maturity date of
December 31, 2002. The stock repurchase loan is repayable in equal installments
on December 31, 1996 and December 31, 2002.
The 1996 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.
In addition, in July 1996, the Company borrowed $6,000,000 evidenced by a
short-term convertible note ("Convertible Bridge Note"). The Convertible Bridge
Note bears interest at 9.5% per annum and matures December 30, 1996. If not then
paid, the Convertible Bridge Note automatically will convert into Class A Common
Stock at a conversion rate of $5.64 per share.
In connection with the 1996 Credit Facility, the Company issued warrants to
the lender enabling the lender to purchase 264,000 shares of Class B Common
Stock at a per share exercise price of $2.82. The warrants are fully vested and
expire in 2003. As a condition to funding, the 1996 Credit Facility required
certain existing stockholders to purchase at least $200,000 of Class B Common
Stock. On July 9, 1996, the existing stockholders purchased an aggregate of
90,331 shares of Class B Common Stock for $254,733 (or $2.82 per share). As a
condition to the Convertible Bridge Note, the lender and certain existing
stockholders entered into a put agreement dated as of July 3, 1996 (the "Put
Agreement"). Pursuant to the Put Agreement, the existing stockholders each
agreed, upon conversion of the Convertible Bridge Note into shares of Common
Stock (the "Conversion Stock"), to purchase its pro rata share of the Conversion
Stock from the lender at $5.64 per share, and the lender agreed to sell such
shares to the existing stockholders. Additionally, the Company and the existing
stockholders entered into an extension agreement dated as of July 3, 1996 (the
"Extension Agreement") pursuant to which, if the Company and the lender agree to
extend the date of the conversion of the Convertible Bridge Note beyond December
30, 1996, the existing stockholders agree to a deferral of up to three months of
their rights and obligations under the Put Agreement. In consideration for their
agreement under the Extension Agreement, if an extension occurs, the Company has
agreed to grant to the existing stockholders options to purchase the number of
shares of Class B Common Stock equal to the sum of 25,092 and the number of
calendar months, up to three, of the extension at an exercise price of $2.82 per
share. The Company issued options to an existing stockholder to purchase 60,221
shares of Class B Common Stock at $2.82 per share in consideration for entering
into the Put Agreement. The $661,366 difference between the exercise price of
the options granted to the lender and an existing stockholder and the fair
market value of the shares underlying such options and the $184,275 difference
between the purchase price and the fair market value of the 90,331 shares of
common stock purchased by an existing stockholder will be capitalized as
additional transaction costs of the MidTex acquisition.
OPTION EXERCISE AND INDEBTEDNESS OF MANAGEMENT
On July 8, 1996, the chairman of the board and the chief financial officer
of the Company exercised options to purchase 137,110 and 82,750 shares of Class
A Common Stock and Class B Common Stock at an aggregate price of $274,220 and
$180,638, respectively. In connection with the exercise, each officer entered
into a promissory note with the Company for the respective aggregate exercise
amounts. The promissory notes bear interest at the applicable short-term federal
rate as prescribed by Internal Revenue Service regulations, mature in four
years, are full recourse and are collateralized by shares of common stock
exercised.
F-17
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLAN
In May 1996, the Company adopted the 1996 Stock Option Plan (the "Stock
Option Plan"). Pursuant to the Stock Option 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.
On January 1, 1996 and May 1, 1996, the Company granted 15,000 and 35,000
stock options, respectively, to employees to purchase Class A Common Stock at an
exercise price of $3.75 per share and $5.64 per share, respectively, which
management of the Company believes was not less than the fair market value of
the options at the date of grant. These options vest over a period of three
years and expire in 2006.
On July 9, 1996, the Company granted incentive stock options to two
officers for the purchase of an aggregate of 252,248 shares of Class B Common
Stock at a per share exercise price of $4.86, which management of the Company
believes represents the approximate fair market value of the options at the date
of grant. These options vest over three years and expire in 2006.
CAPITALIZATION
Upon the completion of the Offering, the Company's authorized stock will be
as follows:
CLASS AUTHORIZED PAR VALUE
- ---------------------------------------- -------------- ---------
(IN THOUSANDS)
Common stock............................ 50,000 $.001
Preferred stock......................... 10,000 .001
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.
CHARTER AMENDMENT
On July 3, 1996, the Company filed an amendment to its Certificate of
Incorporation that (i) decreased the par value of the shares of Class A Common
Stock from $.01 to $.001 (ii) increased from 1,000,000 to 3,000,000 the number
of authorized shares of Class B Common Stock and (iii) decreased the par value
of the shares of Class B Common Stock from $.01 to $.001.
F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Corrections, Inc.:
We have audited the accompanying combined balance sheets of MidTex
Detentions, Inc. and Big Spring Correctional Center as of September 30, 1994 and
1995, and the related combined statements of operations and changes in equity
and cash flows for the years ended September 30, 1993, 1994 and 1995. These
financial statements are the responsibility of MidTex Detentions, Inc. and Big
Spring Correctional Center'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 MidTex Detentions, Inc. and
Big Spring Correctional Center as of September 30, 1994 and 1995, and the
results of their operations and their cash flows for the years ended September
30, 1993, 1994 and 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 16, 1996
F-19
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
COMBINED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 74 $ 66 $ 537
Restricted cash and cash
equivalents................... 244 361 374
Accounts receivable............. 1,673 2,960 2,693
Prepaids and other.............. 74 155 126
Commissary and inmate fund
assets........................ 116 197 167
--------- --------- -----------
Total current assets....... 2,181 3,739 3,897
PROPERTY AND EQUIPMENT, net of
accumulated
depreciation of $1,902, $2,532 and
$2,935, respectively............... 11,350 22,422 22,245
OTHER ASSETS......................... -- 8 5
--------- --------- -----------
Total assets............... $ 13,531 $ 26,169 $26,147
========= ========= ===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities................... $ 1,138 $ 1,856 $ 1,714
Current portion of capital lease
obligations................... 1,096 1,169 1,224
Advances payable to owner....... 275 550 --
Restricted commissary and inmate
fund liabilities.............. 83 189 124
--------- --------- -----------
Total current
liabilities............. 2,592 3,764 3,062
LONG-TERM CAPITAL LEASE OBLIGATIONS,
net of current portion............. 6,614 16,061 15,435
CONTINGENCIES
EQUITY............................... 4,325 6,344 7,650
--------- --------- -----------
Total liabilities and
equity.................. $ 13,531 $ 26,169 $26,147
========= ========= ===========
The accompanying notes are an integral part of
these combined financial statements.
F-20
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Occupancy fees..................... $ 9,026 $ 9,277 $ 13,293 $ 4,995 $ 7,738
Development fees and other
income........................... 1,381 1,160 1,389 445 610
--------- --------- --------- --------- ---------
Total revenues................ 10,407 10,437 14,682 5,440 8,348
OPERATING EXPENSES...................... 6,826 7,047 9,007 3,719 5,058
DEPRECIATION AND AMORTIZATION........... 502 466 682 278 404
--------- --------- --------- --------- ---------
CONTRIBUTION FROM OPERATIONS............ 3,079 2,924 4,993 1,443 2,886
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,084 1,089 1,527 625 720
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS.................. 1,995 1,835 3,466 818 2,166
INTEREST EXPENSE........................ 913 784 1,456 531 870
INTEREST INCOME......................... -- -- (9) (2) (10)
--------- --------- --------- --------- ---------
NET INCOME.............................. 1,082 1,051 2,019 289 1,306
EQUITY, beginning of year............... 2,294 3,276 4,325 4,325 6,344
DISTRIBUTION TO OWNER................... (100) (2) -- -- --
--------- --------- --------- --------- ---------
EQUITY, end of year..................... $ 3,276 $ 4,325 $ 6,344 $ 4,614 $ 7,650
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-21
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS
SEPTEMBER 30, ENDED MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,082 $ 1,051 $ 2,019 $ 289 $ 1,306
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 502 466 682 278 404
Loss on write-off of property and
equipment..................... 71 -- -- -- --
Change in assets and
liabilities --
Decrease (increase) in
accounts receivable...... (901) (25) (1,286) (112) 268
Increase in restricted
cash..................... (71) (90) (117) (17) (13)
Decrease (increase) in
other assets............. (32) (17) (88) (8) 31
Decrease (increase) in
restricted commissary and
inmate fund assets....... 18 (24) (82) (20) 31
Increase (decrease) in
accounts payable and
accrued liabilities...... (202) 701 718 239 (142)
Increase (decrease) in
restricted commissary and
inmate fund
liabilities.............. 22 (16) 106 (2) (65)
--------- --------- --------- --------- ---------
Net cash provided by
operating
activities............ 489 2,046 1,952 647 1,820
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (171) (226) (846) (682) (228)
--------- --------- --------- --------- ---------
Net cash used in investing activities.. (171) (226) (846) (682) (228)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations...................... (1,054) (1,214) (1,389) (673) (571)
Proceeds from note payable......... 2,570 910 1,175 675 --
Payments on note payable........... (1,730) (1,475) (900) (25) (550)
Distributions to owner............. (100) (2) -- -- --
--------- --------- --------- --------- ---------
Net cash used in financing activities.. (314) (1,781) (1,114) (23) (1,121)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 4 39 (8) (58) 471
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 31 35 74 74 66
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 35 $ 74 $ 66 $ 16 $ 537
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period.... $ 918 $ 799 $ 1,468 $ 560 $ 871
Acquisition of capital assets under
capital leases................... -- -- 10,909 10,837 --
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
F-22
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
MidTex Detentions, Inc., a Texas corporation, was formed in November 1987
to provide executive management and guidance to construct prison facilities and
operate overall prison activities for the city of Big Spring, Texas (the
"City"). The Big Spring Correctional Center ("BSCC") is an enterprise fund set
up by the City to operate certain prison facilities. Since 1987, three secured
correctional facilities have been established to house approximately 1,305
inmates for the United States federal government.
In February 1996, MidTex Detentions, Inc. and BSCC (collectively "MidTex")
signed a letter of intent with Cornell Corrections, Inc. (collectively with its
subsidiaries, the "Company"), for the sale of assets. The assets sold are
comprised principally of contract rights for use of the three correctional
facilities. The Company provides to governmental agencies the integrated
development, design, construction and operation of facilities within three areas
of operational focus: (i) secure institutional correctional and detention
services, (ii) non-secure pre-release correctional services and (iii) juvenile
correctional and detention services. At the transaction date, the Company will
obtain the rights to manage and operate the prison facilities for a term of 20
years with three five-year extensions, in exchange for cash consideration.
Essentially all employees of MidTex are expected to be hired by the Company. The
agreements are expected to be finalized in July 1996. The accompanying financial
statements were prepared in connection with the transaction with the Company
described above.
The financial information for the interim periods ended March 31, 1995 and
1996, has not been audited by independent public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of MidTex, the unaudited interim
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for the respective full years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with GAAP. The
financial statements combine the accounts of MidTex after elimination of
significant intercompany balances and transactions.
CASH EQUIVALENTS
For purposes of the statement of cash flows, MidTex considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.
RESTRICTED CASH, COMMISSARY AND INMATE FUND ASSETS
MidTex maintains bank accounts for restricted cash belonging to inmates and
the prison commissaries. Commissary and inmate assets are restricted for
specific uses. All restricted balances are offset by a corresponding liability
and fund balance.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consist of receivables from the FBOP and INS.
No allowance for uncollectible amounts has been recorded as of September 30,
1994 and 1995, as management believes all amounts will be fully collected.
F-23
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1995
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Property and equipment under
capital leases is stated at the net present value of future minimum lease
payments at the inception of the related leases. The costs of improvements that
extend the life of property and equipment are capitalized, while repairs and
maintenance costs are expensed as incurred. Depreciation for financial reporting
purposes is calculated on the straight-line method based upon the estimated
useful lives of the depreciable assets, which range from two to 40 years.
Property and equipment consist of the following (in thousands):
SEPTEMBER 30
ESTIMATED --------------------
LIFE IN YEARS 1994 1995
--------------- --------- ---------
Land................................. -- $ 75 $ 75
Buildings............................ 5-40 12,081 23,017
Machinery and equipment.............. 2-5 375 475
Furniture and fixtures............... 2-10 721 1,327
Construction in progress............. -- -- 60
--------- ---------
13,252 24,954
Less -- Accumulated depreciation..... (1,902) (2,532)
--------- ---------
$ 11,350 $ 22,422
========= =========
The construction in progress at September 30, 1995, relates to construction
and development costs for a new INS courthouse to be located at one of the
prison facilities. MidTex has committed to construct the courthouse at a cost of
approximately $260,000. The cost will be funded by MidTex and through loans from
the owner of MidTex totaling $50,000.
Approximately $11,837,000 and $20,211,000 of buildings, machinery and
equipment as of September 30, 1994 and 1995, respectively, is held under capital
leases.
FINANCIAL INSTRUMENTS
MidTex considers the fair value of all financial instruments not to be
materially different from their carrying values at year-end based on
management's estimate of MidTex's ability to borrow funds under terms and
conditions similar to those of MidTex existing debt.
INCOME TAXES
MidTex is exempt from federal and state income taxes.
REVENUES
Occupancy fees are principally derived from billings to the Federal Bureau
of Prisons (the "FBOP") and Immigration and Naturalization Service ("INS"),
which pay per diem rates based upon the number of occupant days for the period.
Such revenues are recognized as services are provided.
MidTex has other income related to commissary sales and other services
provided to inmates.
USE OF ESTIMATES
The financial statements of MidTex are prepared in accordance with 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
F-24
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1995
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.
BUSINESS CONCENTRATION
Contracts with federal government agencies account for substantially all of
the revenues of MidTex.
3. DEBT:
CAPITAL LEASE OBLIGATIONS
BSCC entered into leases with the owner of Midtex Detentions, Inc. for
three prison facilities and related land under agreements which are classified
as capital leases. As a result, BSCC has recorded property and equipment and
debt based on the present value of the lease payments with effective interest
rates ranging from approximately 8 percent to 20 percent. Management believes
that the discount factors implied in the lease arrangements approximated BSCC's
incremental borrowing rate for such transactions at the time they were agreed
upon. The leases generally provide for the lessee to pay taxes, maintenance,
insurance and certain other operating costs of the leased property.
Monthly installments of principal and interest on the leases range from
$67,000 to $140,000 a month. The leases have original terms ranging from six to
12 years, and each contains stated buyout amounts which decrease over the term
of the applicable lease. Each lease contains a nominal purchase option at the
end of the lease.
The first lease was fully paid and the bargain purchase option exercised in
April 1995. Title to the related prison has transferred to BSCC. The two
remaining leases were still in effect as of September 30, 1995.
Future maturities of capital lease obligations as of September 30, 1995,
are as follows (in thousands):
1996................................. $ 2,858
1997................................. 2,858
1998................................. 2,858
1999................................. 2,858
2000................................. 2,858
Thereafter........................... 13,389
----------
Total minimum lease
payments................... 27,679
Less -- Future interest payments..... (10,449)
----------
Present value of minimum
lease payments............. $ 17,230
==========
LEASES
MidTex leases its office facilities from its owner and president under an
operating lease which expires in 1997. Operating lease expense was $16,000,
$21,000 and $24,000 in 1993, 1994 and 1995, respectively. Future minimum lease
payments related to this operating lease as of September 30, 1995, total
$34,000.
ADVANCES PAYABLE
The owner of MidTex Detentions, Inc. frequently advances funds to BSCC to
finance short-term deficits in working capital at interest rates approximating
market. Total advances payable, due to the owner at September 30, 1994 and 1995,
were $275,000 and $550,000, respectively.
F-25
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1995
4. EMPLOYEE BENEFIT PLANS:
The City, including BSCC, participates in the Texas Municipal Retirement
System ("TMRS") which is a qualified defined contribution plan administered to
all municipal employees in the state of Texas. TMRS requires all BSCC full-time
employees to make contributions. The City pays all general and administrative
expenses and makes matching contributions on behalf of the employees. BSCC made
contributions to the TMRS totaling $123,000, $156,000 and $184,000 in 1993, 1994
and 1995, respectively.
The City established a deferred compensation plan in lieu of Social
Security withholding. Employees are required to contribute a percentage of wages
which is matched by the City on a one-to-one ratio. A portion of the
contributions is remitted to a deferred compensation retirement account, and a
portion is remitted to a life and disability insurance package. BSCC made
contributions to this plan totaling $166,000, $185,000 and $234,000 in 1993,
1994 and 1995, respectively. BSCC does not provide employees any post-retirement
benefits other than pensions. MidTex Detentions, Inc. also does not provide
employees with post-retirement benefits.
5. EMPLOYEE MEDICAL AND WORKERS' COMPENSATION:
BSCC participates with the City in a self-insurance program for employee
medical and workers' compensation benefits up to $50,000 and $250,000 per
occurrence, respectively. BSCC contributes to the City's funds on a monthly
basis, based on total payroll expense. Should actual expenses for all of the
City's funds exceed the amounts contributed by BSCC and other funds, additional
charges could be allocated to BSCC. However, management believes the amount of
funds contributed by BSCC and other City funds is adequate to cover estimated
medical and workers' compensation expenses.
6. CONTINGENCIES:
LITIGATION, CLAIMS AND ASSESSMENTS
MidTex is subject to certain claims and disputes arising in the normal
course of business. In the opinion of management of MidTex, uninsured losses, if
any, resulting from the ultimate resolution of these matters will not have a
material adverse impact on the financial position or results of operations of
MidTex.
7. SUBSEQUENT EVENT:
Effective March 1996, MidTex amended its contract with the FBOP, which
decreased manday rates from $36.92 to $34.92.
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Corrections, Inc.:
We have audited the accompanying combined balance sheet of the Reid Center
division of the Texas Alcoholism Foundation, Inc. and The Texas House
Foundation, Inc. (collectively, the "Texas House"), Texas nonprofit corporations
(further described in Note 1), as of December 31, 1995, and the related combined
statements of operations and fund balance and cash flows for the year then
ended. These financial statements are the responsibility of Texas House's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Reid Center
division of Texas Alcoholism Foundation, Inc. and The Texas House Foundation,
Inc., as of December 31, 1995, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 20, 1996
F-27
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 332 $ 429
Accounts receivable, net........ 461 379
Prepaids and other.............. 57 41
------------ ------------
Total current assets....... 850 849
PROPERTY AND EQUIPMENT, net of
accumulated depreciation
of $611 and $629, respectively..... 1,033 1,016
------------ ------------
Total assets............... $1,883 $1,865
============ ============
LIABILITIES AND FUND BALANCE
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities..................... $ 234 $ 149
Note payable.................... 15 4
------------ ------------
Total current
liabilities.................. 249 153
CONTINGENCIES
FUND BALANCE......................... 1,634 1,712
------------ ------------
Total liabilities and fund
balance...................... $1,883 $1,865
============ ============
The accompanying notes are an integral part of
these combined financial statements.
F-28
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
COMBINED STATEMENTS OF OPERATIONS AND FUND BALANCE
(IN THOUSANDS)
FOR THE THREE
MONTHS ENDED
MARCH 31,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
REVENUES................................ $3,342 $ 828 $ 838
OPERATING EXPENSES...................... 3,562 906 743
DEPRECIATION AND AMORTIZATION........... 71 17 17
------------ --------- ---------
INCOME (LOSS)........................... (291) (95) 78
FUND BALANCE, beginning of period....... 1,925 1,925 1,634
------------ --------- ---------
FUND BALANCE, end of period............. $1,634 $ 1,830 $ 1,712
============ ========= =========
The accompanying notes are an integral part of
these combined financial statements.
F-29
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE
MONTHS ENDED
MARCH 31,
DECEMBER 31, --------------------
1995 1995 1996
------------ --------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss)...................... $ (291) $ (95) $ 78
Adjustments to reconcile income
(loss) to net cash (used in)
provided by operating
activities --
Depreciation and
amortization............... 71 17 17
Change in assets and
liabilities --
Decrease (increase) in
accounts receivable... (38) (15) 82
Decrease (increase) in
other assets.......... (9) (2) 16
Increase (decrease) in
accounts payable and
accrued liabilities... 22 (32) (85)
------------ --------- ---------
Net cash (used in)
provided by
operating
activities....... (245) (127) 108
------------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (47) (3) --
------------ --------- ---------
Net cash used in
investing
activities....... (47) (3) --
------------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable........... (3) (11) (11)
------------ --------- ---------
Net cash used in
financing
activities....... (3) (11) (11)
------------ --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (295) (141) 97
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 627 627 332
------------ --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 332 $ 486 $ 429
============ ========= =========
The accompanying notes are an integral part of
these combined financial statements.
F-30
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND PURPOSE AND BASIS OF PRESENTATION:
Texas Alcoholism Foundation, Inc. and The Texas House Foundation, Inc.
(collectively, "Texas House"), are Texas nonprofit corporations founded in 1965
and 1995, respectively, to provide residential services to male alcoholics.
Services have been expanded to include programs for alcohol, drug and behavior
problems, as well as adult education services. The foundations own and operate
facilities in two locations in Houston, Texas. The Beaumont Highway Facility
(the "Reid Center") consists of a 230-bed residential rehabilitation center and
an 80-bed alcohol and drug abuse treatment center. The 34th Street Facility
consists of a 130-bed residential substance abuse center for indigent residents
of Harris County, Texas and surrounding areas. The Reid Center has a contract
with the Texas Department of Criminal Justice to provide residential services,
reintegration programs and counseling for state parolees.
In May 1996, Cornell Corrections, Inc. (collectively with its subsidiaries,
the "Company") acquired the Reid Center for cash of approximately $2 million.
The Company provides to governmental agencies the integrated development,
design, construction and operation of facilities within three areas of
operational focus: (i) secure institutional correctional and detention services,
(ii) non-secure pre-release correctional services and (iii) juvenile
correctional and detention services. The accompanying financial statements were
prepared in connection with the sale of assets to the Company and include only
the assets, liabilities and results of operations associated with the assets
sold to the Company and exclude the assets, liabilities and results of
operations associated with the 34th Street Facility. While the accompanying
financial statements include substantially all of the assets, liabilities and
results of operations of the Reid Center, only the land, buildings and certain
equipment were sold to the Company as specified in the purchase agreement. The
remaining assets and liabilities were retained by Texas House. Although the
fiscal year of Texas House ends on August 31, the financial statements are
presented on the basis of December 31 to agree with the Company.
The financial information for the interim periods ended March 31, 1995 and
1996 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted from the unaudited interim financial information. In the
opinion of management, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements of the Reid Center have been prepared on the
accrual basis. The significant accounting policies followed are described below.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Reid Center considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
The Reid Center maintains cash balances at several financial institutions
in Texas. Accounts are insured up to $100,000 by the Federal Deposit Insurance
Corporation. At December 31, 1995, the uninsured cash balances totaled $197,000.
F-31
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
PROPERTY AND EQUIPMENT
Property and equipment are capitalized at cost; donated property and
equipment are recorded at the estimated fair market value on the date of
donation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Routine maintenance and repairs that do
not improve or extend the life of the respective assets are expensed as
incurred.
FEDERAL INCOME TAXES
The Reid Center is exempt from federal income tax under Section 501(c)(3)
of the Internal Revenue Code.
REVENUE RECOGNITION
Occupancy fees are principally derived from billings to state government
agencies which pay per diem rates based upon the number of occupant days for the
period. Such revenues are recognized as services are provided.
USE OF ESTIMATES
The Reid Center's financial statements are prepared in accordance with
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.
BUSINESS CONCENTRATION
Contracts with state governmental agencies account for substantially all of
the Reid Center's revenues. The Reid Center has one long-term contract which
provides for a predetermined per diem rate through August 1997.
FINANCIAL INSTRUMENTS
The Reid Center considers the fair value of all financial instruments not
to be materially different from their carrying values at year-end based on
management's estimate of the Reid Center's ability to borrow funds under terms
and conditions similar to those of the existing debt.
3. PROPERTY AND EQUIPMENT:
At December 31, 1995, property and equipment consists of the following (in
thousands):
ESTIMATED
DESCRIPTION LIFE IN YEARS AMOUNT
- ------------------------------------- ------------- ------
Land................................. -- $ 551
Buildings and improvements........... 10-31.5 739
Furniture and equipment.............. 5-7 308
Vehicles............................. 3-5 46
------
1,644
Less -- Accumulated depreciation..... 611
------
$1,033
======
F-32
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
4. NOTE PAYABLE
At December 31, 1995, the Reid Center has an outstanding note payable of
$15,000 related to the financing of one of its insurance policies. The note
bears an annual interest rate of 9 percent.
5. EMPLOYEE BENEFIT PLAN:
During 1991, the Reid Center adopted a deferred annuity plan qualified
under Internal Revenue Code Section 403(b). Full-time employees who have
attained the age of 21 and completed one month of employment are eligible to
join the plan. After completing two years of service, an employee's contribution
is equally matched by the Reid Center up to an amount equal to 5.0 percent of
compensation. Employees' contributions are subject to a maximum legal limit as
defined by the Internal Revenue Code. The Reid Center's contributions to the
plan were $9,000 for the year ended December 31, 1995, and $6,000 in unpaid
contributions was included in accounts payable and accrued liabilities at
December 31, 1995.
6. RELATED-PARTY TRANSACTION:
During 1995, certain improvements were made to the buildings by a
construction company owned by a director of the Reid Center. These expenditures
aggregated $42,000 for 1995.
F-33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Corrections, Inc.:
We have audited the accompanying combined statements of operations,
stockholders' equity and cash flows of Eclectic Communications, Inc. and
International Self-Help Services, Inc. (California corporations), for the year
ended March 31, 1994. These financial statements are the responsibility of the
management of Eclectic Communications, Inc. and International Self-Help
Services, Inc. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations, stockholders'
equity and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operations, stockholders' equity and cash flows. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statements of operations,
stockholders' equity and cash flows presentation. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1 to the financial statements and are not
intended to be a complete presentation of operations of Eclectic Communications,
Inc. and International Self-Help Services, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Eclectic
Communications, Inc. and International Self-Help Services, Inc. for the year
ended March 31, 1994, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 16, 1996
F-34
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1994
(IN THOUSANDS)
REVENUES:
Occupancy fees..................... $ 14,154
Other.............................. 16
---------
14,170
OPERATING EXPENSES...................... 11,403
DEPRECIATION AND AMORTIZATION........... 298
---------
CONTRIBUTION FROM OPERATIONS............ 2,469
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,582
---------
LOSS FROM OPERATIONS.................... (113)
INTEREST EXPENSE........................ 155
INTEREST INCOME......................... (182)
---------
LOSS BEFORE BENEFIT FOR INCOME TAXES.... (86)
BENEFIT FOR INCOME TAXES................ 130
---------
NET INCOME.............................. $ 44
=========
The accompanying notes are an integral part of
this combined financial statement.
F-35
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1994
(IN THOUSANDS)
BALANCE, March 31, 1993................. $ 2,472
Net income......................... 44
Distributions to stockholders...... (342)
---------
BALANCE, March 31, 1994................. $ 2,174
=========
The accompanying notes are an integral part of
this combined financial statement.
F-36
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1994
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 44
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and amortization... 298
Loss on disposal of assets...... 32
Deferred income taxes........... (137)
Provision for bad debt.......... 63
Changes in assets and
liabilities --
Decrease in accounts
receivable..................... 955
Increase in restricted cash... (57)
Decrease in prepaids.......... 133
Decrease in other assets...... 39
Decrease in accounts payable
and accrued liabilities........ (39)
Increase in other
liabilities.................... 38
---------
Net cash provided by
operating activities......... 1,369
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (174)
Advances to stockholders........ (45)
---------
Net cash used in investing
activities................... (219)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt, net.............. (771)
Distributions to stockholders...... (342)
---------
Net cash used in financing
activities................... (1,113)
---------
NET INCREASE IN CASH................. 37
CASH AT BEGINNING OF PERIOD.......... 259
---------
CASH AT END OF PERIOD................ $ 296
---------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period.... $ 155
=========
The accompanying notes are an integral part of
this combined financial statement.
F-37
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Eclectic Communications, Inc. ("ECI"), and International Self-Help
Services, Inc. ("ISSI") (collectively, "Eclectic"), California corporations,
manage residential care and correctional facilities for various governmental
agencies. Effective April 1, 1994, Eclectic's stockholders sold their interests
in Eclectic to Cornell Group L.P., predecessor to Cornell Corrections, Inc., a
Delaware corporation, a company in the same industry. The accompanying
statements of operations, stockholders' equity and cash flows include the
combined accounts of Eclectic for the year ended March 31, 1994. However, they
do not reflect the effects of the acquisition by Cornell Corrections, Inc.
REVENUES
Occupancy fees are principally derived from billings directly to federal
and state governmental agencies, which pay per diem rates based upon the number
of occupant days for the period. Such revenues are recognized as services are
provided.
DEPRECIATION AND AMORTIZATION
Depreciation is computed using straight-line and accelerated methods based
upon the estimated useful lives of the related assets which range from one to 10
years. 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.
INCOME TAXES
Prior to April 1, 1993, ECI provided deferred income taxes based on the
differences in income determined for income tax and financial reporting
purposes. From April 1, 1993, through December 31, 1993, the stockholders of ECI
elected to be taxed as an S Corporation. As such, ECI was not subject to federal
income taxes during this period. State income taxes were based on 2.5 percent of
taxable income during the period.
Effective January 1, 1994, ECI converted to C Corporation status for income
tax purposes. The benefit for income taxes is due to deferred tax assets
recorded in connection with the conversion to C Corporation status. ISSI is a C
Corporation for federal and state income tax purposes. Since its inception,
ISSI's operations have not resulted in significant income or loss.
A reconciliation of tax benefits at the federal statutory rate with income
taxes recorded by Eclectic is presented below (in thousands):
Computed tax benefit at statutory rate
of 34%................................ $ 29
Effect of change from S Corporation to C
Corporation --
Excess tax basis over book basis of
property and equipment at date of
conversion........................ 94
Excess book basis over tax basis of
accrued liabilities at date of
conversion........................ 22
State tax effect on tax and book
basis differences of property and
equipment and accrued
liabilities....................... 21
Other................................... (36)
---------
$ 130
=========
STOCKHOLDERS' EQUITY
Equity includes the capital stock and retained earnings of Eclectic.
F-38
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1994
USE OF ESTIMATES
Eclectic'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.
2. COMMITMENTS AND CONTINGENCIES:
Eclectic is subject to certain claims and lawsuits arising in the normal
course of business. In the opinion of the Eclectic's management and outside
legal counsel, uninsured losses, if any, resulting from the ultimate resolution
of these matters will not have a material adverse impact on Eclectic's results
of operations.
Eclectic generally has long-term operating leases on buildings and
equipment related to Eclectic's facilities. Minimum lease payments under
noncancelable operating leases for the next five years ending March 31 and
thereafter are approximately as follows (in thousands):
1995.................................... $ 2,067
1996.................................... 1,711
1997.................................... 1,309
1998.................................... 948
1999.................................... 746
Thereafter.............................. 232
---------
$ 7,013
=========
3. RELATED-PARTY TRANSACTIONS:
Eclectic leases certain administrative and program facilities under
operating lease agreements with related entities that are owned, or partially
owned, by the stockholders and officers of Eclectic. Total lease payments
applicable to such leases are approximately $717,000 annually.
F-39
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, shares of
Common Stock in any jurisdiction to any person to whom it is unlawful to make
any such offer or solicitation in such jurisdiction or in which the person
making such offer or solicitation is not qualified to do so. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
Use of Proceeds............................................................ 14
Dividend Policy............................................................ 14
Capitalization............................................................. 15
Dilution................................................................... 16
Pro Forma Financial Data................................................... 17
Selected Consolidated Historical and Pro Forma Financial Data.............. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 24
Business................................................................... 30
Management................................................................. 41
Certain Relationships and Related Party Transactions....................... 47
Principal and Selling Stockholders......................................... 50
Description of Capital Stock............................................... 52
Shares Eligible for Future Sale............................................ 54
Underwriting............................................................... 55
Legal Matters.............................................................. 57
Experts.................................................................... 57
Additional Information..................................................... 57
Index to Financial Statements.............................................. F-1
------------------------
Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
[LOGO]
CORNELL CORRECTIONS, INC.
------------------------
3,500,000 SHARES
COMMON STOCK
PROSPECTUS
, 1996
------------------------
DILLON, READ & CO. INC.
EQUITABLE SECURITIES
CORPORATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with issuance
and distribution of the securities being registered, all of which shall be paid
by the Company. All of such amounts (except the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee and the Nasdaq National Market
Fees) are estimated.
Securities and Exchange Commission
Registration Fee..................... $ 19,432
NASD Filing Fee...................... 6,135
Nasdaq National Market Fees.......... *
Printing Expenses.................... *
Legal Fees and Expenses.............. *
Accounting Fees and Expenses......... *
Blue Sky Fees and Expenses........... *
Transfer Agent and Registrar Fees and
Expenses............................. *
Miscellaneous Expenses............... *
---------
Total........................... *
=========
- ------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the
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adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b) of Section 145. Such determination shall be
made (1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no such
directors, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Certificate of Incorporation of the Company provides that a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL is amended to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Company, in addition to the limitation on personal liability described
above, shall be limited to the fullest extent permitted by the amended DGCL.
Further, any repeal or modification of such provision of the Certificate of
Incorporation by the stockholders of the Company shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the Company existing at the time of such repeal or modification.
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Additionally, the Certificate of Incorporation provides that the Company will
indemnify its officers and directors to the fullest extent permitted by the
DGCL.
BYLAWS
The Bylaws of the Company will provide that each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she or a person of whom he or she is the legal
representative, is or was or has agreed to become a director or officer of the
Company or is or was serving or has agreed to serve at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving or having agreed to serve as a director or officer, shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the DGCL, as the same exists or may thereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Company to provide broader indemnification rights than said law permitted the
Company to provide prior to such amendment) against all expense, liability and
loss (including without limitation, attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to serve in the
capacity which initially entitled such person to indemnity thereunder and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
board of directors of the Company. The Bylaws will further provide that the
right to indemnification conferred thereby shall be a contract right and shall
include the right to be paid by the Company the expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the DGCL requires, the payment of such expenses incurred by a current,
former or proposed director or officer in his or her capacity as a director or
officer or proposed director or officer (and not in any other capacity in which
service was or is or has been agreed to be rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Company of an undertaking, by or on behalf of such
indemnified person, to repay all amounts so advanced if it shall ultimately be
determined that such indemnified person is not entitled to be indemnified under
the Bylaws or otherwise. In addition, the Bylaws will provide that the Company
may, by action of its board of directors, provide indemnification to employees
and agents of the Company, individually or as a group, with the same scope and
effect as the indemnification of directors and officers provided for in the
Bylaws.
INDEMNIFICATION AGREEMENTS
The Company expects to enter into Indemnification Agreements with each of
its officers and directors. The Indemnification Agreements will provide that the
Company shall indemnify the officer or director and hold him harmless from any
losses and expenses which, in type or amount, are not insured under the
directors and officers' liability insurance maintained by the Company, and
generally indemnifies the officer or director against losses and expenses as a
result of a claim or claims made against him for any breach of duty, neglect,
error, misstatement, misleading statement, omission or other act done or
wrongfully attempted by the officer or director or any of the foregoing alleged
by any claimant or any claim against the officer or director solely by reason of
him being an officer or director of the Company, subject to certain exclusions.
The Indemnification Agreements will also provide certain procedures regarding
the right to indemnification and for the advancement of expenses.
UNDERWRITING AGREEMENT
The Underwriting Agreement will provide for the indemnification of the
directors and officers of the Company in certain circumstances.
II-3
INSURANCE
The Company has obtained a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
As of or prior to the completion of the Offering, all of the shares of
Class A Common Stock and Class B Common Stock will be reclassified as Common
Stock. Prior to the Reclassification, Class B Stock did not provide holders
thereof the right to vote or to receive dividends.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
Between November 1, 1993 and July 9, 1996, the Company and its predecessor
granted compensatory stock options to six employees covering an aggregate of
105,000 shares of Class A Common Stock (including options for Partnership units
that have been converted into options for Class A Common Stock) at exercise
prices ranging from $2.17 to $5.64 and 252,248 shares of Class B Common Stock at
an exercise price of $4.86 per share. Such issuances were exempt from the
registration requirements of the Securities Act by virtue of Rule 701
thereunder.
On March 31, 1994, in connection with the reorganization of the Company
from a partnership to a corporation, the Company issued an aggregate of
2,100,376 shares of the Company's common stock (which was reclassified as Class
A Common Stock on March 8, 1995 pursuant to an amendment to the Company's
charter) to the following individuals and entities: (i) Concord II (159,500
shares), Concord Japan (39,875 shares), Lexington III (52,500 shares), Lexington
IV (938 shares) and Dillon Read, as agent (247,563 shares), in exchange for
159,500, 39,875, 52,500, 937.5 and 247,562.5 Series A Preferred Units in the
Partnership, respectively; (ii) Concord (168,000 shares), Concord II (192,000
shares) and Concord Japan (40,000 shares), in exchange for all of the stock
owned by each in CCG Holding Company, Inc. (which, in turn, owned 400,000 Series
A Preferred Units in the Partnership); (iii) Norman R. Cox, Jr., a former
officer of the Company (600,000 shares) in exchange for all of the stock owned
by Mr. Cox in NRC, Inc. (which, in turn, owned 600,000 Common Units in the
Partnership); and (iv) David M. Cornell (600,000 shares) in exchange for all of
the stock owned by Mr. Cornell in Mayo, Inc. (which, in turn, owned 600,000
Common Units in the Partnership). Such issuances were exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as a transaction not involving any public offering.
On March 31, 1994, the Company issued an aggregate of 1,088,009 shares of
the Company's common stock (which was reclassified as Class A Common Stock on
March 8, 1995 pursuant to an amendment to the Company's charter) for an
aggregate price of $6,501,500.94 to the following entities: CEP II and an
affiliate of CEP II (768,790 shares), Concord II (181,499 shares), Concord Japan
(25,439 shares), Lexington III (1,595 shares), Lexington IV (598 shares), Dillon
Read, as agent (30,343 shares) and Brown University Third Century Fund (79,745
shares). Such issuances were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as a transaction not involving
any public offering.
On March 31, 1994, the Company issued warrants for the purchase of 43,062
shares of Class A Common Stock to Rauscher Pierce Refsnes, Inc. ("Rauscher") at
an exercise price of $7.53 per share in connection with Rauscher's services as a
private placement agent for the Company and in exchange for $100 in cash. The
warrants expire March 31, 1999. Such issuance was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof as a
transaction not involving any public offering.
On March 14, 1995, the Company granted warrants to Internationale
Nederlanden (U.S.) Capital Corporation ("ING") to purchase 162,500 shares of
Class B Common Stock at an exercise price of $1.00 per share in connection with
the execution of the 1995 Credit Facility. The warrants expire March 14, 2002.
Such issuance was exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof as a transaction not involving any public
offering.
II-4
In connection with the exercise of stock options held by Steven W. Logan,
effective as of October 2, 1995, the Company issued 1,000 shares of Class A
Common Stock to Mr. Logan. Such issuance was exempt from the registration
requirements of the Securities Act by virtue of Rule 701 thereunder.
On November 1, 1995, in connection with the financing of the Stock
Repurchase, the Company issued options to purchase an aggregate of 555,000
shares of Class B Common Stock at an exercise price of $2.00 per share to the
following persons or entities: David M. Cornell (137,110 shares), Wade H.
Whilden (50,000 shares), Steven W. Logan (50,000 shares), Jane B. Cornell
(32,669 shares), CEP II (87,466 shares), Dillon Read, as agent (31,618 shares),
Concord (19,114 shares), Concord II (60,639 shares), Concord Japan (11,982
shares), Lexington III (6,154 shares), Lexington IV (175 shares), Brown
University Third Century Fund (9,073 shares) and ING (59,000 shares). The
options expire October 31, 2002. Such issuances were exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as transactions not involving any public offering.
On April 25, 1996, Mr. Wiebe used a portion of the bonus he received from
the Company for fiscal year 1995 to purchase 4,657 shares of Class A Common
Stock from the Company at 90% of the fair market value of the shares, as
determined by the Board of Directors, (or $5.08 per share). Such issuance was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as a transaction not involving any public offering.
On July 8, 1996, Mr. Cornell exercised options to purchase 137,110 shares
of Class B Common Stock for an aggregate exercise price of $274,220 and Mr.
Logan exercised options to purchase 32,750 shares of Class A Common Stock and
50,000 shares of Class B Common Stock for an aggregate exercise price of
$180,638. Mr. Cornell and Mr. Logan each entered into promissory notes in favor
of the Company for the respective exercise amounts. Such issuances were exempt
from the registration requirements of the Securities Act by virtue of Rule 701
thereunder.
On July 9, 1996, the Company granted warrants to purchase 264,000 shares of
Class B Common Stock at the exercise price of $2.82 per share to ING in
connection with the 1996 Credit Facility and the execution of the Convertible
Bridge Note. The options expire July 9, 2003. Such issuance was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof as transactions not involving any public offering.
On July 9, 1996, the Company granted options to purchase 60,221 shares of
Class B Common Stock at the exercise price of $2.82 per share to CEP II in
connection with the commitment by CEP II under the Put Agreement to purchase
shares of Conversion Stock. The options expire July 9, 2006. Such issuances were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions not involving any public offering.
On July 9, 1996, the Company issued 90,331 shares of Class B Common Stock
to certain of the Concord Investors for an aggregate purchase price of
approximately $254,733 in connection with funding under the 1996 Credit Facility
and the commitment by Concord II under the Put Agreement to purchase shares of
Conversion Stock. Such issuance was exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) thereof as transactions not
involving any public offering.
On July 12, 1994, the Company granted options to purchase 20,000 shares of
Class A Common Stock at an exercise price of $5.64 per share to Mazza & Riley,
Inc. ("Mazza") in consideration for executive recruiting services rendered by
Mazza. Such issuance was exempt from the registration requirements of the
Securities Act by virtue of Section 4(a) thereof as a transaction not involving
any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------
*1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of the Company.
II-5
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------
*3.2 Bylaws of the Company.
*4.1 Form of certificate representing Common Stock.
*4.2 Registration Rights Agreement dated as of March 31,
1994, as amended, among the Company and the
stockholders listed on the signature pages thereto.
*5.1 Opinion of Baker and Botts, L.L.P.
9.1 Stock Transfer and Voting Agreement dated November 23,
1994 between David M. Cornell and Jane B. Cornell.
*10.1 Cornell Corrections, Inc. 1996 Stock Option Plan.
*10.2 Employment Agreement dated as of March 31, 1994
between the Company and Marvin H. Wiebe.
*10.3 Form of Indemnification Agreement between the Company
and each of its directors.
*10.4 Amended and Restated Stockholders Agreement among
certain stockholders named therein.
*10.5 Contract between CCCI and the CDC (No. 92.401) for the
Baker, California Facility dated June 25, 1992, as
amended.
10.6 Professional Management Agreement between the Company
and Central Falls Detention Facility Corporation dated
July 15, 1992.
*10.7 Contract between CCCI and the FBOP (No. J200C-127)
for the El Monte, California Facility dated effective
December 23, 1992, as amended.
*10.8 Contract between CCCI and the CDC (No. R92.132) for
the Live Oak, California Facility dated March 1, 1993,
as amended.
*10.9 Contract between the Company and the FBOP (No.
J200C-248) for the Peter A. Leidel Facility signed
October 5, 1995, as amended.
*10.10 Contract between CCCI and the FBOP (No. J200C-253)
for the San Diego, California Facility dated effective
November 1, 1995.
*10.11 Contract between CCCI and the FBOP (No. J200C-258)
for the Salt Lake City, Utah Facility dated effective
December 1, 1995.
10.12 Contract between Texas Alcoholism Foundation, Inc. and
the Texas Depart- ment of Criminal Justice, Parole
Division for the Reid Facility dated January 31, 1996,
as amended.
*10.13 Contract between CCCI and the FBOP (No. J200C-260)
for the San Francisco, California (Taylor Street)
Facility dated effective February 1, 1996, as amended.
*10.14 Contract between CCCI and the Utah State Department
of Human Services, Division of Youth Corrections for
the Salt Lake City, Utah Juvenile Facility.
10.15 Asset Purchase Agreement among Cornell Corrections of
Texas, Inc. ("CCTI"), Texas Alcoholism Foundation,
Inc. and The Texas House Foundation, Inc. dated May
14, 1996.
*10.16 Asset Purchase Agreement among CCTI, the Company, Ed
Davenport, Johnny Rutherford and MidTex Detentions,
Inc. dated May 22, 1996.
*10.17 Lease Agreement between CCCI and Baker Housing Company
dated August 1, 1987 for the Baker, California
facility.
*10.18 Lease Agreement between CCCI and Sun Belt Properties
dated as of May 23, 1988, as amended for the Live Oak,
California facility.
*10.19 Lease Agreement between CCCI and 101-121 Taylor Street
Partners dated as of August 5, 1991 for the San
Francisco, California (Taylor Street) facility.
*10.20 Lease Agreement between CCCI and The Bennet Trust
dated October 9, 1991 for the San Diego, California
facility.
II-6
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------
*10.21 Lease Agreement among CCCI, Joe S. Moseley and E.
Clarke Moseley dated as of January 19, 1993 for the El
Monte, California facility.
*10.22 Lease Agreement among the Company and Kimwell
Corporation dated November 1, 1995 for the Salt Lake
City, Utah FBOP facility.
*10.23 Amended and Restated Credit Agreement among the
Company, subsidiaries of the Company, the lenders
listed therein (the "Lenders"), ING, as agent to the
Lenders, dated as of July 3, 1996.
*10.24 Convertible Subordinated Promissory Note from the
Company to ING dated as of July 3, 1996.
*10.25 Put Agreement among the Company, Concord II, CEP II,
and ING dated as of July 3, 1996.
*10.26 Subordination Agreement among the Company and ING
dated July 3, 1996.
*10.27 Extension Agreement among the Company, Concord II and
CEP II dated as of July 3, 1996.
*10.28 Warrant Issuance Agreement between the Company and ING
dated July 3, 1996.
*10.29 Stock Option Agreement between the Company and CEP II
dated July 9, 1996.
*10.30 Warrant Issuance Agreement between the Company and ING
dated March 14, 1995.
10.31 Investors Agreement among the Company, ING and certain
stockholders of the Company listed therein dated as of
November 1, 1995.
10.32 Option Agreement between the Company and ING dated as
of November 1, 1995.
10.33 Form of Option Agreement between the Company and the
Optionholder listed therein dated as of November 1,
1995.
*11.1 Computation of Net Income Per Common and Common
Equivalent Share.
*21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Baker and Botts, L.L.P. (contained in
Exhibit 5.1.)
*23.3 Consent of Campbell A. Griffin, Jr. as nominee for
directorship.
*23.4 Consent of Tucker Taylor as a nominee for
directorship.
24.1 Power of Attorney (included on the signature page of
this Registration Statement).
*27.1 Financial Data Schedule.
- ------------
* To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates representing the shares of Common Stock offered hereby in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment
II-7
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON JULY 16, 1996.
CORNELL CORRECTIONS, INC.
By: DAVID M. CORNELL
DAVID M. CORNELL
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints David M. Cornell
and Steven W. Logan, and both of them, either of whom may act without the
joinder of the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this Registration Statement and any registration
statement for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing appropriate or necessary to be done, as fully and for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ---------------------- ------------------------------------ -------------
DAVID M. CORNELL Chairman of the Board, President and July 16, 1996
DAVID M. CORNELL Chief Executive Officer (Principal
Executive Officer)
STEVEN W. LOGAN Chief Financial Officer, Treasurer July 16, 1996
STEVEN W. LOGAN and Secretary (Principal Financial
Officer and Principal Accounting
Officer)
RICHARD T. HENSHAW III Director July 16, 1996
RICHARD T. HENSHAW III
PETER A. LEIDEL Director July 16, 1996
PETER A. LEIDEL
II-9
EXHIBIT 9.1
STOCK TRANSFER AND VOTING AGREEMENT
THIS AGREEMENT (this "Agreement"), dated the 23rd day of November
1994, but effective as of October 20, 1994, is by and among David M. Cornell
("David") and Jane B. Cornell ("Jane") with respect to the transfer to Jane by
David of 210,000 shares of common stock ("Common Stock") of Cornell Cox, Inc.
("Cornell Cox") pursuant to a final divorce decree between David and Jane dated
October 20, 1994 in the 257th Judicial District Court of Harris County (the
"Divorce Decree").
NOW, THEREFORE, pursuant to the property distribution set forth in
the Divorce Decree and in consideration of the mutual covenants, agreements,
representations and warranties set forth in this Agreement, the parties to this
Agreement hereby agree as follows:
1. David hereby transfers to Jane, and Jane hereby accepts, 210,000 shares
of Common Stock (the "Shares").
2. David hereby delivers to Jane a certificate representing the Shares,
which is duly executed by appropriate officers of the Company and appropriately
registered in Jane's name.
3. Jane hereby agrees to vote all of the Shares as David directs on any
matter put to a vote of stockholders of Cornell Cox; provided, however, that
this right of David's to direct the voting of the Shares shall expire upon the
earliest to occur of (i) the date the Shares are publicly tradeable pursuant to
an effective Securities and Exchange Commission registration statement or (ii)
the date at which David owns no shares of Common Stock.
4. Jane acknowledges that the Shares are subject to restrictions contained
in a Stockholders Agreement by and among Cornell Cox and certain Investors
listed therein (the "Stockholders Agreement") dated as of March 31, 1994, and
Jane agrees that she is bound by the terms and requirements of the Stockholders
Agreement to the same extent and in the same manner as David with respect to the
Shares, and she agrees not to transfer the Shares in violation of the
Stockholders Agreement.
5. Except as otherwise expressly provided in this Agreement, all
communications required or permitted under this Agreement shall be in writing
and any such communication or delivery shall be deemed to have been duly given
and received when actually delivered to the address set forth in the Divorce
Decree of the party to be notified personally (by a recognized commercial
courier or delivery service that provides a receipt) or by telecopier (confirmed
in writing by a personal delivery as set forth above). Any party may, by written
notice so delivered to the other, change the address to which delivery shall
thereafter be made.
6. This Agreement embodies the entire agreement between the parties with
respect to the subject matter of this Agreement (superseding all prior
agreements, arrangements, understandings and solicitations of interest or offers
related to the subject matter of this Agreement), and this Agreement may be
supplemented, altered, amended, modified or revoked by writing only, signed by
all of the parties to this Agreement. The headings in this Agreement are for
convenience only and shall have no significance in the interpretation of any
term or provision of this Agreement.
7. This Agreement shall be governed and construed and enforced in
accordance with the laws of the state of Delaware, without regard to rules
concerning conflicts of laws.
8. Each party hereby acknowledges and agrees that such party has consulted
legal counsel in connection with the negotiation of this Agreement and that such
party has bargaining power equal to that of the other party in connection with
the negotiation and execution of this Agreement. Accordingly, the parties agree
that the rule of contract construction that an agreement shall be construed
against the draftsman shall have no application in the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the date first above written, effective as of October 20, 1994.
/s/ DAVID M. CORNELL /s/ JANE B. CORNELL
David M. Cornell Jane B. Cornell
EXHIBIT 10.6
PROFESSIONAL MANAGEMENT AGREEMENT
BETWEEN
THE CORNELL COX GROUP, L.P.
AND
CENTRAL FALLS DETENTION FACILITY CORPORATION
THIS PROFESSIONAL MANAGEMENT AGREEMENT is made and entered into as of
the 15th day of July, 1992, between CENTRAL FALLS DETENTION FACILITY CORPORATION
(hereinafter the "Corporation"), and THE CORNELL COX GROUP, L.P. (hereinafter
the "Operator").
WITNESSETH:
WHEREAS, the Corporation intends to construct and establish a
correctional detention facility known as the Central Falls Detention Facility
(hereinafter the "Facility"); and
WHEREAS, the Corporation intends that operation and management of the
Facility will be accomplished by entering into a management agreement with a
private contractor who has the knowledge, expertise, and experience to operate,
manage, and control all activities of the Facility on an independent contractor
basis; and
WHEREAS, the Operator has represented to the Corporation that it has
resources, including but not limited to its employees, subcontractors,
associates and affiliates, normally associated with the full service operations
of a correctional detention facility; and
WHEREAS, the Corporation desires to employ the Operator to manage the
Facility for the benefit of the Corporation and the Operator desires to accept
such employment, all in accordance with the terms and conditions of this
agreement as hereinafter set forth;
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NOW, in consideration of the mutual promises and covenants herein
contained, and subject to the conditions herein set forth, the parties hereby
agree as follows:
ARTICLE ONE
DEFINITIONS
AGREEMENT - means this Professional Management Agreement.
CITY - means the city of Central Falls, Rhode Island.
CONTRACT MONITOR - means Detention Center Associates, Inc., or such
other consultant or in-house employee as shall be identified by the Corporation
to act as the Corporation's consultant with respect to the Facility and this
Agreement.
DIRECT COSTS - means the direct costs incurred by the City or the
Corporation in connection with the Facility, and shall have the same meaning
given to the term, "Local Direct Costs" in the Trust Agreement.
EXECUTIVE ADMINISTRATIVE POSITIONS - means the warden, chief of
security, chief of inmate programs and the training officer.
FACILITY - means the Central Falls Detention Facility and the dedicated
grounds located in the City and owned or leased by the Corporation.
IGA - means the Intergovernmental Agreement dated August 9, 1991 between
the Corporation and the United States Marshals Service ("USMS"), as such
agreement may be amended, extended or renewed from time to time, such agreement
as in affect on the date hereof attached hereto as Appendix A.
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INDIRECT COSTS - means the indirect costs incurred by the City or the
Corporation in connection with the Facility, and shall have the same meaning
given to the term, "Local Indirect Costs" in the Trust Agreement.
INMATE COMMISSARY - means the inmate commissary to be established and
run in the Facility pursuant to Section 6.10 hereof.
INMATE DAY - means each 24 hour period an inmate is housed in the
Facility, plus, without duplication, the first day of incarceration, but not the
last.
LAWS - means any federal, state or local law, ordinance, code,
regulation, rule or ruling.
MANAGEMENT FEE - means the aggregate Per Diem paid to the Operator.
ANNUAL COSTS - means the sum of the Management Fee due and owing for any
year plus the Direct Costs for such year.
OPERATING BUDGET - means the annual operating budget prepared by the
Operator and approved by the Corporation in accordance with Section 8.2 hereof.
OPERATIONAL COSTS - means all those costs directly or indirectly
associated with the daily operation of the Facility, its programs and
administration as contemplated in the Operating Budget, including, but not
limited to, utilities, inmate medical care included in the per diem paid by the
USMS, inmate food, supplies, local inmate transportation, employee salaries and
benefits, maintenance of the Facility, equipment and insurance as set forth in
Section 5.1 hereof.
OPERATING, RENEWAL AND REPAIR FUND - means the fund by that name
established pursuant to the Trust Agreement.
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OPERATING REVENUES - means all revenues derived from the operation of
the Facility, including, but not limited to, the incarceration of inmates within
the Facility, Ancillary Operations and interest income.
OPERATIONS COMMENCEMENT DATE - means the date on which the first inmate
is received at the Facility.
OPERATOR - means The N.R. Cornell Cox Group, L.P.
PER DIEM - means the amount paid to the Operator per inmate day.
RESERVE FUND - means the fund by that name established Pursuant to the
Trust Agreement.
TRUSTEE - means Fleet National Bank, Corporate Trust Department.
TRUST AGREEMENT - means the Loan and Trust Agreement dated as of July
15, 1992 among the Corporation, the Trustee and the Rhode Island Port Authority
and Economic Development Corporation (the "Issuer"), as such agreement may be
amended from time to time.
USER AGENCY(IES) - means those governmental entities contracting with
the Corporation for the housing of inmates at the Facility.
ARTICLE TWO
EMPLOYMENT
Section 2.1 EMPLOYMENT. The Corporation hereby employs the Operator, and
the Operator hereby accepts such employment, to serve as the exclusive manager
and operator of the Facility in accordance with the terms and conditions set
forth in this Agreement. The Operator shall have such authority, and shall
perform such duties, as shall be set forth in this Agreement.
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Section 2.2 EFFECTIVE DATE; TERM. (a) This Agreement shall become
effective as of the date hereof and shall continue in full force and effect
until 12:00 p.m. five (5) calendar years from the Operations Commencement Date.
If neither party gives notice to the other within 180 days of the end of the
term, this Agreement shall automatically be renewed for an additional five (5)
year term.
(b) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement shall terminate without liability to the Corporation in
the event the Facility does not commerce operations for any reason.
(c) This Agreement may also be terminated in accordance with the
provisions of Section 7.4 hereof.
Section 2.3 OPERATIONAL COSTS. (a) The Operator will pay all Operational
Costs of the Facility from its Management Fee. All Operational Costs in excess
of the Management Fee shall be by the Trustee on behalf of the Corporation from
the Revenue Fund.
(b) The Corporation shall pay to the Operator pre-opening costs pursuant
to the pre-opening budget attached hereto as Appendix B. Such costs shall be
reimbursed as they have incurred upon requisition in accordance with the Trust
Agreement. The Corporation shall also pay other legitimate pre-opening expenses
exceeding the budget total which are adequately justified by the Operator and
for which funds are available in the Project Fund of the Trust Agreement.
Section 2.4 MANAGEMENT FEE. For its services, the Operator will receive
a Per Diem of $53.46 per Inmate Day.
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Section 2.5 PRIORITY OF PAYMENTS.
All Operating Revenues shall be allocated and paid in the manner and
priority set forth in Section 304(b) of the Trust Agreement; PROVIDED, THAT, any
amounts distributed to the Corporation from the Operating, Renewal and Repair
Fund pursuant to Section 309(b) of the Trust Agreement shall be divided between
the Corporation and the Operator, with (A) the Corporation receiving an amount
equal to such amount multiplied by a fraction, the numerator of which is the
Direct Costs for such month and the denominator of which is the Annual Costs and
(B) the Operator receiving an amount equal to such amount multiplied by a
fraction, the numerator of which is the Management Fee for such month and the
denominator of which is the Annual Costs.
Section 2.6 ADJUSTMENT TO PER DIEM. The amount of the Operator's Per
Diem will be automatically adjusted by the amount of any increase or decrease
obtained from the USMS or other User Agency and which relates to Operational
Costs.
Section 2.7 BILLINGS. The Operator will maintain all records relating to
inmate per diem and will bill User Agencies on a monthly basis, in the manner
proscribed by each User Agency. The Operator will send a copy of the invoice
sent to the User Agencies simultaneously to each of the Corporation, the Issuer
and the Trustee. Production and maintenance of these invoices is the sole
responsibility of the Operator and the Operator assumes all responsibility for
the accuracy and veracity of such records. Collection of Per Diem payments shall
be the responsibility of the Trustee at the Corporation's expense. The Operator
agrees to immediately pay to the Trustee all revenues which may be received by
the Operator in connection with the Facility, in the form and amount received
without deduction or set-off of any amount for any reason.
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Section 2.8 LIENS AND ASSESSMENTS. The Operator shall duly observe and
comply with all valid requirements of any governmental agency (including User
Agencies) relative to the Facility and the Operator shall: (a) not create or
suffer to be created any lien or charge upon the Facility or any part thereof
and (b) pay or cause to be discharged or make adequate provision to satisfy and
discharge, within ninety (90) days after the same shall come into force, any
lien or charge upon the Facility or any part thereof, or any payments hereunder
and all lawful claims or demands for labor, materials, supplies or other charges
which, if unpaid, might be or become a lien upon the facility or any part
thereof or any payments hereunder.
Section 2.9 POSSESSION OF FACILITY. (a) On the Operations Commencement
Date, the Corporation shall grant to the Operator exclusive use, possession, and
control of the land and property owned by the Corporation comprising the
Facility for a period co-terminus with this Agreement. The Operator will be
given reasonable access to the Facility prior to that date.
(b) Notwithstanding the foregoing, representatives of the City, the
Corporation, the Issuer, the Trustee and User Agencies shall be allowed
reasonable access to the Facility upon notice to the Operator. The Contract
Monitor shall be allowed access to the Facility as set forth in Section 6.15.
(c) In addition, the City shall be permitted to utilize a portion of the
grounds of the Facility, the location and nature of such use to be agreed on by
the City and the Operator.
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ARTICLE THREE
FACILITY AND EQUIPMENT MAINTENANCE; DAMAGE
Section 3.1 MAINTENANCE. The Operator will be responsible for
landscaping, routine grounds maintenance and Facility maintenance and, in so
doing will maintain, preserve and keep the Facility and equipment in good
repair, appearance, working order and condition, subject to normal wear and
tear, and will from time-to-time make or cause to be made all necessary and
proper repairs, replacements and renewals, which shall thereupon become part of
the Facility. The cost of maintenance, replacements, and supplemental
maintenance agreements are Operational Costs of the Facility and, unless paid
for directly by a User Agency and not included in the per diem paid by such User
Agency, shall be paid from the Operator's Management Fee. However, if the
Management Fee is not sufficient to pay such costs, they shall be paid by the
Trustee on behalf of the Corporation from the Revenue Fund.
Section 3.2 FACILITY AND EQUIPMENT DAMAGE. Promptly after the occurrence
of any damage to the Facility or equipment therein or loss that materially
affects the continued operation of the Facility, the Operator shall notify the
Corporation. Subject to, and in accordance with, the provisions of the Trust
Agreement, the Operator and the Corporation shall then jointly assess the nature
and extent of such damage or loss and, as soon as practicable thereafter, the
Corporation will determine whether it is practicable and desirable to rebuild,
repair or restore such damage or loss.
Section 3.3 RESTORATION/REPLACEMENT. If it so elects, the Corporation
shall forthwith proceed with restoration or replacement pursuant to Section 3.2
and shall notify the Operator of the completion thereof, which restoration or
replacement shall thereupon become part of the Facility.
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If the Corporation determines not to restore or replace the Facility, it may
terminate this Agreement upon ninety (90) days written notice to the Operator.
ARTICLE FOUR
EQUIPMENT
Section 4.1 OWNERSHIP OF PROPERTY. The ownership of all property and
equipment (except such property and equipment purchased by the Operator from its
own funds and not from Operating Revenues) shall remain with the Corporation and
shall not be removed from the Facility without the Corporation's prior written
approval. The Operator shall have the use of all such Property and equipment
during the term of this Agreement.
Section 4.2 RETURN OF EQUIPMENT. At the conclusion of this Agreement,
the Operator shall ensure that all property and equipment, including
replacements but excluding any Operator owned property and equipment, remain at
the Facility in the condition in which they were received, normal wear and tear
excepted.
Section 4.3 ADDITIONAL AND REPLACEMENT EQUIPMENT. The Operator may, from
time to time during the term of this Agreement, install machinery, equipment,
and other property in the Facility, which may be attached or affixed to the
Facility. All such machinery, equipment and other property, shall be paid for
from Operational Revenues and shall become the sole property of the Corporation.
Any equipment purchased by the Operator from its own funds and not paid for from
Operational Revenues shall remain the sole property of the Operator.
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Section 4.4. EQUIPMENT INVENTORY. The Operator and the Corporation shall
conduct an inventory of all property and equipment on an annual basis, such
inventory to set forth a list and the condition of such property and equipment.
Section 4.5. CONSTRUCTION AND EQUIPPING OF THE FACILITY. The Operator
represents and warrants that it has reviewed the plans and specifications
prepared by Durrant Flickinger and Brown & Root Building Company in connection
with the construction of the Facility, and that such plans and specifications
(a) meet or exceed ACA Standards and all requirements of the USMS for the
housing of federal detainees at the Facility and (b) provide for all necessary
machinery, equipment and other property necessary for the Operator to operate
the Facility in accordance with such standards.
ARTICLE FIVE
INDEMNIFICATION AND INSURANCE
Section 5.1 INSURANCE. (a) The parties shall secure and retain, or shall
cause to be secured, a plan of insurance providing professional and general
liability insurance to protect the Operator and the Corporation against all
claims arising from the operation of the Facility and the management services
performed under this Agreement, including claims based on violations of civil
rights.
The plan of insurance required by this Subsection (a) shall be for not
less than One Million Dollars ($1,000,000) per occurrence and Two Million
Dollars ($2,000,000) general aggregate. A reasonable deductible will be
permitted which deductible shall be the responsibility of the Operator.
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(b) The parties shall also secure and retain, or shall cause to be
secured and retained, automobile liability insurance with reasonable and
customary limits and deductibles and workers' compensation insurance as required
by law.
(c) All insurance costs set forth in subsections (a) and (b) above shall
be considered Operational Costs of the Facility and will be paid by the Operator
from its Management Fee.
(d) The Corporation shall obtain, and be responsible for payment of
costs related to, directors and officers insurance and fire and property
insurance coverage for the Facility buildings and contents.
Section 5.2 CERTIFICATES OF INSURANCE AND CANCELLATION. During the term
of this Agreement, the parties shall maintain each policy of insurance for the
mutual protection and benefit cf the Operator and the Corporation naming the
parties as co-insureds and entitled to all notices issued under each policy.
Each party also agrees to name the Trustee and the Issuer as loss payees as
their respective interests may appear and shall comply with any requirements
with respect to insurance of the Trust Agreement and any other contract to which
the Corporation is a party, including the Corporation's Lease with the National
Railroad Passenger Corporation.
In the event that any insurance described herein or any portion thereof
becomes commercially unavailable, the Operator and the Corporation shall
cooperate in efforts to obtain such replacement insurance as may be available
and this Agreement shall be modified accordingly.
Section 5.3 SUBCONTRACTORS. The Operator shall require all
subcontractors to obtain, maintain, and keep in force insurance coverage in
accordance with accepted industry standards and this Agreement during the time
they are engaged hereunder.
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Section 5.4 PRIOR OCCURRENCES. The Corporation shall remain solely
responsible for any losses or costs resulting from litigation pending at the
time this Agreement becomes effective or for lawsuits arising thereafter
relating to events or conditions which occurred or existed prior to the
effective date of the Agreement. The Operator agrees to cooperate with the
Corporation in the defense of these suits.
Section 5.5 INDEMNIFICATION OF THE OPERATOR. Should there be a challenge
to the legality of the Corporation entering into this Agreement, the Corporation
shall indemnify the Operator for all costs incurred by the Operator in defending
the challenge, including any litigation or attorney fees.
Section 5.6 DEFENSE/IMMUNITY. By entering into this Agreement, neither
the Corporation nor the Operator waives any defense which may be available to it
by operation of law, including any limitation on the amount of damages which may
be awarded.
Section 5.7 INDEMNIFICATION.
(a) The Operator hereby agrees to and shall hold the Corporation
and its officers, directors, employees, agents and representatives
harmless from any and all liability, demands, actions, claims,
judgments, losses, costs or damages, including but not limited to,
reasonable attorneys' fees and costs of defense, costs, fines and
penalties arising out of remedial or investigatory actions and any
liability for property damage or bodily injury, including death
(hereinafter, "Losses"), which may arise out of or in any way be
connected with the negligence, willful misconduct or failure to perform
in accordance with this Agreement of the Operator or any of its agents
or subcontractors.
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(b) The Corporation hereby agrees to and shall hold the Operator
and its officers, directors, employees, agents and representatives
harmless from any and all Losses which may arise out of or in any way be
connected with the negligence, willful misconduct or failure to perform
in accordance with this Agreement of the Corporation or any of its
agents or contractors (other than the Operator).
(c) Each party shall promptly notify the other of the assertion
of any claim against it to which it is entitled to indemnification
hereunder, shall give the other party the opportunity to defend such
claim, and shall not settle such claim without the prior written
approval of the other. These indemnification provisions are for the
protection of the Operator and the Corporation only, and shall not
establish, of themselves, any liability to any other entity.
ARTICLE SIX
MANAGEMENT SERVICES
Section 6.1 GENERAL DUTIES AND AUTHORITY. Subject to the right of the
Corporation to terminate this Agreement, the Operator shall have the sole and
exclusive authority, subject to the overall direction and authority of the
Corporation not inconsistent with the terms of this Agreement, to fully and
completely manage and operate the business affairs associated with the Facility
relating to the daily operation thereof, to include but not limited to:
incarceration services, food services, repair and maintenance services, and
administrative services. The Operator agrees to operate the Facility as facility
administrator in accordance with the IGA and to carry out the operations of the
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Facility so as not to cause any cancellation of the IGA. In furtherance, but not
in limitation of the foregoing, the Operator shall:
(a) achieve American Correctional Association accreditation within
eighteen (18) months from the Operations Commencement Date and maintain such
accreditation throughout the term of this Agreement;
(b) provide for the protection of inmates' rights, health, safety and
well-being, as well as the safety of employees and visitors to the Facility;
(c) provide for a progressive inmate classification system based upon
ACA Standards and other accepted professional standards;
(d) provide for the protection of inmates' rights by developing and
implementing a grievance procedure, appeal process and disciplinary procedure
which ensures inmate's due process rights;
(e) develop and train for contingency plans for all emergencies,
including mass evacuation, disturbances and escapes in conjunction with local
authorities;
(f) comply with all Laws, including local and state fire, sanitation and
health codes and applicable state laws so that the Facility will pass various
special inspections conducted routinely by fire, safety, medical and sanitation
officials from appropriate governmental agencies;
(g) establish procedures for employee strikes and work slowdowns, such
procedure to address staffing and operating procedures; and
(h) notify the Corporation at least sixty (60) days prior to the end of
any labor contract or promptly in the event of labor difficulty or major
grievances.
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The Operator shall be deemed to have complied with subsections (b)
through (g) above if it meets or exceeds ACA Standards and complies with all
Laws with respect to the subject matter thereof.
Section 6.2 OPERATIONAL STANDARDS. The Operator will comply with all
Laws and applicable court decisions applicable to the Facility and its
operations and with the American Correctional Association Standards for Adult
Local Detention Facilities (3rd Edition), as such standards may be amended or
supplemented from time to time ("ACA Standards") in the operation of the
Facility.
Section 6.3 PERSONNEL. The Operator will select all vendors, suppliers,
contractors, subcontractors and employees with respect to operation,
maintenance, repair or restoration of the Facility and all machinery, equipment
and other property located therein. The Operator will supply the Corporation
with a monthly updated roster of all full and part-time staff and employees of
the Facility.
Section 6.4 RECORDS. The Operator shall establish and operate a record
and reporting system which complies with ACA Standards and all applicable Laws.
Upon termination of an inmate's confinement, the Operator shall forward the
inmate's records to the appropriate incarcerating authority. The Operator shall
retain public information which can identity the former inmate, copies of any
research data which has been depersonalized, copies of reports generated by the
Operator and such other records deemed necessary by the Operator.
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Section 6.5 MEDICAL SERVICES. The Operator shall provide medical
services in conformity with ACA Standards, applicable Laws and the IGA and other
inmate housing contracts entered into by the Corporation. The Operator shall
have sole authority to contract outside medical services.
Section 6.6 FOOD SERVICES. The Operator shall have the sole discretion
to establish policies and procedures for the providing of food services to
inmates within the Facility, subject to applicable health code laws, ACA
Standards and other applicable Laws. The Operator shall have sole authority to
contract outside services and to determine supply resources, vendors, and
dietary planning within the Facility and the number of its employees necessary
to perform these services.
Section 6.7 REPAIR AND MAINTENANCE. The Operator shall have the sole
discretion, in consultation with the Corporation, to establish such policies and
procedures as shall be necessary for the maintenance of all grounds, buildings,
and fixtures and equipment contained within the Facility. The Operator shall
have sole authority to contract and determine supply resources, personnel mix,
and generally supervise the decisions concerning subcontractors which perform
ongoing maintenance of the facility. The Operator will do all things required by
any regulatory authority or body, with jurisdiction, in order to maintain
compliance with all Laws.
Section 6.8 TRANSPORTATION. All transportation of inmates is the
responsibility of the Operator or the incarcerating agency.
Section 6.9 SECURITY. The Operator shall be responsible for providing
security for all inmates while they are at the Facility and during routine
medical appointments and emergencies outside of the Facility. All other security
will the responsibility of the User Agencies.
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Section 6.10 INMATE COMMISSARY The Operator shall operate or cause to be
operated an Inmate Commissary. Prices charged at the Inmate Commissary shall not
exceed prices charged for similar items in local convenience stores.
Section 6.11 USE OF FORCE. The Operator shall not use force in excess of
that permitted by Law or the User Agency.
Section 6.12 FINANCIAL RECORD INSPECTION AND AUDIT. Upon notice to the
Operator, the Corporation or its agents or Representative shall have access to
and may inspect, examine, and make copies of the books and records of the
Operator insofar as the same relate to the Facility.
Section 6.13 ADMINISTRATIVE SERVICES. The Operator shall have the sole
discretion to establish policies and procedures for the general operation of the
Facility in accordance with ACA Standards and other applicable Laws and shall
develop same into manuals which shall be approved by the User Agencies and the
Corporation. The Operator, acting as employer, shall have sole authority to
select, hire, train, supervise and discharge all of the Operator's employees
subject to the guidelines of the Operating Budget, which Operating Budget will
not be unreasonably restrictive to prevent sound practices and secure operations
of the Facility.
The Operator shall comply with all applicable Laws regarding employment
practices and shall provide adequate training of personnel employed by it, which
training shall be least equal to or exceed ACA Standards. All personnel employed
by the Operator at the Facility shall be registered in accordance with
ss.5-5.1-18 of the Rhode Island General Laws.
Section 6.14 AGREEMENTS. The Operator shall have the authority to
prepare and execute all normal, routine, and reasonable contracts for the
continuance of general operations of the Facility,
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unless otherwise specified within this Agreement, including, but not limited to:
all purchases for goods and services and contracting for inmate care within the
Facility. The Operator shall enter into all such contracts in the name of the
Operator or in the name of the Corporation upon the prior written approval of
the Corporation. However, the Operator shall be obligated to seek reasonable
efficiency in such action to maximize benefits and minimize the cost of
operations to the Corporation. Per diem rates for housing inmates at the
Facility shall be negotiated by the Operator with the User Agencies. The
Operator shall give the Corporation reasonable notice of such negotiations, and
the Corporation may participate in such negotiations at its option.
Section 6.15 INSPECTIONS. The Operator shall cooperate with, and give
representatives of (a) the Corporation access to the Facility to make periodic
inspections of the Facility for the purpose of determining compliance with this
Agreement, (b) the User Agency access to the Facility to make periodic
inspections of the Facility for the purpose of determining compliance with the
IGA and (c) other governmental entities access to the Facility to make periodic
inspections of the Facility for the purpose of determining compliance with Law.
The Operator shall provide each of these representatives or inspectors access to
any requested information to which they are entitled. Findings of these
inspections will be shared with the Operator in order to promote improvements to
Facility operations, conditions of confinement and levels of service.
Section 6.16 CONTRACT MONITOR. The Operator agrees that the Contract
Monitor is the representative of the Corporation and agrees that it shall
cooperate with the Contract Monitor in all reasonable respects, including the
following:
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(a) the Contract Monitor shall have access to the Facility at any time
(including unannounced visits), inmates, inmate records and data and to all
written policies and procedures;
(b) the Contract Monitor shall have the right to interview inmates,
staff, visitors and released inmates, so long as any such interviews are
conducted in a reasonable manner and scheduled with the Operator so as not to be
disruptive;
(c) The Operator shall provide the Contract Monitor with written reports
and information within fifteen (15) days of the occurrence of the following
incidents: escapes and attempted escapes; serious illnesses; prisoner and
employee/staff deaths; serious injury to employees/staff, inmates or visitors;
assaults; major disturbances; use of force; significant disciplinary incidents;
and changes in executive and administrative positions; and shall provide the
Contract Monitor with written reports and information as to such other matters
as may be requested in writing by the Corporation within fifteen (15) days of
such request; and
(d) The Operator shall provide space for, and cooperate with, the
Contract Monitor and give the Contract Monitor access to any inspection reports,
including fire, safety, medical, sanitation, User Agency and ACA inspections.
The Contract Monitor shall provide a written report of all findings
resulting from monitoring procedures to the Operator and the Corporation, and
shall discuss such report with a representative of the Operator. The Operator
shall respond in writing to the Corporation with respect to any problems
identified in such report within the period of time set forth in such report
(which period of time shall reasonably relate to the seriousness of such
problem). Such response by the Operator shall include a summary of the
corrective action to be taken, if any, and a schedule within which the
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Operator shall complete such action. If such response and/or suggested action
are not acceptable to the Corporation, the Operator and the Corporation shall
work together to agree on the corrective action to be taken, and the time in
which to take such action.
Section 6.17 PREFERENCE TO CENTRAL FALLS RESIDENTS. All else being equal
(quality and price), in contracting for all personnel and outside services,
supply resources and vendors (including, without limitation, food services,
repair and :maintenance services, medical services and transportation), the
Operator shall give preference to residents of, and businesses located in, the
City.
Section 6.18 BUDGET. The Operator's sole authority and discretion to
contract for personnel and outside services shall be exercised at all time
consistent with the Operating Budget.
ARTICLE SEVEN
BREACH OF CONTRACT
Section 7.1 ENUMERATION OF BREACHES OF CONTRACT. The following shall be
considered a breach under this Agreement:
(a) a material failure by either party to keep, observe, perform, meet,
or comply with any covenant, agreement, term, or provision of this Agreement and
such failure continues for a period of thirty (30) days after written notice
thereof;
(b) failure by either party to make any payment required in this
Agreement and not in dispute within thirty (30) days from the date it is due
(except that it shall not be a breach hereunder if the Operator has not been
paid within such 30-day period so long as the priority of payments set forth in
Section 304(b) of the Trust Agreement has been observed);
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(c) a material failure by the Operator to meet or comply with any court
order, ACA Standard, or Law, when such failure continues for a period of thirty
(30) days after the Operator has written notice thereof;
(d) the Operator (i) admitting in writing its inability to pay its
debts; (ii) making a general assignment for the benefit of creditors; (iii)
suffering a decree or order appointing a receiver or trustee for it or
substantially all of its property to be entered; (iv) suffering proceedings
under any law relating to bankruptcy, insolvency, or the reorganization or
relief of debtors to be instituted by or against it; or (v) suffering any
judgment, writ of attachment or execution, or any similar process to be issued
or levied against a substantial part of its property which is not released,
stayed, bonded, or vacated within sixty (60) days after issue or levy.
(e) the discovery by either party that any statement, representation or
warranty in this Agreement is false, misleading, or erroneous in any material
aspect.
Section 7.2 FORCE MAJEURE. The failure to perform any of the terms and
conditions of this Agreement resulting from force majeure shall not be
considered a breach of this Agreement.
Section 7.3 TIME TO CURE. A breach set forth in Sections 7.1(a) or (c)
shall not become a breach hereunder if (a) the breach cannot be cured within the
30-day grace period set forth in each such subsection, but is capable of being
cured, (b) the defaulting party, within such thirty (30) day period, submits a
plan for curing the breach within a reasonable period of time, (not to exceed
six (6) months unless extended by the non-defaulting party), (c) the plan is
approved by the non-defaulting party (such approval not to be unreasonably
withheld), (d) the defaulting party diligently
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and timely cures the default pursuant to such plan, and (e) the defaulting party
continues to perform its other obligations under this Agreement.
Section 7.4 REMEDY. Upon the occurrence of a breach hereunder, the
non-defaulting party shall have the right to pursue any remedy it may have at
law or in equity, including but not limited to: (a) reducing its claim to
judgment, (b) taking action to cure such breach at the sole expense of the
defaulting party, and (c) termination of this Agreement.
Section 7.5 WAIVER. No waiver of any breach of any of the terms or
conditions of this Agreement shall be held to be a waiver of any other or
subsequent breach; nor shall any waiver be valid or binding unless the same
shall be in writing and signed by the party alleged to have granted the waiver.
Section 7.6 TRANSITION PERIOD. In the event of termination of this
Agreement by either the Corporation or the Operator, the Operator agrees to use
its best efforts during the transition period to assist the Corporation in a
smooth transition to a new operator. The transition period shall be no less than
30 days and no longer than 180 days unless an extension is agreed to by both
parties. During such transition period, the Operator agrees to comply with all
of its obligations under this Agreement, and the Corporation agrees that the
Operator shall be entitled to payment of its Management Fee in accordance with
this Agreement.
ARTICLE EIGHT
ACCOUNTING AND REPORTING
Section 8.1 FINANCIAL STATEMENTS. (a) Within thirty (30) days after the
end of each month commencing after the Operations Commencement Date, the
Operator shall deliver to the
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Corporation, the Issuer and the Trustee a monthly financial Statement of
Facility operations consisting of a balance sheet and income statement prepared
on the accrual method under generally accepted accounting principles, such
balance sheet to be as of the close of such month and such income statement to
be for the period from the beginning of the then-current fiscal year to the end
of such month. The Operator shall maintain the back-up records contributing to
such accounting for inspection during reasonable business hours by
representatives of the Corporation. The Operator shall make copies of any and
all accounting data of whatever nature and scope available upon request to any
party having the right to such information. The Operator shall be reimbursed for
the reasonable costs incurred to complete such copy activity by any party so
requesting, except the Corporation, the Issuer and the Trustee.
(b) Within one hundred twenty (120) days of the end of each calendar
year, the Operator shall deliver to the Corporation, the Issuer and the Trustee
a balance sheet and income statement of the Facility, together with notes to
financial statements, audited and certified by independent certified public
accountants selected by the Operator and acceptable to the Corporation, the form
of certification to be also acceptable to the Corporation. The Operator will
cause its personnel to assist in every reasonable way such that the audit report
may be timely and efficiently prepared.
(c) In addition to the foregoing, the Operator will deliver any and all
financial statements required under the Trust Agreement in the manner and at the
times set forth therein.
(d) Within thirty (30) days after the end of each month, the Operator
shall deliver to the Corporation such information reasonably requested by the
Corporation, which such information may
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include a break-down of the number of inmates housed, and personnel employed, at
the Facility on each day of the prior month.
Section 8.2 BUDGETS. The Operator shall submit to the Corporation a
proposed annual budget reflecting the anticipated operational costs and needs
for the following year (the "Operating Budget"). The proposed Operating Budget
shall be permitted to the Corporation no later than sixty (60) days prior to the
end of the initial or subsequent term of the IGA. The proposed Operating Budget
shall contain monthly anticipated expenses of operations, maintenance, capital
improvements, and personnel payroll expenses detailed by employee. Upon receipt
of the proposed Operating Budget, the Corporation shall have the right for a
period of thirty (30) days to review the estimates and consult with the Operator
concerning modifications and revisions thereto. The Corporation and the Operator
shall agree on the Operating Budget prior to submitting it to any User Agency.
The Operator will represent the Corporation in defending and explaining the
Operating Budget to User Agencies. The Corporation may participate in such
defense and explanation at its option. The Operator agrees to resubmit a revised
Operating Budget (containing such revisions and modifications required by the
User Agencies) for approval by the Corporation. The Operator shall deliver to
the Corporation, the Issuer and the Trustee the final Operating Budget approved
by the User Agencies within five (5) days of such approval.
The Operator agrees to use its best efforts and good faith to adhere to
the Operating Budget and the Operator will not deviate substantially therefrom,
except in case of an emergency where failure to take a particular action would,
in the best judgment of the Operator, expose the Facility or the Corporation to
imminent danger of criminal or civil liability. The Operator shall use all
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reasonable diligence and efforts to ensure that the actual operational costs of
maintaining and operating the Facility shall not exceed the total Operating
Budget or any one accounting category. All Operational Costs shall be charged to
the proper account as specified in a schedule of account classifications
previously approved by the Corporation and no item of Operational Cost shall be
classified or reclassified for the purpose of avoiding an excess in the annual
budgeted amount for such accounting category. During each calendar year, the
Operator shall promptly inform the Corporation in writing of any increases or
decreases in excess of 15% in Operational Costs in any budget category. The
Operating Budget will not be unreasonable amended by the Corporation to
jeopardize sound and secure operations of the Facility.
ARTICLE NINE
DUTIES OF CORPORATION
The Corporation hereby agrees to cooperate with the Operator in the
performance of the Operator's duties and responsibilities under this Agreement,
to act in good faith, and to do all reasonable things necessary to aid and
affect the Operator's performance as an independent contractor under the terms
of this Agreement. The Corporation shall not unreasonably withhold any approval
requested by the Operator.
ARTICLE TEN
MISCELLANEOUS
Section 10.1 COOPERATION FOR PERMITS AND LICENSES. In the event it may
be necessary for the proper performance of this Agreement, or any rights
hereunder, on the part of the Corporation or the Operator, that any application
or applications for any permit or license or authorization to do
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or to perform certain things be made to any governmental or other agency by one
or more of the Corporation or the Operator, the Operator and the Corporation
each agree to execute promptly upon the request of the other such application or
applications.
Section 10.2 ACCESS TO FACILITY. The Corporation and its agents shall
have the right at all times during the term of this Agreement to enter and
inspect the facility.
Section 10.3 BROKERING BED SPACE. With approval of the USMS and the
Corporation, the Operator may resell beds to other federal agencies in need of
bed space. Payments derived from such activities shall be considered Operating
Revenues and shall be delivered directly to the Trustee upon receipt and
allocated as set forth in Section 2.5 hereof.
Section 10.4 NOTICES.
All notices shall be sent certified mail, return receipt requested to:
Corporation: Edward W. Foran
Chairman
Central Falls Detention Facility Corporation
City Hall
P.O. Box 6103
Central Falls, RI 02863
Operator: Norman R. Cox, Jr.
8023 Vantage Drive
Suite 970
San Antonio, TX 78230
Section 10.5 SUBCONTRACTING/ASSIGNMENT. The Operator may not assign all
or any part of its rights or obligations under this Agreement, without the prior
written approval of the Corporation, which approval shall not be unreasonably
withheld; provided, however, Operator shall have the right, upon the prior
written approval of the Corporation, which approval shall not be unreasonable
-26-
withheld, to assign this Agreement to any subsidiary corporation, or any parent
corporation of which Operator may become a subsidiary, or any corporation or
entity (including but not limited to a partnership) into which Operator is
merged, or any entity resulting from a consolidation of Operator with some other
entity so long as such successor entity agrees in writing to be bound by all of
the terms and provisions of this Agreement. Notwithstanding the foregoing, the
Operator may subcontract for services for which it is responsible hereunder so
long as the Operator remains liable to the Corporation hereunder. This Agreement
shall be binding on the successors and permitted assigns of each party.
Section 10.6 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts.
Section 10.7 HEADINGS. The parties agreed that the headings used in this
Agreement are for convenience of reference only.
Section 10.8 SEVERABILITY. If any clause, provision, or section of the
Agreement is held illegal, invalid, or unenforceable by any court, the
illegality, invalidity, or unenforceability of each clause, provision or section
shall not affect any of the remaining clauses, provisions or sections hereof,
and this Agreement shall be construed and enforced as if such illegal, invalid,
or unenforceable clause, provision or section had not been contained herein.
Section 10.9 ARBITRATION. To the extent permitted by law and unless
otherwise specified herein, any controversy arising out of this Agreement, which
the parties are unable to resolve by mutual agreement, may be submitted to
arbitration in accordance with the rules of the American Arbitration
Association.
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Section 10.10 LAWS OF RHODE ISLAND TO GOVERN. The laws of the State of
Rhode Island shall govern the construction and enforcement of this Agreement.
The Operator represents and warrants that it has qualified to do business in the
State of Rhode Island, and covenants to remain subject to service of process in
the State of Rhode Island throughout the term of this Agreement. The Operator
irrevocably and unconditionally (a) agrees that any arbitration, suit, action or
other legal proceeding arising out of this Agreement may be brought in the
courts of record of the State of Rhode Island and (b) consents to the
jurisdiction and venue of such court in any such arbitration, suit, action or
proceeding.
Section 10.11 ENTIRE AGREEMENT. This Agreement, including Appendices, is
the entire Agreement of the parties, and may be modified only by written
agreement signed by both parties.
IN WITNESS WHEREOF, the parties hereto have caused this Professional
Management Agreement to be duly executed by their authorized officers on the
dates set forth below.
CENTRAL FALLS DETENTION FACILITY
CORPORATION
By: /s/ PATRICIA SALISBURY
Patricia Salisbury
Vice Chairman
THE CORNELL COX GROUP, L.P.
By: NRC, Inc., its General Partner
By: /s/ NORMAN R. COX, JR.
Norman R. Cox, Jr.
President
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EXHIBIT 10.12
TEXAS DEPARTMENT OF CRIMINAL JUSTICE
PAROLE DIVISION
COMMUNITY RESIDENTIAL FACILITY
MANAGEMENT & OPERATIONS AGREEMENT
THIS MANAGEMENT AND OPERATIONS AGREEMENT (as amended or supplemented as
herein provided, the "Agreement") is made and entered into by and between THE
TEXAS ALCOHOLISM FOUNDATION, INC., a duly organized CORPORATION of the State of
Texas (CONTRACTOR), and the TEXAS DEPARTMENT OF CRIMINAL JUSTICE, PAROLE
DIVISION, together with any successor to its functions, the "DEPARTMENT", which
is an agency or department of the State of Texas.
WITNESSETH:
WHEREAS, DEPARTMENT desires that CONTRACTOR provide a community
residential facility, with associated programs within the State of Texas for the
housing, training, education, rehabilitation, and reformation of persons
released on supervision pursuant to TEX. CODE CRIM. PRO. ANN. art. 42.18 (Vernon
Supp. 1994-95): Section 14, Article 42.12, Code of Criminal Procedure, and
Sections 493.009(e)(f), Texas Government Code; and shall be capable of housing a
maximum daily population not to exceed 230 regular parole and mandatory
supervision releasees, and 80 Substance Abuse Releasees, and CONTRACTOR desires
to provide said facility;
WHEREAS, CONTRACTOR agrees to serve:
Offenders who have completed primary treatment at an In Prison
Therapeutic Community ("IPTC") or Substance Abuse Felony Punishment
Facility ("SAFPF") (Therapeutic Community ["TC"] resident);
WHEREAS, CONTRACTOR agrees to make available to DEPARTMENT a community
residential facility known as THE TEXAS HOUSE, located at 10950 BEAUMONT
HIGHWAY, HOUSTON, TEXAS 77078, which CONTRACTOR has entered into a Management
and Operations Agreement with DEPARTMENT.
WHEREAS, all things have been done which are necessary to authorize the
execution of this AGREEMENT and to constitute this AGREEMENT a valid contract of
the parties hereto in accordance with its terms:
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants hereinafter contained, and subject to the conditions herein set forth,
the parties hereto covenant, agree, and bind themselves as follows:
Page 1 of 40
ARTICLE ONE
REPRESENTATIONS AND WARRANTIES
1.1 REPRESENTATIONS OF CONTRACTOR. CONTRACTOR represents and warrants to
and for the benefit of DEPARTMENT, with the intent that DEPARTMENT shall rely
thereon for purposes of entering into this AGREEMENT, as follows:
1.2.1 ORGANIZATION AND QUALIFICATION. CONTRACTOR has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Texas with power and authority to own or
lease its properties and conduct its business as presently conducted.
CONTRACTOR is duly qualified to do business in the State of Texas.
1.2.2 AUTHORIZATION. This AGREEMENT has been duly authorized,
executed, and delivered by CONTRACTOR and, assuming due execution and
delivery by DEPARTMENT, constitutes a legal, valid, and binding agreement
enforceable against CONTRACTOR in accordance with its terms.
1.2.3 NO VIOLATION OF AGREEMENTS, ARTICLES OF INCORPORATION OR
BYLAWS. The consummation of the transactions contemplated by this
AGREEMENT and the fulfillment of the terms hereof shall not conflict with,
or result in a breach of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease, loan
agreement, license, security agreement, contract, governmental license or
permit, or other agreement or instrument to which CONTRACTOR is a party or
by which its properties are bound, or any order, rule, or regulation of
any court or any regulatory body, administrative agency, or properties,
except any such conflict, breach, or default which would not materially
and adversely affect CONTRACTOR'S ability to perform its obligations under
this AGREEMENT, and shall not conflict with, or result in a breach of any
of the terms and provisions of, or constitute a default under, the
Articles of Incorporation (or other corresponding charter document) or
Bylaws of CONTRACTOR.
1.2.4 NO DEFAULTS UNDER AGREEMENTS. CONTRACTOR is not in default,
nor is there any event in existence which, with notice or the passage of
time or both, would constitute a default by CONTRACTOR, under any
indenture, mortgage, deed of trust, lease, loan agreement, license,
security agreement, contract, governmental license or permit, or other
agreement or instrument to which it is a party or by which any of its
properties are bound and which default would materially and adversely
affect CONTRACTOR'S ability to perform its obligations under the
AGREEMENT.
1.2.5 COMPLIANCE WITH LAWS. Neither CONTRACTOR nor its officers and
directors purporting to act on behalf of CONTRACTOR have been advised, and
have no reason to believe, that CONTRACTOR or such officers and directors
have not been conducting business in compliance with all applicable laws,
rules, and regulations of the jurisdictions in which CONTRACTOR is
conducting business including all safety laws and laws with respect to
discrimination in hiring, promotion or pay of employees or other laws
affecting employees generally, except where failure to be so in compliance
would not materially and adversely affect CONTRACTOR'S ability to perform
its obligations under this AGREEMENT.
Page 2 of 40
1.2.6 NO LITIGATION. Except as previously disclosed in writing to
DEPARTMENT'S Director of Specialized Supervision, there is not now pending
or, to the knowledge of CONTRACTOR, any threatened action, suit, or
proceeding to which CONTRACTOR is a party, before or by any court or
governmental agency or body, which might result in any material adverse
change in CONTRACTOR's ability to perform it obligations under this
AGREEMENT, or any such action, suit, or proceeding related to
environmental or civil rights matters; and no labor disturbance by the
employees of CONTRACTOR exists or is imminent which might be expected to
materially and adversely affect CONTRACTOR'S ability to perform it
obligations under this AGREEMENT.
1.2.7 TAXES. CONTRACTOR has filed all necessary federal, state, and
foreign income and franchise tax returns and has paid all taxes as shown
to be due thereon; and CONTRACTOR has no knowledge of any tax deficiency
which has been or might be asserted against CONTRACTOR which would
materially and adversely affect CONTRACTOR'S ability to perform its
obligations under this AGREEMENT.
1.2.8 FINANCIAL STATEMENTS. CONTRACTOR has delivered to DEPARTMENT
copies of the following financial statements contained in its annual
reports, with appended notes and summary of significant accounting
policies which are an integral part of such statements: balance sheet at
December 31, 1994 and statements of income, shareholders' equity, and
changes in financial position of CONTRACTOR for the year ending December
31, 1994. Such financial statements fairly present the financial position
of CONTRACTOR at the dates shown and the results of its operations for the
periods covered, and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis, except as
discussed in the notes to the financial statements.
1.2.9 NO ADVERSE CHANGE. Since the date of CONTRACTOR'S most recent
balance sheet provided to DEPARTMENT, there has not been any material
adverse change in CONTRACTOR'S business or condition, nor has there been
any change in the assets or liabilities or financial condition of
CONTRACTOR from that reflected in such balance sheet which is material to
CONTRACTOR'S ability to perform its obligations under this AGREEMENT.
1.2.10 DISCLOSURE. There is no material fact which materially and
adversely affects or in the future shall (so far as CONTRACTOR can now
reasonably foresee) materially and adversely affect CONTRACTOR'S ability
to perform its obligations under this AGREEMENT which has not been
accurately set forth in this AGREEMENT or otherwise accurately disclosed
in writing to DEPARTMENT by CONTRACTOR prior to the date hereof.
1.2.11 REQUIRED DISCLOSURES BY CONTRACTOR
a. If any person who is an employee of, director of, or
subcontractor for CONTRACTOR is required to register as
a lobbyist under Texas Government Code, Chapter 305, at
any time during the period of this contract, CONTRACTOR
shall provide to DEPARTMENT timely copies of all reports
filed with the Texas Ethics Commission as required by
Chapter 305.
Page 3 of 40
b. If any person who is an employee of, director of, or
subcontractor for CONTRACTOR is or becomes an elected
official during the period of this contract, CONTRACTOR
shall notify DEPARTMENT of that fact prior to execution
of the contract or within ten days of the event, if the
event causing the notification occurs during the period
of the contract. For purposes of this section, "elected
official" means a state legislator, a United States
congressman or senator, or a member of the judiciary.
For purposes of this section, a member of the judiciary
means an individual who is elected and whose salary is
paid pursuant to the Judiciary Article of The General
Appropriations Act.
1.3 REPRESENTATIONS OF DEPARTMENT. DEPARTMENT represents and warrants to
and for the benefit of CONTRACTOR with the intent that CONTRACTOR shall rely
thereon for purposes of entering into this AGREEMENT as follows:
1.3.1 AUTHORIZATION. Pursuant to Article 42.18 of the Texas Code of
Criminal Procedures, DEPARTMENT has the requisite power to enter into this
AGREEMENT and perform its obligations hereunder and by proper action has
duly authorized the execution, delivery, and performance hereof.
1.3.2 NO VIOLATIONS OF AGREEMENTS. The consummation of the
transactions contemplated by this AGREEMENT and the fulfillment of the
terms hereof shall not conflict with, or result in a breach of any of the
terms and provision of, or constitute a default under any other agreement
or instrument to which DEPARTMENT is party or by which its properties,
except any such conflict, breach, or default which would not materially
and adversely affect DEPARTMENT'S ability to perform its obligations under
this AGREEMENT.
1.3.3 DISCLOSURE. There is no material fact which materially and
adversely affects or in the future shall (so far as DEPARTMENT can now
reasonably foresee) materially and adversely affect DEPARTMENT'S ability
to perform its obligations under this AGREEMENT, which has not been
accurately set forth in this AGREEMENT or otherwise accurately disclosed
in writing to CONTRACTOR by DEPARTMENT prior to the date hereof.
ARTICLE TWO
DESCRIPTION OF SERVICES
2.01 CONTRACT PERIOD
(a) The term of this Contract shall begin upon execution of the Contract
and terminate on August 31, 1997.
(b) DEPARTMENT shall have an option to renew the terms of this Contract,
the exercise of which shall be evidenced by the giving by DEPARTMENT
of at least 30 days prior written notice to CONTRACTOR.
Page 4 of 40
2.02 SCOPE OF SERVICES: CONTRACTOR agrees to provide the following
substance abuse treatment services to TC residents:
Phase I/TTC Residential: 60 MALE at $30.00/day to be located at a
community residential facility known as THE TEXAS HOUSE, located at 10950
BEAUMONT HIGHWAY, HOUSTON, TX.
Phase II/TTC Outpatient Counseling Individual Slots: 150 at $30.00 per
hour, Group slots: 150 at $10.00 per hour to be provided at THE TEXAS
HOUSE, located at 10950 BEAUMONT HIGHWAY, HOUSTON, TX.
TC Relapse Detox Beds: 10 MALE at $88.00/day to be located at a community
residential facility known as THE TEXAS HOUSE, located at 10950 BEAUMONT
HIGHWAY, HOUSTON, TX.
TC Relapse Residential Beds: 10 MALE at $45.00/day to be located at a
community residential facility known as THE TEXAS HOUSE, located at 10950
BEAUMONT HIGHWAY, HOUSTON, TX.
2.03 SAFETY REQUIREMENTS. CONTRACTOR shall maintain the physical plant in
compliance with all applicable codes, including, but not limited to the National
Electric Code, Uniform Plumbing Code, Uniform Mechanical Code, Uniform Building
Code, National Fire Protection Association Life Safety Code 101, and local
zoning ordinances. CONTRACTOR shall provide written documentation of compliance
with these codes at the beginning of every fiscal year. Evidence shall consist
of certificates from local health departments, Fire Marshal offices and building
inspectors' offices. These certificates shall be forwarded to the Specialized
Supervision Section of the Texas Department of Criminal Justice Parole Division,
Austin, Texas. In addition, evidence or compliance shall be submitted to the
Specialized Supervision Section upon receipt from the inspecting agency. When
differences between applicable standards exist, the higher standard shall be
followed.
2.04 DEPARTMENT REQUIREMENTS.
(a) The facility size shall meet the needs of the program and
comfortably accommodate the number of residents it serves. The
facility shall be kept clean and in good repair.
(b) Provisions shall be made for sleeping space, lounge areas,
rooms for group and individual counseling of residents, and
office space for use by DEPARTMENT representatives while at
the facility.
(c) The number of square feet per occupant shall be in accordance
with local building codes, but shall be at least 40 square
feet per resident/bed in sleeping areas.
1. Closet space shall not be included in the 40 square foot
living area.
2. Bathrooms, built in closets and hall space are not
included in the 40 square foot requirements.
(d) Each resident shall have access to an individual locked
storage area or drawer for
Page 5 of 40
private articles. Locks shall be provided to all indigent
residents. A key to the storage area shall be provided to both
the resident and the facility director.
(e) There shall be at least one toilet, with seats, for every ten
(10) residents of the facility. There shall be at least one
wash basin for every six (6) residents of the facility. There
shall be at least one shower or bathtub for every fifteen (15)
residents of the facility. These ratios are based on the total
facility capacity, regardless of the number of state
residents. All of the bathroom facilities shall be maintained
and in operating condition.
(f) Adequate heat, air conditioning, light and ventilation shall
be provided for in all rooms including hallways, bathrooms,
bedrooms, dining rooms and activity rooms.
(g) Separate activity rooms shall be large enough to accommodate
all residents in the facility for the purpose of meetings and
recreational activities, such as TV, radio, library, table
games, game room, etc.; weight room shall be separate to allow
for noninterference of activities. Seating shall be available
for all residents wanting to participate in activities.
Smaller rooms shall be allowed to accommodate fewer people as
long as all residents have the equal opportunity to attend
meetings or recreational activities.
(h) CONTRACTOR shall have access to an outside recreational area
for activities such as basketball, volleyball, etc.
(i) CONTRACTOR shall have an established emergency fire plan and
written procedures for the safe evacuation of residents and
staff. Each new resident shall be briefed on evacuation
procedures during intake. Written emergency fire exit plans
shall be posted in all major meeting rooms, dining rooms and
hallways. Monthly fire drills shall take place with written
documentation to include the time, date, amount of time to
evacuate the building, and the number of residents evacuated,
along with problem areas found during the evacuation
procedure. This report shall be signed by CONTRACTOR'S
employees conducting the drill. Monthly fire drills require
the evacuation for the entire facility. It shall be
CONTRACTOR'S responsibility to obtain the NFPA Life Safety
Code.
(j) Extension cords shall not be used as a substitute for fixed
wiring.
(k) CONTRACTOR shall complete an injury report as provided by
DEPARTMENT on all resident injuries if the injury results in
one full days' loss of work or programmatic activity,
following the day of the accident, and/or that results in
medical treatment. First aid shall not be deemed medical
treatment. CONTRACTOR shall complete the form within 48 hours
of the injury and forward it to DEPARTMENT'S assigned employee
representative.
(l) CONTRACTOR shall maintain compliance with TCADA licensure
standards. In the
Page 6 of 40
event that DEPARTMENT'S Contract requirements conflict with
TCADA facility licensure standards, DEPARTMENT'S Contract
requirements shall prevail.
2.05 FURNITURE.
(a) CONTRACTOR shall furnish the facility with the appropriate
furniture for the number of residents projected for placement
in the facility.
(b) At a minimum, the resident shall be provided proper bedding
and storage space for clothing and personal articles. The
storage space shall accommodate hanging and folded clothing.
2.06 CLOTHING AND NECESSITIES.
(a) CONTRACTOR shall ensure indigent residents are provided with
clothing that is appropriate for the weather at no cost to the
resident.
(b) All clothing shall meet the needs of the resident regardless
of gender and should accommodate necessary daily wear/usage. A
minimum of two complete changes of clothing shall be issued to
indigent residents.
(c) Any indigent resident released from a facility during the cold
weather shall be provided with clothing appropriate for the
weather at no cost to the resident.
(d) If a resident is indigent, CONTRACTOR shall provide to the
resident toiletries and hygiene items at no cost to the
resident.
(e) CONTRACTOR shall have written policies and procedures for the
disposition of property of residents who terminate from the
facility without receiving their property.
2.07 LAUNDRY FACILITIES
(a) CONTRACTOR shall provide laundry facilities for all indigent
residents of the facility at no charge to the residents.
(b) CONTRACTOR shall provide the facility with operable washers
and dryers.
(c) Detergent shall be provided by CONTRACTOR to all residents.
(d) CONTRACTOR shall be responsible for the issuance of clean
linen, bath and hand towels at the moment of the residents'
arrival in the facility. The resident's clothes, towels and
linen shall be laundered on a regular basis. Laundering
operations shall be based on the facility set up.
(e) No linen deposit/fees may be charged to residents.
Page 7 of 40
(f) Pillows and mattresses shall be sanitized with chemicals
approved by the Texas Department of Health for sanitizing
bedding before being reissued to a newly received resident.
(g) CONTRACTOR shall provide DEPARTMENT with a description of any
laundry services provided for residents of the facility along
with a detailed accounting of all income derived from such
services (i.e., coin operated vendor machines). CONTRACTOR
shall forward to DEPARTMENT, via separate check, the income
from such laundry services. CONTRACTOR may establish a welfare
fund, whereby income derived from such services shall be
deposited into this fund and utilized to benefit the welfare
of all residents. Any purchase from the welfare fund that
amounts to $500.00 or more shall be approved by DEPARTMENT. In
the event CONTRACTOR has additional funding sources, any
income shall be allocated according to the proportion of
DEPARTMENT residents to total residents. CONTRACTOR shall
submit a written cost allocation plan to DEPARTMENT for its
approval.
2.08 FOOD SERVICE.
(a) CONTRACTOR shall comply with the Texas Department of Health
Rules for Food Services Sanitation. Food services, including
meal planning, staffing, costs, and records shall be in
accordance with the operating plan.
(b) CONTRACTOR shall plan and post menus in advance, and have them
reviewed and approved by a registered dietitian or physician.
1. All meals shall meet the Recommended Daily Allowance
requirements as outlined by the Texas Department of
Health.
2. All meals shall be of sufficient portions to meet the
needs of the resident as defined by a registered
dietitian.
(c) All meals shall be prepared each day for the full term of the
contract.
(d) CONTRACTOR shall be responsible for preparing and providing
three (3) meals per day per resident; provided however, that
CONTRACTOR may provide brunch and dinner on weekends and
national holidays.
(e) Special diets shall be available to residents as prescribed by
appropriate medical or dental personnel and meet recommended
Daily Allowance requirements, unless otherwise specified by a
physician and/or dentist.
(f) Special diets for residents whose religious beliefs require
the adherence to universally recognized religious dietary laws
shall be provided.
Page 8 of 40
(g) CONTRACTOR shall provide DEPARTMENT with a description of any
food services provided for residents of the facility along
with a detailed accounting of all income derived from such
services (i.e., coin operated vendor machines). CONTRACTOR
shall forward to DEPARTMENT, via separate check, the income
from such food services. CONTRACTOR may establish a welfare
fund, whereby income derived from such services shall be
deposited into this fund and utilized to benefit the welfare
of all residents. Any purchase from the welfare fund that
amounts to $500.00 or more shall be approved by DEPARTMENT. In
the event CONTRACTOR has additional funding sources, any
income shall be allocated according to the proportion of
DEPARTMENT residents to total residents. CONTRACTOR shall
submit a written cost allocation plan to DEPARTMENT for its
approval.
2.09 MEDICAL CARE SERVICES.
(a) State certification and licensing requirements shall apply to
all health care personnel responsible for dispensing medical
services to state residents. These requirements shall be in
accordance with the operating plan.
(b) CONTRACTOR shall provide each shift with one employee
certified in standard first aid procedures and cardiopulmonary
resuscitation (CPR) certified.
(c) CONTRACTOR shall have written emergency medical plans which
are communicated to all facility employees and residents.
(d) CONTRACTOR shall have sufficient first aid supplies and
equipment adequately maintained at all times to support the
overall medical treatment requirements of the assigned state
resident population.
(e) Medical first aid supplies and equipment shall be maintained
in accordance with prescribed standards recognized or approved
by a licensed, recognized health authority.
1. The recognized health authority or organization shall
have the expertise to evaluate, assess, and determine
the potential need or conditions of the required first
aid supplies and equipment.
2. CONTRACTOR shall implement an inventory management
system to ensure that first aid equipment and supplies
are adequately replaced and replenished in accordance
with CONTRACTOR'S established policy.
(f) CONTRACTOR shall have and implement written policies that set
forth required procedural guidelines to be followed in the
administration and management of all resident medication:
Page 9 of 40
1. Policy guidelines shall govern the standards for
storage, security, monitoring, dispensing,
self-administration and maintaining administrative
control and accountability of all medication.
2. Administrative control and accountability procedures
shall require a written record providing the name of the
resident, date, time, name and dosage of medication, and
name and signature of the employee of CONTRACTOR
witnessing the self-administration of medication.
3. Medication shall only be monitored and recorded by an
employee of CONTRACTOR who is authorized to monitor
medication and to record the dispensation of medication.
4. CONTRACTOR may propose a "keep on person" medication
policy. Such policy shall be approved by DEPARTMENT.
(g) All medication shall be secured in a suitable locked container
and control records shall be audited by CONTRACTOR on a
monthly basis.
(h) Residents shall be provided their medication upon release. In
the event a resident is released from the facility without
their medication, the medication shall be disposed of in
accordance with state standards. The disposition of the
medication shall be witnessed and documented on the resident's
medical log sheet.
(i) CONTRACTOR shall immediately notify DEPARTMENT upon a
residents hospital admission.
(j) CONTRACTOR shall have written policies and procedures for the
prompt notification of the resident's next of kin in case of
serious illness, surgery, injury, or death. CONTRACTOR shall
comply with DEPARTMENT'S policy regarding death of a resident.
A death in the facility shall be immediately reported to
DEPARTMENT and to the proper local authorities.
(k) CONTRACTOR shall not use residents for medical,
pharmaceutical, or cosmetic experiments.
2.10 MEDICAL - TEX. HEALTH AND SAFETY CODE ART. 85.112, 85.113 AND 85.114.
(a) CONTRACTOR shall develop workplace guidelines which address
HIV policies, confidentiality, and employee/resident education
programs. The guidelines shall, at a minimum, incorporate the
model workplace guidelines developed by the Texas Department
of Health, or mirror the guidelines adopted by DEPARTMENT.
CONTRACTOR shall maintain the written policies and guidelines
at the facility site.
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(b) CONTRACTOR shall develop confidentiality guidelines regarding
AIDS and HIV medical information for employees and residents.
The policies shall be consistent with guidelines published by
the Texas Department of Health and with state and federal laws
and regulations.
(c) Educational programs regarding HIV/AIDS shall be provided to
all employees and residents on a routine basis. These programs
shall be based on the model education program created by the
Texas Department of Health. The education program developed by
CONTRACTOR shall be tailored to meet the needs of all
employees and residents, "including the use of Braille or
telecommunications devices for the deaf". The HIV education
and prevention programs shall also be tailored to address the
needs of persons with physical or mental disabilities.
(d) CONTRACTOR shall not be eligible to receive state funds until
compliance with these provisions has been met.
(e) CONTRACTOR shall provide DEPARTMENT with copies of the
above-stated policies/programs at the beginning of the
contract year.
(f) CONTRACTOR shall develop and maintain a certificate of
completion to be issued and maintained in the files of
employees and residents who have completed HIV/AlDS education.
2.11 TRANSPORTATION
(a) The facility shall be located within one (1) mile of public
transportation routes which are accessible to employment,
community treatment facilities, such as mental health,
alcohol, and drug treatment centers, and other supportive
resources.
(b) If a resident is indigent, CONTRACTOR shall provide either
transportation fare or transportation for the resident for
employment purposes or community referrals.
(c) All vehicles used for the purpose of resident transportation
shall be covered by automobile liability insurance in such
amounts and covering such risks and hazards as set forth under
state law. Verification of automobile liability insurance
shall be maintained at the facility.
(d) In the event DEPARTMENT requires CONTRACTOR to transport a
resident to or from a specific destination, in a county other
than the county in which the facility is located, DEPARTMENT
shall reimburse CONTRACTOR $.28/mile for mileage to and from
the specified destination. Mileage reimbursement shall be
based on "The Official State Mileage Guide". CONTRACTOR shall
develop a transportation log to include, at a minimum:
Destination, Client name and number, purpose of trip,
beginning and ending mileage to each point. This log shall be
attached to the BM29 each month in order to be reimbursed.
Page 11 of 40
2.12 DATA PROCESSING SERVICES/TELECOMMUNICATIONS.
(a) CONTRACTOR, in cooperation with DEPARTMENT, shall utilize
compatible equipment to connect to DEPARTMENT'S IBM mainframe
and CONTRACTOR shall be responsible for all costs so incurred.
The parties shall establish a reasonable cost for ongoing
maintenance of such connection. In the event, CONTRACTOR is
unable to connect to DEPARTMENT'S IBM mainframe, DEPARTMENT
and CONTRACTOR shall establish an alternate resolution.
(b) CONTRACTOR shall provide DEPARTMENT with a description of any
telephone services provided for residents of the facility
along with a detailed accounting of all income derived from
such services. CONTRACTOR shall forward to DEPARTMENT, via
separate check, income less expenses, for such resident
telephone services. CONTRACTOR may establish a welfare fund,
whereby income derived from such services shall be deposited
into this fund and utilized to benefit the welfare of all
residents. Any purchase from the welfare fund that amounts to
$500.00 or more shall be approved by DEPARTMENT. In the event
CONTRACTOR has additional funding sources, the income shall be
allocated according to the proportion of DEPARTMENT residents
to total residents. CONTRACTOR shall submit a written cost
allocation plan to DEPARTMENT for its approval.
2.13 RESIDENT FUNDS
(a) CONTRACTOR shall have written policies and procedures to
govern the operation of any fund established for the
residents, including the amount of money residents may have on
their person.
(b) CONTRACTOR shall have written policies and procedures
requiring all employed residents meet with the employment
counselor within one week of hire and establish a budget which
outlines the resident's proposed income, fee payments, and
mandatory savings participation requirements. Each employed
payments, and mandatory savings participation requirements.
Each employed resident shall be instructed that they are to
deposit and maintain a minimum of 10% of their gross income
each pay period in a financial institution or facility savings
account.
(c) The personal funds of the resident held by CONTRACTOR shall be
controlled by generally accepted accounting principles.
(d) CONTRACTOR shall comply with the established polices and
procedures which prohibit financial transactions between
residents. Any exception shall be submitted to DEPARTMENT for
review and approval.
(e) All funds left behind or abandoned in the facility by
residents for a period of three (3) years shall be deposited
with the office of the State Treasurer, no more than fifteen
(15) days following the expiration of said period.
Page 12 of 40
2.14 PROGRAM DESCRIPTION
(a) Contract shall perform all services for Therapeutic Community
clients as required by Addendum B. CONTRACTOR shall serve all
eligible persons referred by DEPARTMENT or the local Community
Supervision and Corrections Department.
(b) (For HWH residents), CONTRACTOR shall provide housing,
supervision, and programming to halfway house residents. The
CONTRACTOR shall provide programs and treatment. The
programming shall consist of:
ORIENTATION: All residents entering the Texas House shall
complete a three day orientation process that includes the
following:
1) Intake with a counselor;
2) Evaluation of any medical problem and referral for
medical or psychological assistance;
3) Orientation to the Texas House rules and regulations;
4) Referral to appropriate agencies for social security
card, identification card, driver's license, medical
card, clothing, etc.;
5) Assignment to a primary counselor; and
6) Explanation of evacuation procedures for fire drills.
HOUSE PHASE: After orientation, the resident enters the seven
day house phase program consisting of required attendance at
the following classes:
Living Skills - 7 hours, topics include but are not limited to
the following:
1) Budgeting, banking, establishing credit, checking and
savings accounts;
2) Housing in Houston;
3) Information/education on AIDS;
4) Health and nutrition;
5) Relationships and interaction with family and peers;
6) Transportation in Houston;
7) Insurance-Health, Life, and Car;
8) Goal setting;
9) Parenting skills;
10) Overcoming fear of success;
11) Communication skills;
12) Self Concept;
13) Boundaries; and
14) Maturity.
Job Search - 7 hours, topics include but are not limited to:
1) Evaluation of job skills;
2) Appropriate attire for job search;
3) Assertiveness training;
4) Applications and resumes;
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5) Interviews - includes role playing;
6) Telephone skills;
7) Expectations of an employer;
8) Information on Project Rio, community resources and
vocational school;
9) Education firms on seeking and securing employment.
10) Texas House staff shall also develop job leads and
employment opportunities.
11) Labor Pools;
12) Your expectations of an employer;
13) Sign-out procedures;
14) How to handle rejection.
Emotional Awareness - 7 hours, topics include but are not
limited to:
1) Attitudes;
2) Reactions;
3) Responsibilities;
4) Coping strategies;
5) Anger;
6) Depression;
7) Positive reinforcement;
8) Guilt;
9) Self Worth;
10) Feelings;
11) Violence;
12) Pride;
13) Negativity;
14) Aggressiveness.
At this time, the resident shall begin attendance of classes
stipulated as a condition of their parole, or assessed as a
problem area on intake. The special therapy groups include
one-to-one counseling sessions, and therapy groups for sex
offenders. Residents identified with substance abuse problems
shall be referred to appropriate resources, or at a minimum
the facility shall conduct AA or self help groups. All in
house counseling sessions shall be one hour in length. Basic
education, Emotional Healing, and G.E.D. two hours twice a
week.
Job Seeking Phase - Upon completion of house phase, residents
then enter the job seeking phase of the program. The resident
is referred to Project Rio and the Texas Employment Commission
for job referrals. The resident is required to submit daily
job verification sheets to his primary counselor. The
Counselor shall periodically verify job contacts, monitor the
progress of the resident and give guidance and support as
needed.
Residents shall continue to attend programming weekly as
stipulated of their parole and/or assessed as a problem area
on intake. Resident shall also continue to receive one-to-one
counseling, attend sex offenders group if assessed, attend
Basic Education
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and G.E.D. classes, and four hours of living skills classes.
All counseling sessions shall be one hour in length.
Work Phase - Upon obtaining employment, the residents shall be
assessed 25% of their gross salary. Residents shall continue
to receive one-to-one counseling weekly, attend programming as
stipulated of their parole and/or assessed as a problem area
on intake. Resident also continues to attend sex offenders
group if assessed, and Basic Education and G.E.D. classes. All
counseling sessions shall be one hour in length. Residents
shall not be required to attend living skills groups once
employed and paying assessments.
SPECIAL NEEDS PROGRAM (FOR HWH RESIDENTS): CONTRACTOR shall
provide housing, supervision, and programming to "special
needs" offenders.
1. Special needs offenders for the purpose of this contract
are defined as mentally ill, mentally retarded,
emotionally disturbed, and/or physically disabled
offenders.
During placement and intake, special needs residents
shall be identified. The Texas House employs a part-time
psychiatrist, and a part-time physician.
Classes and group for the special needs residents are
held daily. These include, but are not limited to:
Personal hygiene; Social Security: HIV/AIDS education;
budgeting; health and nutrition information; group
sessions with the clinical psychologist; feelings groups
and planning for the future; goals setting; and
community resources.
Special needs residents do not normally follow the
program for the general resident population, and would
not be subject to compliance with that program. If they
are able, as determined by the staff, they would be
required to follow the general resident program.
(c) Basic Education and GED classes are open to all residents of
the Texas House.
(d) The placement of residents shall be at the discretion of
DEPARTMENT.
(e) CONTRACTOR'S failure to accept a referral may result in the
discontinuance of placements in the facility.
2.15 RESIDENT PARTICIPATION IN PROGRAMS.
Resident participation in any program, especially educational and
vocational programs, offered by CONTRACTOR and required by DEPARTMENT, shall not
be contingent upon the resident applying or qualifying for financial assistance
in the form of grants, such as Pell grants, or loans.
Page 15 of 40
2.16 REQUIREMENTS FOR VOCATIONAL AND EDUCATIONAL PROGRAMS FOR REGULAR
PAROLE AND MANDATORY SUPERVISION RESIDENTS.
CONTRACTOR shall develop and write curriculum for vocational and
educational programs. Vocational programs shall be relative to the job market.
DEPARTMENT shall review the curriculum developed by CONTRACTOR.
2.17 INTAKE REQUIREMENTS
For HWH Residents:
(a) CONTRACTOR shall have written policies and procedures
regarding intake for residents. CONTRACTOR shall be required
to complete a written individualized assessment for each
resident. Information utilized to complete the assessment
shall include, but not limited to, information received from
resident interviews, case histories and special conditions.
(b) The individualized assessment shall identify objectives to be
accomplished while at the facility. The facility shall ensure
residents receive appropriate programming and/or referrals for
assessed needs.
(c) The assessment shall be completed within 3 WORKING DAYS of the
resident's arrival at the facility.
(d) CONTRACTOR shall photograph each resident during intake, and
maintain the photograph in the resident's file (for regular
parole and mandatory supervision residents).
For TC Clients:
(e) CONTRACTOR shall have written polices and procedures regarding
intake for clients. The established policies shall be in
compliance with licensure standards required by the TCADA.
(f) CONTRACTOR shall be required to complete a comprehensive
client assessment for each client for every level of service
provided. Information utilized to complete the assessment
shall include, but not limited to, information received from
client interviews, case histories, special conditions and
initial transition planning meetings. This assessment shall be
in compliance with licensure standards required by the TCADA.
(g) CONTRACTOR shall establish an individual treatment plan for
each client in order to identify objectives to be accomplished
while at the facility, which treatment plan shall be completed
as required by the TCADA licensure standard, with such plan
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signed and dated by the facility employee and client.
CONTRACTOR shall ensure clients receive appropriate
programming and/or referrals for assessed needs.
For HWH and TC Clients:
(h) The individual program plan shall be signed and dated by a
facility employee and the resident.
(i) Intake fees/deposits are strictly prohibited.
2.18 TERMINATION OF RESIDENT
(a) CONTRACTOR shall not terminate a resident without the prior
knowledge and consent of DEPARTMENT, UNLESS THE RESIDENT POSES
A PHYSICAL THREAT TO CONTRACTOR'S EMPLOYEES AND/OR other
residents. In the event a resident poses a physical threat to
CONTRACTOR'S employees, other residents and has committed a
criminal offense, the local law enforcement authority shall be
contacted and requested to arrest the resident for the
criminal offense. If local law enforcement shall not assist,
the resident may be terminated. Notification under these
circumstances (when the resident poses a physical threat)
shall be immediately provided to DEPARTMENT via telephone
communication with a DEPARTMENT representative or local
Community Supervision and Corrections Department (CSCD)
representative (for Community Supervision residents).
(b) If a resident fails to arrive at, or return to the facility,
CONTRACTOR shall notify the appropriate DEPARTMENT or local
Community Supervision and Corrections Department (CSCD)
representative (for Community Supervision residents).
2.19 AFTERCARE PLANNING
(a) For halfway house residents, CONTRACTOR shall formulate an
aftercare/residential plan for each resident within 7 working
days of the residents arrival. This plan shall be completed in
accordance with the established policies and procedures for
intake. In the absence of suitable family support, CONTRACTOR
and resident shall develop an independent living plan.
(b) For TC residents, CONTRACTOR shall formulate an aftercare/
residential plan, in coordination with all transition team
members, for each resident within 7 working days of the
residents arrival. This plan shall be completed in accordance
with the established policies and procedures for intake. In
the absence of suitable family support, CONTRACTOR, resident,
and transition team members shall develop an independent
living plan.
(c) The Aftercare plan shall be updated every 30 days or as
changes occur.
Page 17 of 40
2.20 DISCIPLINARY PROCEDURES
(a) CONTRACTOR shall establish written "Disciplinary Procedures",
approved by DEPARTMENT, to include the processing of
violations and graduated sanctions which may be imposed.
(b) Each resident shall be informed of the disciplinary procedures
and provided with a copy of the procedures at intake.
(c) CONTRACTOR shall provide DEPARTMENT with reports and
recommended sanctions in the event a resident commits a
violation.
(d) CONTRACTOR shall maintain a master file of all disciplinary
reports and action taken.
2.21 GRIEVANCE PROCEDURE
(a) CONTRACTOR shall have a written resident grievance procedure,
approved by DEPARTMENT, which procedure shall be provided to
all residents at intake. CONTRACTOR shall adopt DEPARTMENT'S
grievance procedure upon establishment and certification of
such procedures. At a minimum, the procedure shall utilize a
two step process.
(b) This procedure shall include provisions for the following:
1. Written response by CONTRACTOR to all grievances,
including the reasons for the decision and signed
receipt from the resident indicating receipt of the
decision;
2. CONTRACTOR to respond within a ten day time frame;
3. supervisory review of grievance;
4. access to grievance forms by all residents without staff
assistance, with a guarantee against reprisals; and
5. process by which residents can appeal the decision.
(c) CONTRACTOR shall maintain a master file of all grievances
filed, and the action taken.
ARTICLE THREE
FACILITY OPERATION
3.01 POLICIES AND PROCEDURES
(a) CONTRACTOR shall have written policies and procedures to
govern the total operation of the facility. Policies and
procedures cannot conflict with contractual obligations or the
policies and procedures of DEPARTMENT.
Page 18 of 40
(b) Policies and procedures shall be submitted to DEPARTMENT at
the beginning of the contract year for review and approval.
(c) Any revision which alters such policies and procedures shall
be submitted to DEPARTMENT for approval immediately upon
development and prior to implementation.
(d) CONTRACTOR shall comply with all procedures and guidelines as
defined by DEPARTMENT.
(e) For TC clients, CONTRACTOR shall have and maintain a TCADA
facility license for the services contracted for with the
DEPARTMENT to receive payments for those services under this
contract. CONTRACTOR shall not deliver, bill, or provide
services until the TCADA license is received and all licensure
requirements have been met. In the event DEPARTMENT rules
conflict with TCADA rules, DEPARTMENT rules shall prevail.
3.02 SELF-MONITORING
(a) CONTRACTOR shall provide written policies and procedures which
shall be used to facilitate evaluation and monitoring of the
facility and its operation. The policies and procedures shall
include:
1. Reporting procedures;
2. Frequency of reporting; and
3. Subject-matter reported.
(b) An audit system providing quarterly and periodic assessment of
required facility operations shall reveal the degree of
compliance with CONTRACTORS policies and procedures.
CONTRACTOR shall forward copies of their quarterly assessments
to DEPARTMENT, no later than the 15th of the month following
the quarter.
(c) The internal administrative audit conducted by CONTRACTOR
shall exist apart from any external or continuing audit
conducted by DEPARTMENT or any other agency.
(d) If community service work is provided, CONTRACTOR shall
maintain a community service work project log which shall
include dates, times, location, work performed, and the
residents/facility employees assigned to the project. All
community service work projects shall have prior approval of
DEPARTMENT.
3.03 FACILITY AUDITS/INSPECTIONS
(a) Facility audits may be conducted by DEPARTMENT at any time and
CONTRACTOR shall provide access to all areas of the facility.
Inspections may be conducted on a monthly basis by DEPARTMENT
Contract Monitor.
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(b) DEPARTMENT has the right to examine and audit all books,
records, correspondence, etc., of CONTRACTOR, subcontractors,
and all related parties and CONTRACTOR agrees to provide
DEPARTMENT copies of all documents, if so requested.
(c) CONTRACTOR shall receive from DEPARTMENT a written report
noting any deficiencies and required corrective actions after
any audit, monitoring or inspection, within fifteen (15) days
thereafter CONTRACTOR shall submit a plan to correct
deficiencies indicating action to be taken, and time frames
for full compliance provided, however, that all deficiencies
shall be corrected within ninety days from the report or as
otherwise required therein.
(d) At the end of the specified time frame, CONTRACTOR may again
be audited/inspected and if the deficiencies have not been
corrected or continue to recur, DEPARTMENT shall consider it
an Event of Default by CONTRACTOR and shall pursue remedies as
outlined in Section 5.02.
(e) CONTRACTOR'S failure to comply with contractual terms and
conditions, resulting in a breach of security or health and
safety standards may result in the immediate cancellation of
the contract.
(f) Upon its receipt of audit/monitoring reports that are
conducted by other agencies or organizations, thereafter,
CONTRACTOR shall provide copies thereof to DEPARTMENT within
30 days thereafter.
3.04 FINANCIAL RECORDS
(a) All records and documents pertinent to the services contracted
hereunder shall be kept for a minimum of three years and 90
days after the termination hereof. If any litigation, claim,
or audit involving these records begins before the retention
period expires, CONTRACTOR must continue to retain said
records and documents until all litigation, claims, or audit
findings are resolved, meaning that there is a final court
order from which no further appeal may be made, or a written
agreement is entered into between DEPARTMENT and CONTRACTOR.
(b) Each resident referred to the facility by the Parole Division
shall be assessed 25% of their gross monthly income to the
program to reduce state costs. Residents referred to the
facility by the Community Justice Assistance Division or local
Community Supervision and Corrections Department shall pay the
25% assessment if a court order exists. This amount shall be
deducted from the amount paid to CONTRACTOR for that month.
The 25% assessment shall be rounded to the nearest dollar
amount. The 25% assessment shall be collected and accounted
for in accordance with CONTRACTOR'S established policies and
procedures.
(c) All income shall be included in the 25% assessment.
Page 20 of 40
(d) CONTRACTOR shall collect the 25% assessment from the resident
and maintain records in accordance with generally accepted
accounting principles.
(e) CONTRACTOR shall insure that 25% of any and all income to
residents is credited to the state on the monthly billing.
(f) No resident receiving income shall be exempt from paying the
25%, except as noted in 3.04(b) above.
(g) CONTRACTOR shall submit HWH billing information to the
Huntsville Specialized Supervision office and TC billing
information to accounts payable, Specialized Supervision -
Austin.
(h) CONTRACTOR shall submit to DEPARTMENT, with its monthly
billing, the names of residents who fail to pay 25%, the
reason for non-payment, and the action taken by CONTRACTOR.
(i) CONTRACTOR shall credit 25% to the State when the resident's
failure to pay can be attributed to CONTRACTOR by DEPARTMENT.
This adjustment shall be credited to DEPARTMENT on the
subsequent payment due to CONTRACTOR.
(j) CONTRACTOR shall maintain a roster of resident names and
DEPARTMENT numbers (TDCJ and/or SID) of all working residents,
the employer name, work begin date, work termination date, and
hourly wages/salaries. The roster shall include 25%
assessments collected by CONTRACTOR based on the resident's
gross pay or income for the period.
(k) CONTRACTOR shall use its best efforts to determine actual
wages earned by residents. However, if CONTRACTOR is unable to
provide proof of the number of hours worked and wages earned
by resident, the 25% credit to the State shall be calculated
as 8 hours X prevailing minimum wage ($4.25 as of 9/1/95).
(l) CONTRACTOR shall utilize the instructions and forms as noted
in Addendum A for processing billing and collection of the 25%
assessment for TC clients.
3.05 RESIDENT MONITORING
(a) Appropriate safeguards shall be established to enable
CONTRACTOR to monitor the whereabouts of each resident at all
times. CONTRACTOR shall establish written policies and
procedures regarding egress and ingress to the facility and
shall provide same to residents upon intake.
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(b) Residents shall only be allowed to leave the facility under
the following conditions:
1. When going to or from:
(a) approved job interview;
(b) approved job search;
(c) approved employment;
(d) family visitation;
(e) church services;
(f) recreational functions; and
(g) social service agencies to conduct business
regarding family matters, and any other approved
outings that may necessitate the resident being
away from the facility; provided, however, that
CONTRACTOR shall in all events remain mindful that
degree of unescorted access to the community must
be guided by community attitudes regarding this
matter.
2. The degree of unescorted access to the community shall
be dependent upon community attitudes reporting this
matter.
3. CONTRACTOR shall periodically verify the resident's
location as indicated on the sign-in/sign-out sheet.
Verification shall include, but not be limited to, job
search activity and resident pass location.
4. CONTRACTOR shall utilize the written pass policy in
accordance with CONTRACTOR'S established procedures.
Residents shall be advised of this policy at intake.
Residents may be allowed to receive overnight passes
with the approval of DEPARTMENT (for regular parole and
mandatory supervision) or the transition team (for TC
residents) which shall have at least one representative
from DEPARTMENT or local Community Supervision and
Corrections Department.
5. CONTRACTOR shall establish and utilize mandatory
sign-in/sign-out procedure which shall include:
a) the time the resident leaves the facility and
returns to the facility.
b) the resident's destination, including the name,
address, and telephone number of the destination;
and
c) an authorized signature by the facility staff
member.
Sign-in/Sign-out sheets shall be maintained in a log
and/or in the individual residents record.
6. CONTRACTOR shall develop and implement a daily system
for physically counting all residents assigned to the
facility assuring strict accountability for residents
who are working, going to school, on approved passes and
participating in Community Service work and that at
least one resident count
Page 22 of 40
access per shift. Documentation of this system shall be
kept by CONTRACTOR.
7. CONTRACTOR shall not bill DEPARTMENT for the day the
resident is admitted to the hospital or taken into
custody by law enforcement officials, or any day
thereafter until returned to the facility.
8. Residents on pass in excess of 48 hours shall be for
billing purposes, terminated and then readmitted upon
their return.
9. CONTRACTOR shall ensure employers are notified of
resident's parole/mandatory status and the nature of
their instant offense and criminal history.
3.06 VISITATION
(a) CONTRACTOR shall provide a designated area for family
visitation. This designated area shall accommodate visitors
and also provide shelter in inclement weather.
(b) Family visits shall be allowed in accordance with CONTRACTOR's
established policy.
3.07 STAFFING
(a) CONTRACTOR shall have written job descriptions which describe
duties for all employees working in the facility.
(b) EMPLOYEE BACKGROUND INVESTIGATION. A background investigation
shall be made by CONTRACTOR of each employee (including
consultants and independent contractors and their employees
and agents who work on a routine basis at the facility) prior
to being hired by CONTRACTOR for assignment to a facility, the
results of which investigation shall be made available to
DEPARTMENT upon request. Background investigation shall
include NCIC and TCIC record checks.
(c) CONTRACTOR shall hire no upper level management personnel
(Facility Director/Director of Security/Director of Programs)
without prior approval of DEPARTMENT, which approval shall not
be unreasonably withheld.
(d) FACILITY DIRECTOR: The minimum background requirement for
qualification to serve as a chief operating officer shall be:
1. A baccalaureate degree in one of the social or
behavioral sciences, Criminal Justice/Law Enforcement,
or related field and two years supervisory experience
with a social service agency; or
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2. Four years experience in social services at the
supervisory level; or
3. Approval by the Director of Specialized Supervision or
designee.
(e) COUNSELOR/EMPLOYMENT COUNSELOR:
1. A baccalaureate degree in one of the social or
behavioral sciences; or
2. Two years full-time prior experience as a counselor; or
3. Approval by the Director of Specialized Supervision or
designee.
(f) RESIDENT SUPERVISOR:
High school degree or G.E.D., and the desire and ability to
work with correctional residents.
(g) Vocational and academic instructors shall have adequate
education, experience, and training to write curriculum and
conduct classes. CONTRACTOR shall establish minimum
requirements for vocational/ academic instructors.
(h) Additional staffing positions shall be submitted to DEPARTMENT
for evaluation and approval.
(i) Other Staff: CONTRACTOR shall comply with the licensure
standards of TCADA for staffing positions related to the
Therapeutic Community program.
3.08 STAFFING PATTERN
(a) CONTRACTOR shall have qualified and trained paid employees on
the facility premises to provide 24 hour supervision, seven
(7) days a week and shall have a sufficient number of
employees who are awake, fully dressed and present to meet all
contractual requirements as well as to ensure facility
control, security and resident safety.
(b) Staffing patterns shall be posted and provided to DEPARTMENT
representatives.
(c) CONTRACTOR shall provide DEPARTMENT with a current list of all
employees including position title and whether or not the
employee is currently on active parole and/or probation, at
the beginning of the contract year, and upon request.
CONTRACTOR shall notify DEPARTMENT within seventy-two (72)
hours of an employees arrest. CONTRACTOR shall notify
DEPARTMENT at least one (1) working day prior to the
termination of the Facility Director or other key staff.
(d) CONTRACTOR shall provide in service training to staff on a
quarterly bases such that the training will total at least
twenty (20) hours per year to ensure the efficient operation
of the facility. In addition, CONTRACTOR shall provide
training regarding multiple needs offenders, to include the
oversight and monitoring of
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mentally impaired, mentally retarded, and sex offenders. Prior
to the scheduled training, CONTRACTOR shall submit, to the
Contract Monitor, the proposed date(s) of training, staff
positions to be trained, topics and a synopsis of each, and
the duration of the training. In the event scheduled
programming for residents will not be available, CONTRACTOR
shall submit proposed alternate programming to occur during
the training period. The Contract Monitor shall review the
proposal and approve or disapprove.
3.09 RESIDENT RECORDS
(a) CONTRACTOR shall be responsible for maintaining accurate and
complete case records, reports, and statistics necessary for
the evaluation of its program and these records shall not be
disclosed to the resident or to any person other than
authorized DEPARTMENT employees who have a need to access said
information.
(b) Appropriate safeguards shall be established by CONTRACTOR to
protect the confidentiality of resident records and minimize
the possibility of theft, loss, or destruction, recognizing
that any and all records provided to the facility or any
facility employee by DEPARTMENT are deemed confidential and
privileged information pursuant to Article 42.18 Section 18 of
the Texas Code of Criminal Procedure and 42 CFR, Part 2.
(c) All records shall be locked in a file cabinet accessible only
to CONTRACTOR and/or DEPARTMENT representatives.
(d) Individual case files for each resident shall be maintained on
a current basis and for a period of not less than three (3)
years after the resident has been discharged.
(e) Each resident file shall include the following information:
1. Identification data;
2. Parole Plans;
3. Case History;
4. Appropriate mental and physical information;
5. Intake forms and facility needs assessment;
6. Referrals for services to other agencies and follow-up
information on referrals;
7. Correspondence regarding the case;
8. Signed release of information form to specific agencies;
9. Current employment data and past employment history to
include:
a. place of employment;
b. date of employment;
c. job title;
d. rate of pay;
e. record of resident earnings;
f. an on-going record of employment;
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g. verification by the CONTRACTOR on a weekly basis;
h. copies of paychecks and check stubs; and
i. records of deductions from earnings for such
purposes as taxes, savings, and resident
contributions.
(f) Resident's adjustment and programming activity shall be
reviewed and documented weekly. Files and photocopies shall be
made available to the DEPARTMENT upon request.
(g) Monthly file audits shall be conducted by CONTRACTOR'S Program
Director.
3.10 MODIFICATION OF CONTRACT
None of the requirements set forth herein shall be modified without the
written authorization of DEPARTMENT's Parole Division Director or authorized
representative. All modifications to this Contract shall be in the form of
Amendments signed by DEPARTMENT and CONTRACTOR.
ARTICLE FOUR
GENERAL PROVISIONS
4.01 NUMBER OF RESIDENTS TO BE SERVED
(a) CONTRACTOR shall make available to the DIVISION during the
contract term those services for a daily population not to
exceed 230 regular parole and mandatory supervision releasees
and 80 TC residents as referred from DEPARTMENT.
4.02 ORGANIZATIONAL AND NAME CHANGE. CONTRACTOR shall submit written
notification to DEPARTMENT of any changes in CONTRACTOR'S name, address, and/or
telephone number. CONTRACTOR shall submit to DEPARTMENT a copy of any
registration to do business as, "DBA", OR "AKA", also known as, and any legal
corporate name change filed with the Secretary of State.
4.03 EXPENDITURE OF FUNDS
(a) CONTRACTOR shall develop, implement, and maintain a financial
management and control system that includes the development of
a budget that adequately reflects all resources necessary to
carry out contracted activities and the adequate determination
of costs (the "Program Budget") which shall be approved by
DEPARTMENT prior to the execution thereof. CONTRACTOR shall
expend any and all funds disbursed by DEPARTMENT only in
accordance with the approved Program Budget.
(b) CONTRACTOR shall develop, implement, and maintain a financial
management system including accurate, correct, and complete
payroll, accounting, and financial reporting records, cost
source documentation, effective internal and budgetary
controls, determination of reasonableness, allowability, and
allocability of costs, and
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timely and appropriate audits and resolution of any
questionable or improper findings.
4.04 ANNUAL FINANCIAL REPORTS. CONTRACTOR shall have an annual audit
performed by an independent certified public accountant and submit the following
reports prepared according to generally accepted accounting principles within
one hundred twenty (120) days after the end of the CONTRACTOR'S fiscal year.
Procurement of audit services shall comply with State procurement procedures.
Such audit reports shall contain:
(a) Consolidate statements of income, retained earnings and source
of funds for capital expenditures of CONTRACTOR and its
subsidiaries for such year, setting forth in each case in
comparative form the corresponding figures for the preceding
fiscal year, all in reasonable detail and certified by
independent certified public accountants of recognized
standing to the effect that said financial statements fairly
present, except as specifically stated, the consolidated
financial position and results of operations of CONTRACTOR and
its subsidiaries as of the end of such year for the year
involved, and a statement signed by a senior accounting or
financial officer of CONTRACTOR that such officer has no
knowledge, except as specifically stated, of the occurrence
and continuance of any Event of Default or event which, with
the lapse of time or the giving of notice, or both, would
constitute an Event of Default, or, if such circumstance does
exist, specifying the nature and extent thereof and the
actions proposed to cure same.
(b) A report of internal control structure based solely on an
assessment of control risk made as part of the audit of the
general purpose or basic financial statements.
(c) A report on compliance with laws and regulations that may have
a material effect on the general purpose or basic financial
statements.
For DEPARTMENT funded programs:
(a) A report on a supplementary schedule of the CONTRACTOR'S total
program revenue, total program expenditures, and other details
for each funded program.
(b) A report on internal controls used in administering DEPARTMENT
funds.
(c) A report on compliance with laws and regulations relating to
DEPARTMENT programs.
(d) A report on general compliance matters relating to DEPARTMENT
programs.
(e) An opinion on compliance with laws, regulations, and
DEPARTMENT programs.
(f) If necessary, a report on fraud, abuse, or an illegal act, or
indications of such acts, when discovered (a separate written
report is required).
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(g) A schedule of findings and questioned costs, if applicable.
(h) Any findings of non-compliance that are not considered
material must be reported to the CONTRACTOR'S management,
which shall be required to provide that information to
DEPARTMENT. CONTRACTOR comments on such findings and
recommendations must accompany report.
(i) Status of known findings and recommendations from previous
audits. If previous findings and recommendations have not been
rectified, CONTRACTOR comments must accompany report.
(j) Questionable Expenditures. CONTRACTOR is prohibited from
expending any funds received hereunder for illegal purposes.
CONTRACTOR is further advised that expenditures for any items
listed on the Program Budget may be considered unallowable
costs by the Office of the State Auditor.
4.05 COSTS AND SCHEDULING OF PAYMENTS
(a) CONTRACTOR shall establish and provide financial services and
operations which comply with generally accepted accounting
principles in order to insure that the funds of DEPARTMENT are
safeguarded and that the financial records accurately reflect
the transactions relevant to the implementation of this
contract.
(b) CONTRACTOR shall maintain a separate account of any funds
designated for this contract. CONTRACTOR shall submit a
written cost allocation plan to DEPARTMENT for its review and
approval with regards to costs that are allocated across, to
or among any funding sources in addition to DEPARTMENT.
(c) For each month hereof, CONTRACTOR shall prepare and submit to
DEPARTMENT no later than the 5th day of the following month:
(For Regular Parole and Mandatory Supervision Residents)
1. Monthly Attendance and Enrollment Report (BM-29); and
2. Cash Payment Report (BM-30).
and
(For TC Residents)
1. Monthly Invoice (PMS-50 & PMS-50A);
2. Cash Payment Report (PMS-51); and
3. Mileage Reimbursement Form (PMS-47).
(d) CONTRACTOR shall submit daily activity reports to DEPARTMENT,
for regular parole and mandatory supervision residents; and
daily and weekly activity reports to DEPARTMENT for TC
residents as detailed in Addendum A.
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(e) CONTRACTOR shall participate in an annual Program Evaluation
and annual Fiscal Audit of all Community Residential
Facilities including the maintenance and availability of
accurate and up-to-date program, resident, and financial
records for inspection.
(f) DEPARTMENT agrees to pay CONTRACTOR $29.50 per regular parole
and mandatory supervision releasee per day, less amount paid
by the resident.
(g) CONTRACTOR shall not bill DEPARTMENT for the day the residents
terminated.
(h) Payment is to be made monthly by DEPARTMENT to CONTRACTOR
after services are rendered and all reports required hereunder
have been submitted accurately and completely.
(i) DEPARTMENT reserves the right to suspend placements, withhold
funds or require the return of funds in the case of
non-compliance with DEPARTMENT regulations, standards, and
policies, including but not limited to recurring acts of
non-compliance.
(j) CONTRACTOR shall bill DEPARTMENT for only one service type per
resident for any given date.
(k) CONTRACTOR shall not bill DEPARTMENT for Peer Support Group or
other mutual self-help group treatments.
(l) Services or expenditures submitted by CONTRACTOR that cannot
be verified will be disallowed for reimbursement.
4.06 INDEMNIFICATION AND INSURANCE
(a) CONTRACTOR agrees to assume complete responsibility for all
real and personal property located at the contract facility
used in the operations thereof.
(b) CONTRACTOR shall indemnify and save DEPARTMENT, the Board of
Criminal Justice, the State of Texas, and its officers,
agents, servants, and employees harmless from and against:
1. any and all claims arising from the provision of the
Operation and Management Services, including, but not
limited to any and all claims arising from:
a. Any act of negligence of CONTRACTOR, or any of its
agents, subcontractors, servants, employees, or
licensees;
b. Any breach or default on the part of CONTRACTOR in
the performance of any covenant or agreement to be
performed pursuant to the terms hereof;
c. Any accident, injury, or damage whatsoever caused
to any person;
and
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2. all costs, reasonable attorney's fees, expense, and
liabilities incurred in or about any such claim, action
or proceeding brought thereon.
(c) Provided, however, nothing herein is intended to deprive
DEPARTMENT or CONTRACTOR of the benefits of any law limiting
exposure to liability and/or setting a ceiling on damages, or
any laws establishing defenses for them. By entering into this
contract, DEPARTMENT does not waive its right of sovereign
immunity, nor does CONTRACTOR waive any immunity which may
extend to it by operation of law.
(d) In case any action or proceeding is brought against DEPARTMENT
or the State by reason of any such claim, CONTRACTOR, upon
notice from DEPARTMENT or the State, shall defend against such
action by counsel satisfactory to DEPARTMENT, unless such
action or proceeding is defended against by counsel for any
carrier of liability insurance provided for herein. The
aforementioned indemnification shall not be affected by a
claim that negligence of DEPARTMENT or its respective agents,
CONTRACTORS, employees, or licensees contributed in part to
the loss or damage indemnified against. DEPARTMENT shall have
the right to utilize separate counsel to participate in the
investigation and defense thereof, but the fees and expenses
of such counsel shall be paid by DEPARTMENT unless the
employment of such counsel has been previously authorized in
writing by CONTRACTOR.
(e) Neither DEPARTMENT nor CONTRACTOR shall waive, release, or
otherwise forfeit any possible defense DEPARTMENT or
CONTRACTOR may have regarding claims arising from or made in
connection with the operation of a Community Residential
Facility in Texas by CONTRACTOR without the consent of the
other party to this AGREEMENT. DEPARTMENT and CONTRACTOR shall
preserve all such available defenses and cooperate with each
other to make such defenses available for each other's benefit
to the maximum extent allowed by law. This provision shall
include any defenses DEPARTMENT may have regarding litigation,
losses, and costs resulting from claims or litigation pending
at the time this AGREEMENT becomes effective or arising
thereafter from occurrences prior to the effective date of
this AGREEMENT.
(f) CONTRACTOR shall continuously maintain such accident, general
liability, worker's compensation, and automobile insurance, as
required by law, to include protecting CONTRACTOR, its
officers, employees, and agents from any and all liability
caused by or arising out of any aspect of the operation of the
facility and the furnishing of services to DEPARTMENT,
including the payment of damages and attorney's fees.
(g) CONTRACTOR shall provide proof of insurance coverage to
DEPARTMENT upon request at the beginning of each fiscal year.
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4.07 NON-DISCRIMINATION
(a) In the performance of this Contract, CONTRACTOR warrants that
it shall not discriminate against any employee, subcontractor
or resident on account of race, color, handicap, religion,
sex, national origin or resident age. In addition, CONTRACTOR
shall not discriminate against employees, subcontractors, or
residents who have or are perceived to have a handicap because
of AIDS or HIV infection, antibodies to HIV, or infection with
any other probable causative agent of AIDS. CONTRACTOR shall
post notices setting forth the provisions of this non-
discrimination clause in conspicuous places, available to
employees and applicants for employment.
(b) CONTRACTOR shall, in all solicitations or advertisements for
employees and purchase of service contracts placed by or on
behalf of CONTRACTOR, state that such CONTRACTOR is an equal
opportunity employer; provided, however, that notices,
advertisements, and solicitations placed in accordance with
federal law, rule, or regulation shall be deemed sufficient
for the purpose of meeting the requirements hereof.
(c) CONTRACTOR shall include the provisions of the foregoing
paragraphs in every subcontract so that such provisions shall
be binding upon each subcontractor or vendor.
(d) CONTRACTOR shall send to each labor union representative or
workers with which it has a collective bargaining agreement or
other contract or understanding, a notice advising the said
labor union or worker's representatives, of CONTRACTOR'S
commitments under this section and shall post copies of the
notice in conspicuous places available to employees and
applicants for employment.
4.08 MINORITY AND SMALL BUSINESS
In all subcontracts CONTRACTOR shall be encouraged to utilize minority and
women suppliers and services and small businesses and to purchase materials and
supplies of United States origin for use in the performance of this contract.
ARTICLE FIVE
SPECIAL PROVISIONS
5.01 CONTRACT TERMINATION
(a) This contract is terminable by either party and termination
for cause may include but is not exclusively limited to:
1. non-compliance with DEPARTMENT'S standards, policies,
CONTRACTOR'S approved program, policies and procedures,
and approved
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performance outcome or violation of CONTRACTOR'S
warranty of no discrimination; or
2. if there is insurmountable local opposition to the
reintegration program which make it difficult to operate
effectively in the community; or
3. unavailability of appropriated funds or other like
reasons covered in Article Six, Non-Appropriation; or
4. a material failure to keep, observe, perform, meet or
comply with any covenant, agreement, term, or provision
of this AGREEMENT to be kept, observed, met, performed,
or complied with by CONTRACTOR hereunder, which such
failure continues for a period of thirty (30) days after
CONTRACTOR has received a written notice of deficiency
from the DEPARTMENT; or
5. the discovery by DEPARTMENT that any statement,
representation or warranty in this AGREEMENT is false,
misleading, or erroneous in any material respect.
(b) CONTRACTOR shall provide written notification to DEPARTMENT of
the following:
1. its inability to pay its debts;
2. any general assignment for the benefit of creditors;
3. any decree or order appointing a receiver or trustee for
it or substantially all of its property;
4. any proceedings under any law relating to bankruptcy,
insolvency, or the reorganization or relief of debtors
to be instituted by or against it; and or
5. any judgment, writ of attachment or execution, or any
similar process to be issued or levied against a
substantial part of its property.
Failure to make this notification shall be grounds for
termination of this contract.
(c) This Agreement shall remain in full force and effect until
cancellation by either party giving the other party written
notice of cancellation, such notice shall effectively cancel
this contract 30 days after receipt thereof. Any such notice
of cancellation shall be in writing and sent by certified mail
(return receipt required) to the signatories to this contract.
(d) No payment shall be made by DEPARTMENT for expenses incurred
or services rendered by CONTRACTOR after receipt of notice
except those expenses incurred prior to the date of
termination that are necessary to curtailment of work under
this contract.
(e) Upon termination of the Agreement by DEPARTMENT for breach or
default, DEPARTMENT may procure, upon such terms as
appropriate, work similar to the work so terminated, and
CONTRACTOR shall be liable to DEPARTMENT for any excess costs
for such similar work; provided that CONTRACTOR shall continue
the performance of this contract to the extent not terminated
under this clause.
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(f) Except with respect to defaults of subcontractors, CONTRACTOR
shall not be liable for any excess costs if the failure to
perform the contract arises out of causes beyond the control
and without the fault or negligence of CONTRACTOR.
(g) If the failure to perform is caused by the default of a
subcontractor and arises out of causes beyond the control of
both CONTRACTOR and subcontractors, and without the fault or
negligence of either of them, CONTRACTOR shall not be liable
for any excess costs for failure to perform. CONTRACTOR shall
be given the opportunity to correct deficiencies in accordance
with the provisions set forth in Article Three Section 3.03.
5.02 REMEDY OF DEPARTMENT
Upon the occurrence of an Event of Default by CONTRACTOR of the type
specified in Section 5.01, DEPARTMENT shall have the right to pursue any remedy
it may have or in equity, including but not limited to, (a) reducing its claim
to a judgment, (b) taking action to cure the Event of Default, in which case
DEPARTMENT may offset against any payments owed to CONTRACTOR all reasonable
costs incurred by DEPARTMENT in connection with its efforts to cure such Event
of Default, and (c) termination of this AGREEMENT and the offsetting against any
Payments owed to CONTRACTOR by DEPARTMENT of any reasonable amounts expended by
DEPARTMENT to cure the Event of Default.
Upon Default by CONTRACTOR, and if an Event of Default continues following
the 30th day after CONTRACTOR has received written notice of default from
DEPARTMENT, and such thirty (30) day period has not been extended by DEPARTMENT
and DEPARTMENT has convened the meeting with CONTRACTOR, DEPARTMENT shall give
ten (10) business days' written notice of its intention to deduct sums from the
funds payable to CONTRACTOR. Written notice shall be given by certified mail as
provided herein. Notice shall include statements as to what Events remain
uncured and what specific actions are required to cure. If the additional ten
(10) business day period has expired and the Event(s) of Default have not been
cured, then for each calendar day after the expiration of the ten (10) business
days, a sum of $310.00 (one (1) dollar per day per bed) may be deducted from
funds payable to CONTRACTOR under this AGREEMENT as penalties until such
Event(s) of Default are cured. The amount of per day penalty shall be determined
by DEPARTMENT and shall bear a demonstrated and reasonable relationship to the
harm done by the default.
CONTRACTOR shall have the right to appeal to the Executive Director of the
Texas Department of Criminal Justice the deduction of funds pursuant to this
subsection. Upon the filing of the appeal, any and all accrual of penalties
shall be tolled and shall be reinstituted only upon the Executive Director's
final denial of the appeal.
Upon the curing of the Event(s) of Default, CONTRACTOR shall be paid the
funds deducted, up to and including the amounts deducted for the first sixty
(60) days of withholding.
5.03 REMEDY OF CONTRACTOR. Upon an Event of Default by DEPARTMENT for
matters other than disputes concerning payments due hereunder, CONTRACTOR'S sole
remedy shall be to terminate this AGREEMENT. Upon such termination, CONTRACTOR
shall be entitled to receive from
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DEPARTMENT payment for all services furnished under this AGREEMENT up to and
including the date of termination.
5.04 NON-ASSIGNMENT OF RIGHTS AND DUTIES
CONTRACTOR shall not sell, assign, transfer, convey, or encumber, in whole
or in part, this Agreement or any right, interest, duty, or obligation of
performance herein or hereunder or suffer or permit any such assignment,
transfer, or encumbrance to occur by operation of law without the prior written
consent of the DEPARTMENT. Such approval shall not be unreasonably withheld. In
the event of any sale, transfer, or assignment consented to by the DEPARTMENT,
the transferee or its legal representative shall agree in writing with
DEPARTMENT to assume, perform, and be bound by the covenants, obligation, and
agreements contained herein.
5.05 APPROVAL OF SUBCONTRACTORS
All subcontractors of CONTRACTOR are subject to the approval by
DEPARTMENT, which approval shall not be unreasonably withheld.
5.06 COMPLIANCE WITH APPLICABLE RULES, REGULATIONS, POLICIES, PROCEDURES
AND LAWS
CONTRACTOR shall provide community residential services to DEPARTMENT
which are in compliance with all applicable local, state, and federal laws,
rules and regulations now in effect or that become effective during the term of
this contract including but not limited to, Civil Rights Act of 1964; Section
504 of the Rehabilitation Act of 1973; the Age of Discrimination in Employment
Act; the Immigration Reform and Control Act of 1986; Code of Federal
Regulations, Title 42, Part 2 (regarding information about drug and alcohol
abuse clients); Environmental Protection Agency (EPA) Rules and Regulations,
Texas Government Code of Criminal Procedure; Texas Health and Safety Code,
Chapters 85, 595, 611; Texas Administrative Code, Title 25, Chapter 403,
Subchapter K (regarding client identifying information); the Americans with
Disabilities Act of 1990; the Civil Rights Act of 1991; Occupational Safety and
Health Act (OSHA) of 1970 Section 231.006, Texas Family Code; and any and all
rules, policies, and procedures established from time to time by DEPARTMENT
and/or the Texas Board of Criminal Justice regarding the operations of Community
Residential Facilities.
5.07 PERFORMANCE OUTCOME MEASURES
CONTRACTOR shall comply with performance outcome measures and the
measurement of such. CONTRACTOR shall report process measures by the 15th of the
month following the end of each quarter. CONTRACTOR shall report final process
measures and outcome measures by the 45th day after the end of each fiscal year
of the contract period. CONTRACTOR shall utilize the following Performance
Outcome Measures:
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A. GOAL 1.
To assist each releasee to establish stable and adequate
employment, or income maintenance, where appropriate, that
will provide the means for independent living and lessen the
likelihood that the releasee will return to the institutional
division.
(1) STRATEGY: Provide initial assessment and develop a
written individual assessment based on identified needs.
MEASURES:
100% of clients have a written individual treatment plan
assessment identifying objectives to be accomplished
(completed in accordance with TCADA licensure standards
for TC clients, completed within 3 working days for HWH
residents).
95% of residents with special needs will be screened for
eligibility for SSI or SSDI.
100% of written individual assessments will be reviewed
and approved in writing by the appropriate facility
staff member and resident.
(2) STRATEGY: Provide employment services, including job
search assistance, job development, and other support
services.
MEASURES:
75% of vendor developed job placement slots will be
filled by residents.
95% of all residents who are unemployed, part-time
employed or under employed will be referred to the area
TEC-Project RIO site.
65% of residents will obtain full time employment (30
hours/week or more) at minimum wage.
20% of residents will obtain part time employment (less
than 30 hours/week).
95% of residents required to pay, will pay 25 percent of
their gross salary toward upkeep of the halfway house.
(3) STRATEGY: Provide personal/social adjustment group
services.
MEASURES:
95% of residents will attend personal/social adjustment
group classes.
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90% of residents attending classes will successfully
complete the classes.
95% of residents mandated by the Board of Pardons and
Paroles to participate in Adult Basic Education [ABE or
General Equivalency Diploma (GED)] are referred to local
education providers or the facility program.
90% of residents referred to ABE and/or GED courses will
be enrolled in GED classes.
B. GOAL 2.
To reduce anti-social behavior to ensure releasees become productive
contributing members of society.
(1) STRATEGY: Provide substance abuse education, group, individual
and family counseling.
MEASURES: 95% of all residents with identified drug and/or
alcohol problems will attend substance abuse education and
treatment programs.
90% of all residents enrolled in substance abuse education
treatment classes will complete.
75% of all residents tested will test negative for drug use
after completion of drug education classes or during
particular substance abuse treatment program.
85% of all clients required to attend group and/or individual
counseling will successfully complete their individual
treatment goals.
C. CONTRACTOR shall provide information, to DEPARTMENT on a quarterly
basis, regarding the effectiveness or efficiency of services or
service delivery.
D. DEPARTMENT shall review the quarterly information, to verify the
accuracy of the data.
ARTICLE SIX
NON-APPROPRIATION
6.01 THIS ARTICLE PARAMOUNT
Not withstanding any other provision of this Agreement, the provisions of
this Article prevail over any other provisions hereof.
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6.02 PAYMENTS CONTINGENT UPON APPROPRIATION
The payment or expenditure of any money under any provision of this
contract by DEPARTMENT or the State is contingent upon the availability of funds
appropriated by the Texas Legislature to DEPARTMENT in sufficient amounts needed
to make such payments or to pay such amounts to cover the provisions of this
contract. Should the Legislature not appropriate sufficient funding, this shall
not constitute a default of this agreement by DEPARTMENT.
ARTICLE SEVEN
EMPLOYEES
7.01 INDEPENDENT CONTRACTOR
CONTRACTOR is associated with DEPARTMENT only for the purposes and to the
extent set forth in this AGREEMENT, and in respect of the performance of the
Operation and Management Services pursuant to this AGREEMENT, CONTRACTOR is and
shall be an independent CONTRACTOR and subject to the terms of this AGREEMENT,
shall have the sole right to supervise, manage, operate, control, and direct the
performance of the details incident to its duties under this AGREEMENT. Nothing
contained in this AGREEMENT shall be deemed or construed to create a partnership
or joint venture, to create the relationships of an employer-employee or
principal-agent, or to otherwise create any liability for DEPARTMENT whatsoever
with respect to the indebtedness, liabilities, and obligations of CONTRACTOR or
any other party. CONTRACTOR shall be solely responsible for (and DEPARTMENT
shall have no obligation with respect to) payment of all Federal income,
F.I.C.A., and other taxes owed or claimed to be owed by CONTRACTOR, arising out
of CONTRACTOR'S association with DEPARTMENT pursuant to this AGREEMENT, and
CONTRACTOR shall indemnify and hold DEPARTMENT harmless from and against, and
shall defend DEPARTMENT against any and all losses, damages, claims, costs,
penalties, liabilities, and expenses howsoever arising or incurred because of,
incident to, or otherwise with respect to any such taxes.
7.02 SUBCONTRACTORS
No contractual relationship shall exist between DEPARTMENT and any
subcontractor and DEPARTMENT shall accept no responsibility whatsoever for the
conduct, actions, or commissions of any subcontractor selected by CONTRACTOR.
CONTRACTOR shall be responsible for the management of the subcontractors in the
performance of their work.
ARTICLE EIGHT
MISCELLANEOUS PROVISIONS
8.01 INCONSISTENCIES
Where there exists any inconsistency between this contract and other
provisions of collateral contractual agreements which are made a part of this
contract by reference or otherwise, the provisions of this contract shall
control.
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8.02 SEVERABILITY
Each paragraph and provision of this contract is severable from the entire
contract and if any provision is declared invalid, the remaining provisions
shall nevertheless remain in effect.
8.03 REIMBURSEMENT OF FUNDS
CONTRACTOR shall be liable to DEPARTMENT for full repayment of funds in
the event of their use for any purpose other than stated in the award.
8.04 ESTABLISHMENT OF CONTROLS
(a) CONTRACTOR agrees to establish controls which ensure:
1. The expenditure charged to program activities are
allowable.
2. That documentation is readily available to verify that
such charges are accurate, said documentation to be
maintained for a period of three years after final
payment under this contract or any extension thereof.
(b) CONTRACTOR agrees that no funds shall be expended for payment
of any consultant fee or honorarium to any employee of
DEPARTMENT.
8.05 BINDING NATURE
This AGREEMENT shall not be binding upon the parties until it is approved
and executed by both parties. This AGREEMENT after properly approved and
executed by the parties, shall inure to the benefit of DEPARTMENT and CONTRACTOR
and shall be binding upon DEPARTMENT and CONTRACTOR and their respective
successors and assigns, subject to the limitations set forth in Section 8.06 and
elsewhere in this AGREEMENT.
8.06 PROHIBITION AGAINST ASSIGNMENT
It is hereby agreed by the parties that there shall be no assignment or
transfer of this AGREEMENT without the prior written approval of DEPARTMENT.
8.07 JURISDICTION
Any and all suits for any and every breach of this AGREEMENT shall be
instituted and maintained in any court of competent jurisdiction in the County
of Travis, State of Texas.
8.08 LAW OF TEXAS
The AGREEMENT shall be governed by and construed in accordance with the
laws of the State of Texas.
Page 38 of 40
8.09 NOTICES
All notices called for or contemplated hereunder shall be in writing and
shall be deemed to have been duly given when personally delivered or 48 hours
after mailed to the Authorized Representative of each party by certified mail,
return receipt requested, postage prepaid, addressed as set forth below:
DIVISION: Melinda Hoyle Bozarth
Division Director
Texas Department of Criminal Justice
Parole Division
P.O. Box 13401, Capitol Station
Austin, TX 78711
with a copy to: Marsha McLane, Director
Specialized Supervision
Texas Department of Criminal Justice
Parole Division
P.O. Box 13401, Capitol Station
Austin, TX 78711
CONTRACTOR: Joe B. Knauth, Director
The Texas House
10950 Beaumont (Hwy. 90)
Houston, TX 77078
8.10 ENTIRE AGREEMENT
This AGREEMENT incorporates all the agreements, covenants, and
understandings between the parties hereto concerning the subject matter hereof,
and all such covenants, agreements, and understandings have been merged into
this written AGREEMENT. No other prior agreement or understandings, verbal or
otherwise, of the parties or their agents shall be valid or enforceable unless
embodied in this AGREEMENT.
8.11 AMENDMENT
No changes to this AGREEMENT shall be made except upon written agreement
of both parties.
8.12 CONFIDENTIALITY
Any confidential information provided to or developed by CONTRACTOR in the
performance of this AGREEMENT shall be kept confidential, unless otherwise
provided by law, and shall not be made available to any individual or
organization by CONTRACTOR or DEPARTMENT without prior approval of the other
party.
Page 39 of 40
8.13 HEADINGS
The headings used herein are for convenience of reference only and shall
not constitute a part hereof or effect the construction or interpretation of
this AGREEMENT.
8.14 WAIVER
No failure on the part of any party to exercise, and no delay in
exercising, and no course of dealing with respect to any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or in the
exercise of any other right. The remedies provided in the AGREEMENT are
cumulative and non-exclusive of any remedies provided by law or in equity,
except as expressly set forth herein.
8.15 COUNTERPARTS
This AGREEMENT may be executed in any number of and by the different
parties hereto on separate counterparts, each of which when so executed shall be
deemed to be an original, and such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this contract to be duly
executed by their respective duly authorized Representatives on the 31st day of
January, 1996.
TEXAS HOUSE TEXAS DEPARTMENT OF CRIMINAL JUSTICE
BY: /s/ JOE B. KNAUTH BY: /s/ WILLIAM MCCRAY
Joe B. Knauth William McCray
TITLE: Director TITLE: Deputy Director
Page 40 of 40
EXHIBIT 10.15
ASSET PURCHASE AGREEMENT
BY
AND
AMONG
CORNELL CORRECTIONS OF TEXAS, INC.
TEXAS ALCOHOLISM FOUNDATION, INC.
AND
THE TEXAS HOUSE FOUNDATION, INC.
DATED AS OF THE 14TH DAY
OF MAY, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I DEFINITIONS............................................................1
Section 1.1 ACCOUNTING TERMS.......................................................1
Section 1.2 DEFINED TERMS..........................................................1
ARTICLE II CLOSING................................................................4
Section 2.1 CLOSING................................................................4
ARTICLE III PURCHASE, SALE AND DELIVERY............................................5
Section 3.1 THF ACQUISITION ASSETS.................................................5
Section 3.2 TAF ACQUISITION ASSETS.................................................5
Section 3.3 EXCLUDED ASSETS........................................................7
Section 3.4 PURCHASE PRICE.........................................................8
Section 3.5 ALLOCATION REPORTING...................................................9
ARTICLE IV LIABILITIES AND OBLIGATIONS............................................9
Section 4.1 ASSUMED LIABILITIES....................................................9
Section 4.2 LIABILITIES NOT ASSUMED BY PURCHASER..................................10
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLERS.............................11
Section 5.1 ORGANIZATION; QUALIFICATION...........................................11
Section 5.2 AUTHORITY; ENFORCEABILITY.............................................11
Section 5.3 SUBSIDIARIES..........................................................12
Section 5.4 CONFLICTING AGREEMENTS AND OTHER MATTERS; CONSENTS....................12
Section 5.5 NO DEFAULT; COMPLIANCE WITH LAWS AND REGULATIONS......................12
Section 5.6 FINANCIAL STATEMENTS..................................................13
Section 5.7 NO UNDISCLOSED LIABILITIES............................................13
Section 5.8 ABSENCE OF CERTAIN CHANGES............................................13
Section 5.9 CONTRACTS, AGREEMENTS, PLANS AND COMMITMENTS..........................15
Section 5.10 ACTIONS PENDING.......................................................16
Section 5.11 ENVIRONMENTAL.........................................................16
Section 5.12 INSURANCE.............................................................16
Section 5.13 TITLE.................................................................17
Section 5.14 REAL ESTATE...........................................................17
Section 5.15 SUPPLIES..............................................................18
Section 5.16 TAXES.................................................................18
Section 5.17 EMPLOYEE BENEFIT PLANS................................................18
Section 5.18 EMPLOYEES AND LABOR MATTERS...........................................19
Section 5.19 INTELLECTUAL PROPERTY RIGHTS..........................................20
Section 5.20 RELATIONSHIPS.........................................................20
Section 5.21 CERTAIN PAYMENTS......................................................20
Section 5.22 BOOKS AND RECORDS.....................................................21
Section 5.23 CONDITION AND SUFFICIENCY OF ASSETS...................................21
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Section 5.24 SELLERS' DISCLAIMER OF REPRESENTATIONS AND WARRANTIES.................21
Section 5.25 CERTAIN EXPENSES......................................................21
Section 5.26 INMATE BANK ACCOUNTS..................................................22
Section 5.27 ASSUMED ACCRUED VACATION EXPENSE......................................22
Section 5.28 STUDIES, ETC..........................................................22
Section 5.29 DISCLOSURE............................................................22
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................22
Section 6.1 CORPORATE EXISTENCE...................................................22
Section 6.2 AUTHORITY; NO CONFLICTS...............................................22
Section 6.3 BINDING AGREEMENT.....................................................23
Section 6.4 REGULATORY APPROVALS..................................................23
Section 6.5 PURCHASER'S INSPECTION................................................23
ARTICLE VII CERTAIN UNDERSTANDINGS AND AGREEMENTS
OF THE PARTIES........................................................23
Section 7.1 EMPLOYEES.............................................................23
Section 7.2 TAXES.................................................................24
Section 7.3 CONSENTS..............................................................25
Section 7.4 TITLE.................................................................25
Section 7.5 SURVEY................................................................26
Section 7.6 REMOVAL OF EXCLUDED ASSETS............................................26
Section 7.7 ORIGINAL BOOKS AND RECORDS............................................26
Section 7.8 FURTHER ASSURANCES....................................................26
Section 7.9 MAIL RECEIVED AFTER CLOSING...........................................26
Section 7.10 POST-CLOSING SETTLEMENT...............................................26
Section 7.11 BILLS AND PAYMENTS RECEIVED AFTER CLOSING.............................27
Section 7.12 LOSS DUE TO CONDEMNATION..............................................27
Section 7.13 LOSS DUE TO CASUALTY..................................................28
ARTICLE VIII COVENANTS.............................................................28
Section 8.1 SELLERS' COVENANTS....................................................28
Section 8.2 PURCHASER'S COVENANTS.................................................30
ARTICLE IX CONDITIONS TO CLOSING.................................................30
Section 9.1 CONDITIONS TO OBLIGATIONS OF PURCHASER................................30
Section 9.2 CONDITIONS TO OBLIGATIONS OF SELLERS..................................33
ARTICLE X TERMINATION...........................................................34
Section 10.1 GROUNDS FOR TERMINATION...............................................34
Section 10.2 EFFECT OF TERMINATION.................................................35
ARTICLE XI INDEMNIFICATION.......................................................35
Section 11.1 SELLERS' INDEMNITY OBLIGATIONS........................................35
Section 11.2 PURCHASER'S INDEMNITY OBLIGATIONS.....................................36
-ii-
Section 11.3 THRESHOLD.............................................................36
Section 11.4 INDEMNIFICATION PROCEDURES............................................36
Section 11.5 DETERMINATION OF INDEMNIFIED AMOUNTS..................................38
Section 11.6 ESCROW................................................................39
ARTICLE XII COVENANTS NOT TO COMPETE..............................................39
Section 12.1 SELLERS' COVENANTS NOT TO COMPETE.....................................39
ARTICLE XIII MISCELLANEOUS.........................................................40
Section 13.1 COMMISSIONS...........................................................40
Section 13.2 SURVIVAL..............................................................40
Section 13.3 EXPENSES..............................................................40
Section 13.4 NOTICES...............................................................40
Section 13.5 ENTIRE AGREEMENT......................................................41
Section 13.6 GOVERNING LAW.........................................................41
Section 13.7 ARBITRATION...........................................................41
Section 13.8 ASSIGNMENTS AND THIRD PARTIES.........................................42
Section 13.9 SEVERABILITY..........................................................43
Section 13.10 AMENDMENTS; NO WAIVERS................................................43
Section 13.11 NO THIRD PARTY BENEFICIARIES..........................................43
Section 13.12 HEADINGS; USE OF CERTAIN TERMS........................................43
Section 13.13 COUNTERPARTS..........................................................43
SCHEDULES
Schedule 3.2(a) Machinery, Equipment and Other Tangible Personal Property
Schedule 3.2(b) Contracts
Schedule 3.2(c) Motor Vehicles and Other Rolling Stock
Schedule 3.2(i) Permits
Schedule 3.3(j) Other Excluded Assets
Schedule 3.5 Allocation of Purchase Price
Schedule 5.1 Foreign Qualification
Schedule 5.4 Conflicting Agreements and Other Matters; Consents
Schedule 5.8 Absence of Certain Changes
Schedule 5.9 Contracts, Agreements, Plans and Commitments
Schedule 5.10 Actions Pending
Schedule 5.12 Insurance
Schedule 5.14 Real Estate
Schedule 5.17 Employee Benefit Plans
Schedule 5.18 Employees and Labor Matters
Schedule 5.26 Inmate Bank Accounts
Schedule 7.4(a) Title Commitment
-iii-
EXHIBITS
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Exhibit A Land
Exhibit B Escrow Agreement
Exhibit C Sellers' Officer's Certificate
Exhibit D Deed
Exhibit E-1 Texas Alcoholism Foundation, Inc. Bill of Sale and Assignment
Exhibit E-2 The Texas House Foundation, Inc. Bill of Sale and Assignment
Exhibit F Consulting Agreement
Exhibit G Purchaser's Officer's Certificate
</TABLE>
-iv-
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "AGREEMENT") dated May 14,
1996 by and among Texas Alcoholism Foundation, Inc., a Texas nonprofit
corporation ("TAF"), The Texas House Foundation, Inc., a Texas nonprofit
corporation ("THF," along with TAF, each a "SELLER," and collectively,
"SELLERS"), and Cornell Corrections of Texas, Inc., a Delaware corporation
("PURCHASER").
WHEREAS, TAF and THF are in the business of operating a
halfway-house for the Texas Department of Criminal Justice ("TDCJ") for parolees
and probationers and providing counseling and treatment for behavioral,
emotional and psychological disorders; and
WHEREAS, Purchaser wishes to purchase from Sellers and Sellers
wish to sell, transfer, assign and deliver to Purchaser substantially all of the
assets of the Business (as hereinafter defined) (except those assets hereinafter
specifically excluded from such sale) on the terms and subject to the conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements stated herein, the parties
hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles and on a basis not inconsistent with those applied in the
preparation of the financial statements referred to in Section 5.6 hereof.
Section 1.2 DEFINED TERMS. As used in this Agreement, the following
terms have the meanings specified in this Section 1.2. Other capitalized terms
have the meanings assigned to them elsewhere in this Agreement.
AFFILIATE: with respect to any Person, means any Person directly or
indirectly controlling, controlled by or under common control with such Person,
and any natural Person who is an officer, director or partner of such Person and
any members of their immediate families living within the same household. A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise.
ASSUMED ACCRUED VACATION EXPENSE: means Sellers' accrued vacation
expense arising in the ordinary conduct by Sellers of the Business and
determined in accordance with generally accepted accounting principles, which,
as of May 1, 1996, equaled $13,645.18.
-1-
BALANCE SHEET: means the balance sheet of each of TAF and THF as of
January 31, 1996 described in Section 5.6.
BEST EFFORTS: means a party's best efforts in accordance with reasonable
commercial practice and without the incurrence of unreasonable expense.
BUSINESS: means the business engaged in by Sellers, consisting primarily
of operating a halfway-house for TDCJ parolees and probationers representing a
community residential facility with associated programs within the state of
Texas for the housing, training, education, rehabilitation and reformation of
persons released on supervision and capable of housing regular parole and
mandatory supervision releasees and substance abuse releasees and business to be
operated under contracts to provide services or housing for juvenile offenders,
but excluding the operations of Sellers conducted at the Excluded Real Property
(as hereinafter defined).
CERCLA: means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
CODE: means the Internal Revenue Code of 1986, as amended, or any
amending or superseding tax laws of the United States of America.
ENVIRONMENTAL LAWS: means any and all laws, common law, statutes,
ordinances, rules, regulations, judgments, orders or other official acts or
determinations of any Governmental Authority relating to the protection of human
health or safety or regulating or imposing liability or standards of conduct
concerning any hazardous, toxic or dangerous waste, substance, element,
compound, mixture or material in any and all jurisdictions in which property of
Sellers is located or the business of Sellers is conducted or in which such
business at any time has been conducted, including, without limitation, (a)
CERCLA, (b) RCRA, (c) the Solid Waste Disposal Act, as amended, (d) the
Hazardous and Solid Waste Amendments Act of 1984, as amended, (e) the Clean Air
Act, as amended, (f) the Toxic Substances Control Act, as amended, (g) the Safe
Drinking Water Act, as amended, (h) the Federal Water Pollution Prevention and
Control Act, as amended, (i) the Occupational Safety and Health Act of 1970, as
amended, (j) the Hazardous Materials Transportation Act, as amended, (k) the
Rivers and Harbors Act of 1899, as amended, and (l) any rules and regulations
promulgated pursuant to any or all of (a) through (k) above. The terms "RELEASE"
or "THREATENED RELEASE" shall have the meanings specified in CERCLA, and the
terms "SOLID WASTE" and "DISPOSAL" (or "DISPOSED") shall have the meanings
specified in RCRA; PROVIDED, HOWEVER, that, to the extent the laws of any
jurisdiction applicable to Sellers or any of its properties or assets establish
a meaning for "release," "solid waste" or "disposal" which is broader than that
specified in either CERCLA or RCRA, such broader meaning shall apply in such
jurisdiction.
ERISA: means the Employee Retirement Income Security Act of 1974, as
amended.
GOVERNMENTAL AUTHORITY: means any nation or government, any state or
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to,
government.
-2-
HAZARDOUS SUBSTANCE: means those elements, materials, compounds,
mixtures or substances which are contained in the list of hazardous substances
adopted by the United States Environmental Protection Agency (the "EPA") or the
list of toxic pollutants designated by Congress or the EPA or which are defined
as hazardous, toxic, pollutant, infectious, flammable or radioactive by any of
the Environmental Laws and, whether or not included on such lists, all products
or substances containing petroleum, asbestos, polychlorinated biphenyls,
chlorinated hydrocarbons and petroleum products or derivatives thereof.
INMATE: means any parolee, probationer or other resident, some of whom
may be sex offenders, utilizing the services of the halfway-house operated as
part of the Business.
"KNOWLEDGE OF SELLERS" or "BEST KNOWLEDGE OF SELLERS": means, with
respect to any matter in question, knowledge or best knowledge, as the case may
be, of the officers of Sellers.
LIEN: means any mortgage, pledge, hypothecation, security interest,
encumbrance, right of first refusal, option, lien, charge, condition,
restriction or burden of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code of any jurisdiction).
MATERIAL ADVERSE EFFECT: means any material adverse effect on the
business, financial condition, properties, prospects, net worth or results of
operations of Sellers.
OPERATING EXPENSES: means, for any period, customary gross expenses
related to the operation of the Business in the ordinary course of business
consistent with historical expenses related to the operation of the Business for
such period as determined in accordance with generally accepted accounting
principles (on an accrual basis).
OPERATING REVENUES: means, for any period, gross revenues related to the
operation of the Business (including all ancillary net revenues collected from
vending machines and telephone operations) for such period, including all cash
and other payments received and trade accounts receivable and other rights to
receive payment for services of the Business performed during such period, as
determined in accordance with generally accepted accounting principles (on an
accrual basis).
PERMITTED ENCUMBRANCES: means (a) materialmen's, mechanics',
repairmen's, employees', contractors', operators', tax and other similar liens
or charges arising in the ordinary course of business prior to the Closing Date
(i) if they relate to obligations that have not yet become due and payable or
(ii) if their validity is being contested in good faith by appropriate actions;
(b) minor defects and irregularities affecting title to the assets of Sellers,
but only if such defects and irregularities do not and will not impair the
operation, value or use of the asset affected by such defect or irregularity;
and (c) rights reserved to or vested in any governmental body to control or
regulate any asset in any manner that does not materially impair the value or
use of such asset, including statutory liens for real estate ad valorem taxes
not yet due and payable.
-3-
PERSON: means any individual, partnership, joint venture, corporation,
limited liability company, association, trust, unincorporated organization,
government or agency or subdivision thereof or any other entity.
PLAN: means an "employee benefit plan" (as defined in Section 3(3) of
ERISA) which is or has been established or maintained, or to which contributions
are or have been made, by THF or TAF or by any trade or business, whether or not
incorporated, which, together with THF or TAF, is under common control, as
described in Section 414(b) or (c) of the Code.
RCRA: means the Resources Conservation and Recovery Act of 1976, as
amended.
SUBSIDIARY or SUBSIDIARIES: means, with respect to any specified Person,
a corporation, partnership, joint venture, trust, limited liability company,
unincorporated organization or other Person at least a majority of whose
securities having ordinary voting power for the election of its board of
directors or other similar managing body are, at the time as of which any
determination is being made, owned legally or beneficially by such Person or one
or more Subsidiaries thereof.
TAX RETURN: means any return, report, statement, information return or
other document (including any related or supporting information) filed or
required to be filed with any Governmental Authority in connection with the
determination, assessment or collection of any Taxes or the administration of
any laws, regulations or administrative requirements relating to any Taxes.
TAXES: means all federal, foreign, state, local or other net or gross
income, gross receipts, sales, use, transfer, real property gains or transfer,
school, ad valorem, property, value-added, franchise, production, severance,
windfall profit, withholding, payroll, employment, excise or similar taxes,
assessments, duties, fees, levies or other governmental charges, together with
any interest thereon, any penalties, additions to tax or additional amounts with
respect thereto and any interest in respect of such penalties, additions or
additional amounts.
ARTICLE II
CLOSING
Section 2.1 CLOSING. The closing of the purchase and sale provided for
herein (the "CLOSING") shall take place at the offices of Baker & Botts, L.L.P.,
One Shell Plaza, 910 Louisiana Street, Houston, Texas 77002, on the date of
funding, which shall be on or before June 30, 1996, or at such other place, time
or date as may be agreed upon by the parties hereto (the "CLOSING DATE").
-4-
ARTICLE III
PURCHASE, SALE AND DELIVERY
Section 3.1 THF ACQUISITION ASSETS. Subject to the terms and conditions
of this Agreement and subject to the exclusions set forth in Section 3.3 hereof,
and on the basis of the representations and warranties hereinafter set forth, at
the Closing THF shall sell, transfer, convey, assign and deliver to Purchaser,
and Purchaser shall acquire and purchase from THF, subject to Section 3.3
hereof, all of the assets, properties and rights of THF associated with the
Business including, without limitation, all of THF's rights, title and interest
in and to the following:
(a) the fee simple interest in and to the real property,
containing in the aggregate approximately nine (9) acres, located at
10950 Beaumont Highway, Houston, Harris County, Texas, as more
specifically described in the legal description on EXHIBIT A hereto (the
"LAND");
(b) all buildings, structures, fixtures and other improvements
located on the Land (the "IMPROVEMENTS");
(c) all right, title and interest, if any, of THF in and to (i)
all easements, tenements, hereditaments, privileges and appurtenances in
any way belonging to the Land and Improvements, (ii) any land lying in
the bed of any highway, street, road, avenue or access way, open or
proposed, in front of or abutting or adjoining the Land and
Improvements, (iii) the use of all strips and rights-of-way, if any,
abutting, adjacent, contiguous to or adjoining the Land and
Improvements, and (iv) all other rights and appurtenances belonging or
in any way pertaining thereto including, without limitation, all water,
wastewater and other utility rights and capacities (the
"APPURTENANCES"); and
(d) subject to the exclusions set forth in Section 3.3 hereof,
all other or additional privileges, rights, interests, properties and
assets of every kind and description and wherever located that are used
or intended for use in connection with, or that are necessary to the
continued conduct of, the Business as presently conducted.
Section 3.2 TAF ACQUISITION ASSETS. Subject to the terms and conditions
of this Agreement and subject to the exclusions set forth in Section 3.3 hereof,
and on the basis of the representations and warranties hereinafter set forth, at
the Closing TAF shall sell, transfer, convey, assign and deliver to Purchaser,
and Purchaser shall acquire and purchase from TAF, subject to Section 3.3
hereof, all of the assets, properties and rights of TAF associated with the
Business including, without limitation, all of TAF's rights, title and interest
in and to the following:
(a) all of the machinery, equipment, trade fixtures, tools,
furniture, appliances, implements, spare parts, supplies, leasehold
improvements, construction in progress and all other tangible personal
property used in the operation of the Business which are owned by
Sellers on the Closing Date, including, without limitation, those listed
on SCHEDULE 3.2(A) hereto (collectively, the "EQUIPMENT");
-5-
(b) subject to Section 7.3 hereof, all right, title and interest
in, to and under all contracts (including, without limitation, all of
the operating contracts of TAF), leases, agreements, equipment or other
lease licenses, government contract awards, management agreements and
building service agreements related to services used in the operation of
the Business and to which TAF is a party on the Closing Date or by which
any of the Acquisition Assets (as hereinafter defined) are then bound
including, without limitation, those listed on SCHEDULE 3.2(B) hereto
(collectively, the "CONTRACTS");
(c) the motor vehicles and other rolling stock used in the
operation of the Business which are owned by TAF on the Closing Date,
which are those listed on SCHEDULE 3.2(C) hereto (collectively, the
"MOTOR VEHICLES");
(d) all prepaid items, deposits and other similar assets of TAF
which exist at the Closing Date and which are associated with goods or
services used in the Business;
(e) all office supplies, kitchen supplies, laundry supplies,
medical supplies, spare parts, safety equipment, maintenance supplies,
other supplies used or consumed in the Business and other similar items
which exist on the Closing Date and which are used in the Business
(collectively, the "SUPPLIES");
(f) cash or cash equivalents representing fund accounts of
Inmates ("INMATE BANK ACCOUNTS"), if any;
(g) Operating Revenues for the period commencing on May 1, 1996,
subject to the assumption and payment of Operating Expenses for such
period by Purchaser pursuant to Section 4.1(d) hereof.;
(h) all goodwill and going concern value of the Business;
(i) all right, title and interest in licenses, permits and
franchises issued by any federal, state, municipal or other governmental
authority (the "PERMITS") relating to the Acquisition Assets or the
Business, including, without limitation, those listed on SCHEDULE 3.2(I)
hereto to the extent transferable;
(j) all patents, patent applications, processes, shop rights,
formulas, brand names, trade secrets, service marks, copyrights,
drawings, and any similar items and related rights owned by or licensed
to TAF and used in connection with the Business, together with any
goodwill associated therewith and all rights of action on account of
past, present and future unauthorized use or infringement thereof,
excluding any trademarks and trade names owned by or licensed to Sellers
and used in connection with the Business;
(k) all rights under express or implied warranties from the
suppliers of TAF with respect to the Acquisition Assets, to the extent
they are assignable;
-6-
(l) all warranties and guaranties pertaining to the Permits and
Contracts, to the extent transferable under their terms and applicable
laws;
(m) copies, if any, made at Purchaser's sole cost and expense, of
all books, records, papers and instruments of whatever nature and
wherever located that relate to the Business or the Acquisition Assets
or which are required or necessary in order for Purchaser to conduct the
Business from and after the Closing Date in the manner in which it is
presently being conducted, including, without limitation, blueprints of
the Improvements, accounting and financial records relating to the
Contracts, maintenance records, environmental records and reports,
correspondence with the TDCJ or other Governmental Authorities related
to the Business, supplier lists and other supplier data relating to the
purchase of supplies used in connection with the Business, and
confidential information exclusively relating to or exclusively arising
out of the Business (collectively, the "BUSINESS RECORDS");
(n) copies, if any, made at Purchaser's sole cost and expense, of
all personnel files and other materials relating to employees of Sellers
who are to be offered employment by Purchaser as contemplated by Section
7 hereof (collectively, the "PERSONNEL FILES");
(o) copies, if any, made at Purchaser's sole cost and expense, of
all records of compliance and noncompliance with the laws, regulations,
ordinances and orders applicable to the Acquisition Assets or the
Business (collectively, the "COMPLIANCE RECORDS");
(p) all right, title and interest in, to and under all rights,
privileges, claims, causes of action, and options relating or pertaining
to the Acquisition Assets or the Business save and except claims of TAF
(and THF, if any) against the Texas Commission on Alcoholism and Drug
Abuse ("TCADA") relating to periods prior to the Closing Date; and
(q) subject to the exclusions set forth in Section 3.3 hereof,
all other or additional privileges, rights, interests, properties and
assets of every kind and description and wherever located that are used
or intended for use in connection with, or that are necessary to the
continued conduct of, the Business as presently conducted.
Subject to Section 3.3 hereof, all of the assets referenced in
Section 3.1 and Section 3.2 are collectively referred to as the "ACQUISITION
ASSETS."
Section 3.3 EXCLUDED ASSETS. Notwithstanding Section 3.1 and Section 3.2
hereof, Sellers are not selling and Purchaser is not purchasing pursuant to this
Agreement any of the following, all of which shall be retained by Sellers
(collectively, the "EXCLUDED ASSETS"):
(a) any cash or cash equivalents and bank accounts other than (i)
Inmate Bank Accounts and (ii) cash included in the Acquisition Assets
pursuant to Section 3.2(g);
(b) any minute books, tax returns and other similar corporate
documents;
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(c) all trade accounts receivable and all other rights to payment
for goods sold or leased or for services rendered prior to May 1, 1996;
(d) all insurance policies of Sellers;
(e) any and all employee benefit plans of Sellers;
(f) the real property located at 2208 West 34th Street, Houston,
Harris County, Texas (the "EXCLUDED LAND"), and all buildings,
structures, fixtures and other improvements located on the Excluded
Land, and all right, title and interest, if any, in and to the following
to the extent the same relate to the Excluded Land and do not form part
of the Land, Improvements or Appurtenances: (i) all easements,
tenements, hereditaments, privileges and appurtenances in any way
belonging to the Excluded Land and/or its improvements, (ii) any land
lying in the bed of any highway, street, road, avenue or access way,
open or proposed, in front of or abutting or adjoining the Excluded Land
and/or its improvements, (iii) the use of all strips and rights-of-way
and other land, if any, abutting, adjacent, contiguous to or adjoining
the Excluded Land and/or its improvements, and (iv) all other rights and
appurtenances belonging or in any way pertaining to the foregoing
Excluded Land, improvements and other interests, including, without
limitation, all water, wastewater and other utility rights and
capacities (collectively, the "EXCLUDED REAL PROPERTY");
(g) subject to the provisions of Section 7.7 hereof, originals
of the Business Records, Personnel Files and Compliance Records;
(h) equipment, contracts, prepaid items, supplies, goodwill,
permits, intellectual property, business records, personnel files,
compliance records and other items solely related to operations
conducted at the Excluded Land and not previously assets of, or recorded
on Sellers' books as being assets of, the Business;
(i) claims of Sellers against TCADA for sums due Sellers for
services rendered prior to May 1, 1996; and
(j) any other assets listed on SCHEDULE 3.3(J) hereto.
Section 3.4 PURCHASE PRICE.
(a) The aggregate consideration for the purchase of the Acquisition
Assets and Sellers' covenants not to compete, as set forth in Article XII
hereof, shall be (i) $2,000,000, (ii) less an amount equal to the Assumed
Accrued Vacation Expense as of May 1, 1996, (iii) plus 8% simple interest per
annum based on a 360-day year on $2,000,000 from May 1, 1996 through the Closing
Date (collectively, the price for the Acquisition Assets and Sellers' covenants
not to compete shall be referred to as the "PURCHASE PRICE").
(b) Contemporaneous with the execution of this Agreement, Purchaser has
delivered to Sellers the sum of $9,900 to serve as an option fee (the "OPTION
FEE"), which, upon the terms and
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subject to the conditions hereof, including Section 10.2, shall be applied
against the Purchase Price at Closing.
(c) Upon the terms and subject to the conditions hereof, at the Closing,
Purchaser shall pay $1,890,100, less an amount equal to the Assumed Accrued
Vacation Expense as of May 1, 1996 of the Purchase Price to Sellers by wire
transfer to an account designated in writing by Sellers or by a bank cashier's
check made payable to Sellers, as specified by Sellers.
(d) Upon the terms and subject to the conditions hereof, at the Closing,
Purchaser shall pay $100,000 (the "ESCROWED PURCHASE PRICE") of the Purchase
Price to Charter Title Company, as Escrow Agent, or another escrow agent
mutually acceptable to Purchaser and Sellers (the "ESCROW AGENT"), to be held by
the Escrow Agent and disbursed by the Escrow Agent in accordance with the terms
and conditions of the Escrow Agreement, substantially in the form of EXHIBIT B
hereto (the "ESCROW AGREEMENT"), to be executed by Purchaser and Sellers at the
Closing.
Section 3.5 ALLOCATION REPORTING. Unless otherwise agreed by Purchaser
and Sellers, (i) SCHEDULE 3.5 hereto sets forth the allocations established by
Purchaser and Sellers of the Purchase Price and the Assumed Liabilities (as
hereinafter defined) (and any other items constituting consideration paid by
Purchaser or received by Sellers in connection with the disposition of the
Acquisition Assets) among the Acquisition Assets; (ii) the allocations set forth
on SCHEDULE 3.5 hereto will be used by Purchaser and Sellers as the basis for
reporting asset values and other items for purposes of all required Tax Returns
(including any Tax Returns required to be filed under Section 1060(b) of the
Code and the Treasury regulations thereunder); and (iii) Purchaser and Sellers
will not to assert, in connection with any audit or other proceeding with
respect to Taxes, any asset values or other items inconsistent with the
allocations set forth on SCHEDULE 3.5 hereto.
ARTICLE IV
LIABILITIES AND OBLIGATIONS
Section 4.1 ASSUMED LIABILITIES. As part of the consideration for the
Acquisition Assets, and subject to Section 4.2 hereof, at the Closing, Purchaser
shall assume and pay, and shall discharge and, to the extent described in
Article XI hereto, indemnify Sellers with respect to the following:
(a) the Assumed Accrued Vacation Expense as of May 1, 1996;
(b) any commitments and liabilities arising after the Closing
Date pursuant to all Contracts (provided that the rights thereunder have
been duly and effectively assigned to Purchaser);
(c) subject to representations and warranties of Sellers set
forth in this Agreement, any liability or obligation resulting from
Environmental Laws and compliance with Governmental Authorities related
to Environmental Laws with respect to the Land and the Appurtenances
(together, the "ACQUIRED PROPERTY") and the operation of the Business on
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the Acquired Property arising after the Closing Date, but excluding any
such liability or obligation resulting from, caused by or related to any
act or omission of Sellers or any current or former officer, director,
employee, agent, representative, tenant or invitee of Sellers occurring
prior to the Closing Date;
(d) Operating Expenses in connection with services rendered by
Sellers in connection with the Business for the period after April 30,
1996; and
(e) any claims by Sellers' employees and inmates to the extent
resulting from actions by Purchaser or any of Purchaser's directors,
officers, stockholders, employees, agents or representatives which
occurred between May 1, 1996 and the Closing Date.
The above-referenced liabilities (Section 4.1(a), through 4.1(d)) are
collectively referred to as the "ASSUMED LIABILITIES."
Section 4.2 LIABILITIES NOT ASSUMED BY PURCHASER. Except as provided in
Section 4.1 hereof, Purchaser does not assume or agree to pay, perform or
discharge, and shall not be responsible for, any other liabilities or
obligations of a Seller, whether accrued, absolute, contingent or otherwise,
including, without limitation, liabilities or obligations based on, arising out
of or in connection with the following (collectively, the "EXCLUDED
LIABILITIES"):
(a) any indebtedness (whether short-term or long-term) for
borrowed money;
(b) any Taxes for which a Seller is liable (taking into account
the provisions of Section 7.2(a) hereof);
(c) except as specifically set forth in 4.1(d) with respect to
Operating Expenses after April 30, 1996 and 4.1(e) with respect to
certain claims resulting from actions prior to the Closing Date, all
liabilities and obligations accruing on or prior to the Closing Date,
including, without limitation, liabilities and obligations associated
with claims by TCADA, or its successors, against a Seller related to
events which occurred prior to the Closing Date;
(d) except with respect to liabilities assumed pursuant to
Section 4.1(d) above, any accrued or other liability (excluding the
Assumed Accrued Vacation Expense as of May 1, 1996) to or with respect
to any employee relating to service rendered prior to the Closing Date,
any accrued or other liability under any pension plan or agreement or
employee benefit plan or arrangement with respect to any of Sellers'
employees, past or present, and any other accrued expenses;
(e) any liability or obligation (contingent or otherwise) of
Sellers arising out of any claim, litigation or proceeding threatened or
pending on or before the Closing Date or any claim, litigation or
proceeding threatened or initiated after the Closing Date, to the extent
based on an act or omission of Sellers occurring before the Closing
Date, whether or not set forth on SCHEDULE 5.10, (none of which
liabilities or obligations shall be considered Operating Expenses for
purposes of Section 4.1(d) hereof);
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(f) any liability or obligation under or in connection with the
Excluded Real Property or the business conducted on the Excluded Real
Property;
(g) except as expressly set forth in Section 4.1(c) hereof, any
claims or conditions arising under or relating to Environmental Laws or
similar legal requirements attributable or relating to the assets
(including, without limitation, the operation thereof) or the business
of Sellers, including any liability or obligation resulting from
Environmental Laws with respect to the Acquired Property arising after
the Closing Date resulting from, caused by or related to any act or
omission of Sellers or any current or former officer, director,
employee, agent, representative, tenant or invitee of Sellers which
occurred prior to the Closing Date;
(h) any liability arising out of or in connection with Sellers'
defective performance of any Contract or any express or implied warranty
with respect to performance of any Contract prior to the Closing Date;
(i) any liability arising out of or in connection with any
unlicensed or other unauthorized use by Sellers of any patented or
unpatented invention, trade secret, copyright, trademark or other
industrial property right; or
(j) any liability or obligation under or in connection with the
Excluded Assets.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent, warrant and agree to and
with Purchaser as follows:
Section 5.1 ORGANIZATION; QUALIFICATION. Each Seller is a nonprofit
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. Each Seller has heretofore delivered to Purchaser true,
correct and complete copies of its articles of incorporation and bylaws, each as
amended or restated through the date of this Agreement. Each Seller has all
requisite power and authority to own and operate its assets and properties and
to carry on its business as it is now being conducted. Each Seller is duly
licensed or qualified as a foreign entity to do business and is in good standing
in all jurisdictions, if any, wherein the character of the properties owned or
held by it or the nature of the business transacted by it requires it to be so
licensed or qualified. SCHEDULE 5.1 hereto sets forth a list of all
jurisdictions in which each Seller is currently licensed or qualified to
transact business as a foreign entity.
Section 5.2 AUTHORITY; ENFORCEABILITY. Each Seller has all requisite
corporate power and authority to enter into this Agreement. All necessary action
on the part of each Seller has been taken to authorize the execution and
delivery of this Agreement, the performance of their respective obligations
hereunder and the consummation of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by each Seller. This
Agreement
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constitutes, as of the date hereof, and this Agreement and all documents and
instruments required hereunder to be executed and delivered by Sellers at
Closing will constitute, on the Closing Date, legal, valid and binding
obligation of each Seller enforceable against each Seller in accordance with its
terms, subject to the effect of any applicable bankruptcy, reorganization,
insolvency, moratorium, fraudulent transfer, fraudulent conveyance or similar
laws affecting creditors' rights generally and subject, as to enforceability, to
the effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
Section 5.3 SUBSIDIARIES. No Seller has any Subsidiaries or holds any
equity interest in or controls (directly or indirectly, through the ownership of
securities, by contract, by proxy, alone or in combination with others, or
otherwise) any corporation, limited liability company, partnership, business
organization or other Person.
Section 5.4 CONFLICTING AGREEMENTS AND OTHER MATTERS; CONSENTS. No
Seller is a party to any contract or agreement or subject to any charter or
other corporate restriction which materially and adversely affects its business,
property or financial condition as of the date hereof. Except as set forth on
Schedule 5.4 hereto, the execution and delivery of this Agreement does not, the
fulfillment of or compliance with the terms and provisions hereof will not, and
the consummation of the transactions contemplated hereby will not:
(a) violate or conflict with any provision of, or require any
notice, consent, authorization or approval under, the articles of
incorporation or bylaws of a Seller;
(b) violate or conflict with any provision of, or require any
filing, consent, authorization or approval under, any law or
administrative regulation or any judicial, administrative or arbitration
order, award, judgment, writ, injunction or decree applicable to or
binding upon a Seller or to which any of a Seller's assets or properties
is subject; or
(c) conflict with, result in a breach of, constitute a default
under (whether with notice or the lapse of time or both), accelerate or
permit the acceleration of the performance required by, or require any
consent, authorization or approval under, (i) any mortgage, indenture,
deed of trust, loan or credit agreement or any other agreement or
instrument evidencing indebtedness for money borrowed to which a Seller
is a party or by which a Seller is bound or to which any of a Seller's
properties is subject or (ii) any lease, license, contract or other
agreement or instrument to which a Seller is a party or by which a
Seller is bound or to which any of a Seller's properties is subject.
Section 5.5 NO DEFAULT; COMPLIANCE WITH LAWS AND REGULATIONS.
(a) No Seller is in default under, and no condition exists that with
notice or lapse of time or both would constitute a default under, (i) any
mortgage, loan or credit agreement, indenture, evidence of indebtedness or other
instrument evidencing borrowed money to which a Seller is a party or by which a
Seller or any of its properties is bound, (ii) any judgment, order or injunction
of any court or Governmental Authority or (iii) any other material agreement,
contract, lease or license.
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(b) To the best knowledge of Sellers, no Seller is in violation of any
law, regulation, order, judgment or decree of any federal or state court or
Governmental Authority applicable to its business or operation.
(c) Each Seller holds such licenses, certificates, permits, franchises,
consents, waivers, authorizations, approvals and orders of Governmental
Authorities as are necessary to carry on its business as currently conducted. To
the best knowledge of Sellers, no Seller is in material violation of any such
license, certificate, permit, franchise, consent, waiver, authorization,
approval or order. All such licenses, certificates, permits, franchises,
consents, waivers, authorizations, approvals and orders are in full force and
effect, and no written notice of, or, to the knowledge of Sellers, verbal notice
of, suspension, revocation or cancellation thereof has been threatened, and each
Seller is fully authorized to assign to Purchaser such licenses, certificates,
permits, franchises, consents, waivers, authorizations, approvals and orders
subject to consents, authorizations and approvals from Governmental Authorities
or other third parties.
Section 5.6 FINANCIAL STATEMENTS. Each Seller has heretofore furnished
Purchaser with the following financial statements, identified by the principal
financial officer each Seller, as the case may be: (a) the audited balance
sheets of each Seller as of August 31 in each of the years 1993 and 1994, the
unaudited balance sheet of each Seller as of August 31, 1995 and the related
income and cash flow statements for each such year, and (b) an unaudited balance
sheet of each Seller as of January 31, 1996 and the related income and cash flow
statements for the five (5) month period ended on January 31, 1996. Such
financial statements (including any related schedules and notes) are true,
complete and correct, and fairly present the financial position of each Seller
as of their respective dates and the results of operations of each Seller for
the periods therein indicated, and were prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved. Except for ordinary and customary liabilities that have arisen in the
ordinary course of business of each Seller since January 31, 1996, each Seller
does not have any liabilities or obligations of any nature (absolute, accrued,
contingent or otherwise) that are not reflected in its financial statements.
Section 5.7 NO UNDISCLOSED LIABILITIES. There is no existing, contingent
or threatened liability, obligation, Lien or claim of any nature (absolute,
accrued, contingent or otherwise) that relates to or has been or may be asserted
against a Seller, other than liabilities arising after the date of the Balance
Sheet in the ordinary course of business consistent with past practice.
Section 5.8 ABSENCE OF CERTAIN CHANGES. Except as disclosed on SCHEDULE
5.8 hereto, since January 31, 1996 there has not been:
(a) any material adverse change in the business, financial
condition, properties, prospects, net worth or results of operations of
a Seller;
(b) any damage, destruction or loss suffered by Sellers, whether
covered by insurance or not;
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(c) any change by a Seller in tax methods, principles or
elections or in accounting methods or principles that would be required
to be disclosed under generally accepted accounting principles;
(d) any sale, lease or other disposition of properties and assets
of a Seller, other than those in the ordinary course of business
consistent with past practices;
(e) any merger or consolidation of a Seller with any other
Person or any acquisition by a Seller of the stock or business of
another Person;
(f) any borrowing, agreement to borrow funds or guaranty by a
Seller or any termination or amendment of any evidence of indebtedness,
contract, agreement, deed, mortgage, lease, license or other instrument
to which any Seller is bound or by which a Seller or any of its
properties is bound other than in the ordinary course of business and
consistent with past practices;
(g) any cancellation of debt by a Seller or waiver of any claim
or right of substantial value to a Seller;
(h) any increase in the compensation payable or to become payable
by a Seller to the directors, officers or employees of such Seller, any
increase in benefits or benefit plan costs or any increase in any bonus,
insurance, compensation or other benefit plan made for or with or
covering any directors, officers or employees of such Seller other than
consistent with past practices;
(i) any employment, consulting, severance or indemnification
agreement entered into or made by a Seller with any of its employees, or
any collective bargaining agreement or other obligation to any labor
organization incurred or entered into by a Seller;
(j) the creation or imposition of any Lien, other than a
Permitted Encumbrance, on any of the Acquisition Assets;
(k) any reduction in accruals or reserves, except to the extent
of related cash payments or other reductions consistent with past
practice;
(l) any write-up or write-down of the value of a Seller's assets,
except for writeups or write-downs in accordance with generally accepted
accounting principles and in the ordinary course of business and
consistent with past practice;
(m) the making of any capital expenditure or commitments
therefor in excess of $10,000 in the aggregate;
(n) any amendment to the articles of incorporation or bylaws of
a Seller;
(o) any contract bid for an amount in excess of $10,000; or
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(p) any contract or commitment to do any of the foregoing.
Section 5.9 CONTRACTS, AGREEMENTS, PLANS AND COMMITMENTS. SCHEDULE 5.9
hereto sets forth a complete list of the following contracts, agreements, plans
and commitments to which any Seller is a party or by which any Seller or any of
its properties is bound as of the date hereof:
(a) any contract, commitment or agreement that involves
aggregate expenditures by a Seller of more than $10,000 per year;
(b) any contract or agreement (including any such contracts or
agreements entered into with any Governmental Authority) relating to the
maintenance, operation or occupancy of a halfway-house on the Land or
the provision of outpatient counseling services to the residents of a
halfway-house operated on the Land;
(c) any indenture, loan agreement or note under which a Seller
has outstanding indebtedness, obligations or liabilities for borrowed
money;
(d) any lease or sublease for the use or occupancy of real
property;
(e) any agreement that restricts the right of a Seller to engage
in any type of business;
(f) any guarantee, direct or indirect, by any Person of any
contract, lease or agreement entered into by a Seller;
(g) any partnership, joint venture or construction and operation
agreement;
(h) any agreement of surety, guarantee or indemnification with
respect to which a Seller is the obligor, outside of the ordinary course
of business;
(i) any contract that requires a Seller to pay for goods or
services substantially in excess of its estimated needs for such items
or the fair market value of such items; and
(j) any other contract that a Seller deems to be material to the
Business.
True, correct and complete copies of each of such contracts, agreements, plans
and commitments have been delivered to or made available for inspection by
Purchaser. All such contracts, agreements, plans and commitments (i) were duly
and validly executed and delivered by each Seller, as applicable, and, to the
knowledge of Sellers, the other parties thereto and (ii) are valid and in full
force and effect. Each Seller has fulfilled all material obligations required of
each Seller under each such contract, agreement, plan or commitment to have been
performed by it prior to the date hereof. Except as set forth on SCHEDULE 5.9,
there are no counterclaims or offsets under any of such contracts, agreements,
plans and commitments.
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Section 5.10 ACTIONS PENDING. Except as set forth on SCHEDULE 5.10
hereto, there is no action, claim, suit, investigation or proceeding pending or,
to the knowledge of Sellers, threatened against a Seller or involving any
properties or rights of Seller by or before any court, arbitrator or
Governmental Authority. There is no action, claim, suit, investigation or
proceeding pending or, to the knowledge of Sellers, threatened against a Seller
which purports to affect the validity or enforceability of this Agreement or
that seeks to prohibit, restrict or delay the consummation of the transactions
contemplated hereby or that might have a Material Adverse Effect on a Seller or
its assets or property. SCHEDULE 5.10 sets forth a summary description
(including the cost to each Seller of each such lawsuit (including any
settlements or judgments paid by each Seller and reasonable attorneys' fees
incurred by each Seller) and the amount, if any, covered by insurance) of all
current and prior lawsuits by or against a Seller.
Section 5.11 ENVIRONMENTAL. To the best knowledge of Sellers, each
Seller has conducted and is conducting its businesses in compliance with all
Environmental Laws and none of the operations of a Seller is the subject of
federal, state or local investigation evaluating whether any remedial action is
needed to respond to a release of any Hazardous Substance into the environment.
No Seller has (and to the best knowledge of Sellers, no other Person has) filed
any notice under any federal, state or local law indicating that a Seller is
responsible for the release into the environment or the improper storage of any
amount of any Hazardous Substance, or that any such Hazardous Substance has been
released or is improperly stored upon any owned, operated or leased property of
a Seller. To the best knowledge of Sellers, no Seller otherwise has liability or
contingent liability in connection with any violation of Environmental Laws or
in connection with the release or threatened release into the environment or the
improper storage of any Hazardous Substance. To the best knowledge of Sellers,
all notices, permits, licenses or similar authorizations, if any, required to be
obtained or filed in connection with the operations of a Seller, including,
without limitation, present or past treatment, storage, disposal or release of a
Hazardous Substance into the environment, have been duly obtained or filed, and
each Seller is in compliance with the terms and conditions of all such notices,
permits, licenses and similar authorizations. To the best knowledge of Sellers,
there has been no release or threatened release of any Hazardous Substances on
or to any of the owned, operated or leased properties or assets of a Seller that
either (a) is not in compliance with Environmental Laws or (b) could create an
obligation or liability of a Seller under Environmental Laws, and there are no
storage tanks or other containers on or under any of the owned, operated or
leased properties or assets of a Seller from which any Hazardous Substances may
be released into the surrounding environment. To the best knowledge of Sellers,
no claims are pending or threatened by third parties against a Seller alleging
liability for exposure to a Hazardous Substance and there have been no
environmental investigations, studies, audits, reviews or other analyses
conducted by or which are in the possession of a Seller regarding any facility
or property owned, operated or leased by a Seller which have not been delivered
to Purchaser.
Section 5.12 INSURANCE. SCHEDULE 5.12 hereto sets forth a list of all
insurance policies owned by each Seller by which a Seller or any of its
properties or assets is covered against present losses, all of which are now in
full force and effect. No insurance has been refused with respect to any
operations, properties or assets of a Seller nor has coverage of any insurance
been limited by any insurance carrier that has carried, or received any
application for, any such insurance during the last
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three (3) years. No insurance carrier has denied any claims made against any of
the policies listed on SCHEDULE 5.12 hereto.
Section 5.13 TITLE. Each Seller has good and indefeasible title to its
personal, tangible and intangible properties and assets, including such
properties and assets reflected in the Balance Sheet and, except as noted in the
financial statements and the notes thereto delivered pursuant to Section 5.6
hereof, said properties and assets are not subject to any Lien, other than
Permitted Encumbrances. No Seller has received any written notice of any
material adverse claim that has not been satisfied with respect to its title to
any material Permit, right-of-way, easement or lease on or under which any of
its facilities are located. Each Seller enjoys peaceful and undisturbed
possession under all material Permits or leases under which it is operating, and
all such Permits and leases are valid, subsisting and in full force and effect.
Section 5.14 REAL ESTATE.
(a) SCHEDULE 5.14 hereto contains an accurate and complete list of all
real property owned in whole or in part by each Seller as part of or related to
the Business, and includes the name of the record title holder thereof and a
list of all indebtedness secured by any Lien thereon. Each Seller has good and
indefeasible title in fee simple to all the real property owned by it, free and
clear of any Lien, except for Permitted Encumbrances. To the best knowledge of
Sellers, none of the buildings, structures or appurtenances (or any equipment
therein) located on such real property, nor the operation or maintenance
thereof, violates in any respect any restrictive covenant, or encroaches on any
property owned by others. No condemnation proceeding is pending, or to the
knowledge of Sellers, threatened which would preclude or impair in any material
respect the use of such property by a Seller for the purpose for which it is
currently used.
(b) SCHEDULE 5.14 hereto sets forth a list and summary description
(including property location, parties and annual rental payments) of all leases,
subleases and other agreements as part of or related to the Business under which
any Seller is lessor or lessee of, or uses or occupies or allows the use or
occupancy of, any real property. All such leases, subleases and other agreements
are valid and subsisting and in full force and effect.
(c) There is no proceeding pending or, to the knowledge of Sellers,
threatened that could result in the termination of or material limitations on
access to the real property listed on SCHEDULE 5.14 to and from public highways,
streets and roads, and the real property listed on SCHEDULE 5.14 is connected to
and serviced by public utilities, all of which, in Sellers' reasonable judgment,
are adequate for the use of the real property listed thereon as the Business is
currently conducted. Except as caused by natural disasters or power outages, no
Seller has experienced during the three (3) years preceding the date hereof any
material interruption in the delivery of adequate quantities of any utilities
(including, without limitation, electricity, natural gas, potable water, water
for cooling or similar purposes and fuel oil) or other public services
(including, without limitation, sanitary and industrial sewer service) required
in the operation of the Business during such period and no such material
interruption is, to the knowledge of Sellers, threatened.
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Section 5.15 SUPPLIES. The Supplies of each Seller are of a quantity and
quality that has been normal for such Seller in the ordinary course of business
of such Seller and are owned by such Seller free and clear of any Liens. The
value of the Supplies have been recorded on the books of each Seller in
accordance with generally accepted accounting principles.
Section 5.16 TAXES.
(a) Each Seller has provided Purchaser with true and correct copies of
all Tax Returns, if any, of each such Seller for the past three years.
(b) Each Seller has caused to be duly filed in a timely manner with the
appropriate Governmental Authorities all Tax Returns required to be filed by or
with respect to the Business or the Acquisition Assets and has caused to be paid
or deposited all Taxes (including estimated Taxes) required with respect to the
periods covered by such Tax Returns or by any taxing authority. All Taxes
required to be collected or withheld with respect to the Business or the
Acquisition Assets have been duly collected or withheld, and all Taxes with
respect to the Business or the Acquisition Assets required under generally
accepted accounting principles to be accrued on the financial statements of each
Seller have been so accrued.
(c) No liens with respect to Taxes exist, and no Seller has reason to
expect that any lien with respect to Taxes will arise, on or with respect to the
Business or the Acquisition Assets, except for liens imposed by law and incurred
in the ordinary course of business for obligations not yet due. No extension of
time is in effect with respect to the date on which any Tax Return is to be
filed by or with respect to the Business or the Acquisition Assets. There are no
outstanding agreements or waivers extending the period for assessment or
collection of any Taxes relating to the ownership or operation of the Business
or the Acquisition Assets.
(d) There is no pending action, proceeding or investigation, and, to the
knowledge of Sellers, no action, proceeding or investigation has been threatened
by any Governmental Authority, for assessment or collection of Taxes with
respect to the Business or the Acquisition Assets. No claim for assessment or
collection of Taxes has been asserted during the past five (5) years and no
actual or proposed assessment has been made with respect to Taxes relating to
the ownership or operation of the Business or the Acquisition Assets.
Section 5.17 EMPLOYEE BENEFIT PLANS.
(a) Each Plan is listed on SCHEDULE 5.17 hereto. No Plan is or has been
(i) covered by Title IV of ERISA, (ii) subject to the minimum funding
requirements of Section 412 of the Code or (iii) a "multi-employer plan" as
defined in Section 3(37) of ERISA. Each Plan intended to be qualified under
Section 401(a) of the Code is designated as a tax-qualified plan on SCHEDULE
5.17 and is so qualified.
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(b) Each Seller has heretofore delivered to Purchaser true and correct
copies of the following, if any:
(i) each Plan listed on SCHEDULE 5.17, all amendments thereto as
of the date hereof and all current summary plan descriptions provided to
employees regarding the Plans;
(ii) each trust agreement and annuity contract (or any other
funding instruments) pertaining to any of the Plans, including all
amendments to such documents to the date hereof;
(iii) each management or employment contract or contract for
personal services and a complete description of any understanding or
commitment between a Seller and any officer, consultant, director,
employee or independent contractor of a Seller that is not by its terms
terminable at will; and
(iv) a complete description of each other plan, policy, contract
or arrangement providing for bonuses, deferred compensation, retirement
payments, profit sharing, incentive pay, commissions, hospitalization or
medical expenses or insurance for any officer, consultant, director,
annuitant, employee or independent contractor of a Seller as such or
members of their families (other than directors' and officers' liability
policies), whether or not insured (a "BENEFIT PROGRAM").
(c) Each Plan and Benefit Program has been maintained and administered
in compliance with the terms and requirements of all applicable laws. No Seller
has a commitment or obligation to establish or adopt any new or additional Plans
or to increase the benefits under any existing Plan. The combined annual cost to
Sellers of all Plans does not exceed two percent of the combined annual payroll
of Sellers, including overtime, required to operate the Business (including all
administrative and support personnel, but excluding the salary of Joe Knauth).
Section 5.18 EMPLOYEES AND LABOR MATTERS.
(a) SCHEDULE 5.18 hereto is a complete list of all employees of Sellers
listing the title or position held, base salary or wage rate and any bonuses,
commissions, profit sharing, Sellers' vehicles, club memberships or other
compensation or perquisites payable, all employee benefits received by such
employees and any other material terms of any oral or written agreement with
each Seller which relate to the Business. As of the date of this Agreement and
as of the Closing Date, the combined projected annual payroll for calendar year
1996 of Sellers, including overtime, required to operate the Business (including
all administrative and support personnel, but excluding the salary of Joe
Knauth) is not greater than $1,215,000, and no Seller has entered into any
agreement or agreements pursuant to which the combined annual payroll of
Sellers, including overtime, required to operate the Business (including all
administrative and support personnel, but excluding the salary of Joe Knauth)
would be greater than $1,215,000. SCHEDULE 5.18 also includes a detailed
description of all health, dental, life and disability insurance plans of each
Seller and a description of the cost per employee under each such plan for
individual coverage as well as for coverage of such employee's dependents.
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(b) Except as set forth on SCHEDULE 5.18, no Seller is a party to or
bound by any employment agreements or commitments (written or oral), other than
on an at will basis. Sellers are in compliance with all applicable laws
respecting the employment and employment practices, terms and conditions of
employment and wages and hours of its employees and is not engaged in any unfair
labor practice. All of the employees of each Seller who work in the United
States are lawfully authorized to work in the United States according to federal
immigration laws. There is no labor strike or labor disturbance pending or, to
the knowledge of Sellers, threatened against a Seller with respect to the
Business and during the past five (5) years no Seller has experienced a work
stoppage with respect to the Business.
(c) No Seller is a party to or bound by the terms of any collective
bargaining agreement or other union contract applicable to any employee of such
Seller and no such agreement or contract has been requested by any employee or
group of employees of a Seller, nor has there been any discussion with respect
thereto by management of Seller with any employees of such Seller. No Seller is
aware of any union organizing activities or proceedings involving, or any
pending petitions for recognition of, a labor union or association as the
exclusive bargaining agent for, or where the purpose is to organize, any group
or groups of employees of a Seller. There is not currently pending, with regard
to any of its facilities, any proceeding before the National Labor Relations
Board, wherein any labor organization is seeking representation of any employees
of a Seller.
Section 5.19 INTELLECTUAL PROPERTY RIGHTS. All patents, trademarks
(whether registered or not), trade names, corporate names, computer software,
copyrights and patent or know-how licenses (wherein a Seller is either licensee
or licensor) and any other intellectual property of a Seller (the "INTELLECTUAL
PROPERTY RIGHTS") are lawfully owned, possessed or used by each such Seller, as
the case may be. No past due royalties or other payments subsequent to the
Closing Date are or will be required to be paid to any Person who is the
licensor under such license agreements as they currently exist, and no Seller is
now nor upon consummation of the transactions contemplated hereby will be in
default in any obligation with respect to any agreement with others concerning
the Intellectual Property Rights. There is no existing or threatened
infringement, misuse or misappropriation by others of the Intellectual Property
Rights; there is no pending or threatened claim by a Seller against others for
any such infringement, misuse or misappropriation; and there is no pending
judicial proceeding involving any claim, and no Seller has received any notice
or claim of any infringement, misuse or misappropriation by a Seller of any
patent, trademark, trade name, copyright, Intellectual Property Rights license
or similar right owned by any third party during the past five (5) years.
Section 5.20 RELATIONSHIPS. No Seller has received written notice from
any supplier or from any party to any Contract involving more than $10,000
annually with such Seller (each a "CONTRACT PARTY"), during the past two (2)
years that such supplier or Contract Party intends to discontinue doing business
with such Seller, and no supplier or Contract Party during the past two (2)
years has indicated any intention (a) to terminate its existing business
relationship with such Seller or (b) not to continue its business relationship
with such Seller, whether as a result of the transactions contemplated hereby or
otherwise.
Section 5.21 CERTAIN PAYMENTS. No Seller or, to the best knowledge of
Sellers, any officer or employee of a Seller has paid or received or caused to
be paid or received, directly or indirectly,
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in connection with the business of such Seller (a) any bribe, kickback or other
similar payment to or from any domestic or foreign government or agency thereof
or any other Person or (b) any contribution to any domestic or foreign political
party or candidate (other than from personal funds of officers or employees not
reimbursed by a Seller or as permitted by applicable law).
Section 5.22 BOOKS AND RECORDS. The corporate minute books, and other
corporate records of each Seller are correct and complete in all material
respects and the signatures appearing on all documents contained therein are the
true signatures of the person purporting to have signed the same. All actions
reflected in said books and records were duly and validly taken in compliance
with the laws of the State of Texas and no meeting of board of directors, or
committee has been held for which minutes have not been prepared and are not
contained in the minute books. To the extent that they exist, all personnel
files, reports, accounting and tax records and other similar records that relate
to the business of each Seller have been prepared and maintained in accordance
with good business practices and, where applicable, in conformity with generally
accepted accounting principles and applicable laws and regulations. All such
books and records are located in the offices of Sellers.
Section 5.23 CONDITION AND SUFFICIENCY OF ASSETS. The Improvements and
Equipment are in adequate condition and repair (subject to normal wear and tear
and loss by fire or casualty) and are adequate for the uses to which they are
being put. The Improvements, Equipment and Motor Vehicles reflected in the
Balance Sheet (except any such tangible property disposed of since January 31,
1996 in the ordinary course of business), or acquired by a Seller after January
31, 1996, constitute all of the operating assets held for use or used in
connection with the Business other than those disposed of in the ordinary course
of business, and are sufficient for the continued conduct of the Business at the
Closing in substantially the same manner as conducted prior to the Closing.
Section 5.24 SELLERS' DISCLAIMER OF REPRESENTATIONS AND WARRANTIES.
EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY CONTAINED HEREIN OR IN
ANY OTHER CERTIFICATE OR DOCUMENT DELIVERED IN CONNECTION HEREWITH, SELLERS
HEREBY ARE SELLING THE ACQUIRED PROPERTY "AS IS WHERE IS" AND DO NOT MAKE, AND
EXPRESSLY DISCLAIM, ANY REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR
IMPLIED AS TO (i) THE USE, OPERATION, CHARACTERISTICS OR CONDITION OF THE
ACQUIRED PROPERTY OR ANY PORTION THEREOF, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF SUITABILITY, HABITABILITY, MERCHANTABILITY, OR DESIGN OR FITNESS
FOR ANY SPECIFIC OR A PARTICULAR PURPOSE, (ii) THE SURFACE OR SUBSURFACE OF THE
ACQUIRED PROPERTY, WHETHER OR NOT OBVIOUS, VISIBLE OR APPARENT, (iii) THE
PRESENCE OR ABSENCE OF HAZARDOUS SUBSTANCES IN, ON OR UNDER THE ACQUIRED
PROPERTY, OR THE COMPLIANCE OF THE BUSINESS WITH ENVIRONMENTAL LAWS, AND (iv)
THE SOIL IN, ON OR UNDER THE LAND, DRAINAGE, FLOODING CHARACTERISTICS, UTILITIES
OR OTHER CONDITIONS EXISTING IN, ON, OR UNDER THE LAND.
Section 5.25 CERTAIN EXPENSES. The combined cost to Sellers of water and
sewer services relating to the Business (including, without limitation, repair
and maintenance expenses, usage fees
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and any other expenses related to the provision of water and sewer services to
the Business) for the twelve (12) months ended December 31, 1995 did not exceed
$70,000.
Section 5.26 INMATE BANK ACCOUNTS. SCHEDULE 5.26 lists each of the
Inmate Bank Accounts.
Section 5.27 ASSUMED ACCRUED VACATION EXPENSE. To the best knowledge of
Sellers, the Assumed Accrued Vacation Expense as of the Closing Date will not
exceed the Assumed Accrued Vacation Expense as of May 1, 1996 by more than
twenty percent (20%).
Section 5.28 STUDIES, ETC. Sellers have no studies, reports, plans,
analyses or similar documents (whether prepared by a Seller's employees or
others) in their possession or control relating to Hazardous Substances and
Environmental Laws or relating to the Business, Land and Improvements.
Section 5.29 DISCLOSURE. To the best knowledge of Sellers, there is no
fact known to a Seller that has specific application to such Seller (other than
general economic or industry conditions) that would have a Material Adverse
Effect that has not been set forth in this Agreement or in the Schedules
attached hereto.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants that:
Section 6.1 CORPORATE EXISTENCE. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is duly qualified to transact business in all jurisdictions wherein
the nature of its business or ownership of its assets require such
qualification.
Section 6.2 AUTHORITY; NO CONFLICTS. Purchaser has all requisite
corporate power and authority to carry on its business as presently conducted,
to enter into this Agreement and to perform its other obligations under this
Agreement. The consummation of the transactions contemplated by this Agreement
will not violate, or be in conflict with, any provision of Purchaser's charter,
bylaws, any agreement or instrument to which Purchaser is a party or by which
Purchaser is bound or any law applicable to Purchaser. The execution, delivery
and performance of this Agreement and the transactions contemplated hereby have
been duly and validly authorized by all requisite corporate action on the part
of Purchaser. There is no action, claim, suit, arbitration, investigation or
proceeding pending or threatened against Purchaser which purports to affect the
validity or enforceability of this Agreement or that seeks to prohibit, restrict
or delay the consummation of the transactions contemplated hereby.
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Section 6.3 BINDING AGREEMENT. This Agreement constitutes, as of the
date hereof, and this Agreement and all documents and instruments required
hereunder to be executed and delivered by Purchaser at Closing will constitute,
on the Closing Date, legal, valid and binding obligations of Purchaser
enforceable against Purchaser in accordance with their respective terms, subject
to the effect of any applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent transfer, fraudulent conveyance or similar laws affecting
creditors' rights generally and subject, as to enforceability, to the effect of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Section 6.4 REGULATORY APPROVALS. No filings or other regulatory
approvals are required to be filed or obtained by Purchaser in connection with
the execution, delivery and performance by Purchaser of this Agreement prior to
the consummation of the transactions contemplated herein.
Section 6.5 PURCHASER'S INSPECTION. Purchaser acknowledges that it is
acquiring the Acquired Property based solely on its own (or its representative)
inspections of the Acquired Property subject only to the representations and
warranties expressly contained in this Agreement or in any other certificate or
document delivered in connection herewith. Purchaser further acknowledges that
no other representations or warranties (oral or written) of any kind have been
made by Sellers, or any representatives of Sellers, as to the Acquired Property,
and that SELLERS HAVE DISCLAIMED ALL OTHER REPRESENTATIONS OR WARRANTIES RELATED
TO THE ACQUIRED PROPERTY.
ARTICLE VII
CERTAIN UNDERSTANDINGS AND AGREEMENTS OF THE PARTIES
Section 7.1 EMPLOYEES.
(a) Purchaser may, but shall not be obligated to, offer employment to
any of the employees of the Business. No Seller will solicit, or endeavor to
solicit, after the Closing Date any employee or discourage any such person from
accepting such employment with Purchaser. No Seller has made any representations
or promises, oral or written, to employees of such Seller concerning employment
by Purchaser.
(b) Purchaser shall not be responsible for any costs, obligations or
liabilities which may result from the termination of employment by a Seller of
any employee of the Business; PROVIDED, HOWEVER, that Purchaser shall be
responsible for and shall assume all costs, losses or damages in connection with
the termination by Purchaser of any employee of the Business who is hired by
Purchaser on or after the Closing Date. Purchaser makes no representation with
respect to the comparability of Purchaser's employee benefits to those offered
by a Seller. Purchaser specifically disclaims any obligation to remunerate
employees of a Seller who, following the Closing Date, will be employed by
Purchaser, at levels equal to the aggregate remuneration provided to such
employees while employed by such Seller. Each Seller shall have taken all
necessary actions to comply with
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the Worker Adjustment and Retraining Notification Act (the "WARN ACT") to the
extent it is subject to the WARN Act.
(c) Each Seller shall take such actions as it deems appropriate to
terminate, modify, alter or amend the existing Benefit Programs with respect to
employees of the Business due to the transactions contemplated by this
Agreement. Purchaser shall have no obligation to assume, establish or continue
any of such Benefit Programs, including, without limitation, any severance plans
of a Seller. Each Seller shall provide all employees of the Business terminated
by such Seller with health insurance continuation in accordance with the
provisions of Part 6 of Title 1 of ERISA, if applicable.
Section 7.2 TAXES.
(a) LIABILITY FOR TAXES. Subject to Section 7.2(d) hereof, Sellers shall
be liable for, and shall indemnify and hold Purchaser and its Affiliates
harmless from, (i) all Taxes that are imposed on or incurred by Sellers, (ii)
all Taxes that are imposed on or incurred with respect to the Acquisition Assets
or the Business for any taxable period ending on or before May 1, 1996, (iii) a
portion, determined as described below, of any Taxes that are imposed on or
incurred with respect to the Acquisition Assets or the Business for any taxable
period beginning prior to and ending after May 1, 1996 ("STRADDLE PERIOD") which
is allocable to the period ending on or before May 1, 1996, (iv) any Taxes
payable as a result of a breach by Sellers of any of the representations set
forth in Section 5.16 hereof, and (v) any attorneys' fees or other costs
incurred by Purchaser or its Affiliates in connection with any payment from
Sellers under this Section 7.2(a). Purchaser shall be liable for, and shall
indemnify and hold Sellers and their Affiliates harmless from, all Taxes that
are imposed on or incurred with respect to the Acquisition Assets or the
Business for which Sellers are not liable under the preceding sentence. The
determination of the portion of any Taxes imposed on or incurred with respect to
the Acquisition Assets or the Business for a Straddle Period which is allocable
to the period ending on or before May 1, 1996 shall be made, in the case of ad
valorem, property or similar Taxes, if any, which are not measured by, or based
upon, production, or franchise or capital Taxes which are not measured by, or
based upon, net income, by allocating such Taxes on a per diem basis, and, in
the case of all other Taxes, by assuming that the period ending on or before the
Closing Date constitutes a separate taxable period and by taking into account
the actual taxable events occurring during such period.
(b) TAX RETURNS. Sellers shall be responsible for the preparation and
filing of any Tax Return relating to the Acquisition Assets or the Business that
is originally due on or before the Closing Date. Purchaser shall be liable for
the preparation and filing of all other Tax Returns that relate to the
Acquisition Assets or the Business.
(c) RIGHT TO REFUNDS. If Sellers, on the one hand, or Purchaser, on the
other hand, receives a refund of any Taxes for which the other is liable, then
the party receiving such refund shall, within 30 days after its receipt, remit
it to the other party.
(d) TRANSFER TAXES. Purchaser shall be liable for and pay, and shall
indemnify and hold Sellers and their Affiliates harmless from all transfer,
sales, use, gross receipts, stamp, value added,
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excise, or similar Taxes imposed on or relating to the sale or transfer of the
Acquisition Assets or the Business.
Section 7.3 CONSENTS. Sellers shall use their Best Efforts to procure
all consents, novations, approvals or waivers which must be obtained by Sellers
pursuant to this Agreement or which are necessary to assign the Contracts to
Purchaser, and Purchaser will use its Best Efforts to assist Sellers in
procuring such consents, novations, approvals or waivers. Purchaser shall pay
the expenses, if any, of obtaining such consents. At the Closing, Purchaser may
elect to close the transactions contemplated hereby, notwithstanding the fact
that Sellers may have failed to obtain consents to the transfer. After the
Closing, each Seller will use its Best Efforts to obtain any consents required
in connection with the transactions contemplated hereby that are reasonably
requested by Purchaser and that have not been previously obtained provided all
reasonable expenses therefor are assumed by Purchaser.
Section 7.4 TITLE.
(a) Purchaser has caused Charter Title Company, as agent for Lawyers
Title Insurance Corporation (the "TITLE COMPANY"), to furnish Purchaser a
Commitment for Title Insurance (the "COMMITMENT") from the Title Company
addressed to Purchaser covering the Land and Improvements, pursuant to which the
Title Company, at Sellers' sole cost and expense (except as provided in Section
9.1(e)(ii)), shall commit to issue to Purchaser a Texas Owner's Policy of Title
Insurance (the "TITLE POLICY"), without deletion of the areas and boundaries
exception (which may be obtained at Purchaser's expense), in the amount of One
Million Eight Hundred Thousand Dollars ($1,800,000) in the form of the
Commitment described on SCHEDULE 7.4(A), together with legible copies of all
instruments described in the Commitment evidencing defects in, exceptions or
objections to or encumbrances upon title to the Land or Improvements.
(b) Purchaser, at its sole cost and expense, shall have obtained a
report of searches made of the Uniform Commercial Code Records of Harris County,
Texas and the Secretary of State of Texas in the name of Sellers (the "UCC
SEARCHES"), evidencing any Liens relating thereto granted by Sellers.
(c) Purchaser shall have fifteen business days following receipt of the
UCC Searches and Sellers' delivery of the Commitment and the Survey provided for
in this Section 7.4 and Section 7.5 to deliver to Sellers its written objections
to any matters reflected therein. Any such matters which are not objected to by
Purchaser within said fifteen business days shall all be considered Permitted
Encumbrances. Sellers shall in good faith diligently work to have the title and
survey exceptions raised by Purchaser, other than the Permitted Encumbrances,
cured or removed to the reasonable satisfaction of Purchaser by the Closing Date
after Purchaser notifies Sellers in writing of such exceptions or objections. If
Sellers fail to cure or satisfy such objections for any reason within such time
period, Purchaser may either (A) accept conveyance of title to the Land and
Improvements subject to such uncured matters and proceed with the Closing
contemplated herein (in which event all such matters shall be deemed Permitted
Encumbrances), or (B) give written notice to Sellers electing to terminate this
Agreement pursuant to Article X hereof. Notwithstanding the foregoing, if the
Commitment discloses matters which constitute a mortgage security interest or
other lien(s),
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then on the Closing Date, Sellers shall apply such portion of the Purchase Price
as may be necessary to discharge any such lien(s) of record.
Section 7.5 SURVEY. Sellers, at their sole cost and expense, have caused
a new survey (the "SURVEY") of the Land to be made by a licensed surveyor
approved by Purchaser. The Survey shall be acceptable to Sellers, to Purchaser
and the Title Company and shall contain a certification in favor of Purchaser
and the Title Company that the Survey is correct and accurate and that the Land
is free of encroachments, except as shown, the form and content of which
certification shall be approved by the Purchaser, Sellers, and the Title
Company. For purposes of the description of the Land to be included in the Deed
(as defined in Section 9.1(e)(i) hereof) to be delivered pursuant to Section
9.1, the description prepared by the surveyor shall control any conflicts or
inconsistencies with the descriptions of the Land on EXHIBIT A hereto, and such
description shall be deemed to be incorporated into this Agreement upon their
completion and approval by Purchaser.
Section 7.6 REMOVAL OF EXCLUDED ASSETS. Sellers shall remove all
Excluded Assets from the Acquired Property within fifteen (15) days after the
Closing Date.
Section 7.7 ORIGINAL BOOKS AND RECORDS. Regardless of whether or not
Purchaser obtains copies at the Closing pursuant to Sections 3.2(m), 3.2(n) and
3.2(o) of this Agreement, Seller shall leave all original Business Records,
Personnel Files and Compliance Records at the Improvements for use and copying
by Purchaser for one year following the Closing Date. During such one year
period, Purchaser shall provide Sellers with access to such Business Records,
Personnel Files and Compliance Records during normal business hours and upon
reasonable notice to Purchaser and Purchaser shall be responsible for preserving
such records.
Section 7.8 FURTHER ASSURANCES. Sellers and Purchaser shall execute and
deliver to the other, at the Closing or thereafter, any other instrument which
may be requested by the other and which is reasonably appropriate to perfect or
evidence any of the sales, assignments, transfers or conveyances contemplated by
this Agreement or to transfer any Acquisition Assets identified after the
Closing.
Section 7.9 MAIL RECEIVED AFTER CLOSING. Following the Closing,
Purchaser may receive and open all mail addressed to Sellers at the Acquired
Property and, to the extent that such mail and the contents thereof relate to
the Business or the Acquisition Assets, deal with the contents thereof in its
discretion. Purchaser shall promptly notify Sellers of (and provide Sellers
copies of the relevant portions of) any mail that obliges Sellers to take any
action or indicates that action may be taken against any of them. To the extent
that such mail and the contents thereof do not relate to the Business or the
Acquisition Assets, such mail and the contents thereof shall be promptly
forwarded to Sellers at 2208 West 34th Street, Houston, Texas 77018.
Section 7.10 POST-CLOSING SETTLEMENT. As soon as practicable after the
Closing, and in any event within thirty (30) business days following the Closing
Date, Sellers shall deliver to Purchaser a statement (the "INTERIM PERIOD
ACCOUNTING STATEMENT") indicating (i) the Operating Revenues for the period from
May 1, 1996 through the Closing Date (the "INTERIM PERIOD"), (ii) the Operating
Expenses for the Interim Period, (iii) the amount of the Operating Revenues for
the Interim Period
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collected by Sellers (the "INTERIM REVENUES COLLECTED AMOUNT"), and (iv) the
amount of the Operating Expenses for the Interim Period paid by Sellers (the
"INTERIM EXPENSES PAID AMOUNT," and, together with the Interim Revenues
Collected Amount, the "INTERIM AMOUNTS"). The Interim Period Accounting
Statement shall be accompanied by a certificate of Sellers to the effect that
such statement has been prepared on a basis consistent with that used in the
preparation of the Balance Sheet and generally accepted accounting principles.
Within five (5) business days following the delivery of the
Interim Period Accounting Statement, Purchaser shall notify Sellers if Purchaser
disputes the Interim Amounts. If Purchaser does not so notify Sellers, Purchaser
shall be deemed to have accepted such Interim Amounts upon the expiration of the
five (5) business days. If Purchaser does so notify Sellers that Purchaser
disputes the Interim Amounts, and if Purchaser and Sellers are thereafter unable
to agree within ten (10) additional business days upon the Interim Amount, such
amount shall be determined by an independent accounting firm selected by Sellers
from a list of three such firms provided by Purchaser. The determination by such
accounting firm shall be final and binding on Purchaser and Sellers, and the
fees and expenses of such accounting firm shall be borne equally by Sellers, on
the one hand, and Purchaser, on the other hand.
If, as finally determined pursuant to this Section, the Interim
Revenues Collected Amount is greater than the Interim Expenses Paid Amount,
Sellers collectively shall pay Purchaser an amount in cash equal to the
difference. If, as finally determined pursuant to this Section, the Interim
Revenues Collected Amount is less than the Interim Expenses Paid Amount,
Purchaser shall pay Sellers collectively an amount in cash equal to the
difference. Such payments by Purchaser or Sellers pursuant to this Section shall
be made within five (5) business days of either Purchaser's acceptance of the
Interim Amounts or the determination of the Interim Amounts by the accounting
firm.
Section 7.11 BILLS AND PAYMENTS RECEIVED AFTER CLOSING. Purchaser shall
promptly send Sellers any bills or other notices that payment is due that
Purchaser receives after Closing related to obligations of Sellers not assumed
by Purchaser under this Agreement, and Sellers shall promptly pay such bills or
other debts on or before the date that such bills are due. Sellers and Purchaser
shall each promptly send to the other any payments received by them after
Closing that is an asset of the other.
Section 7.12 LOSS DUE TO CONDEMNATION. In the event of a condemnation
proceeding commenced on or before the Closing Date with respect to all or any
material portion of the Land and Improvements, Purchaser may, upon written
notice to the Sellers given within 10 days of receipt of notice of such event,
terminate this Agreement pursuant to Article X of this Agreement. In the event
that Purchaser does not elect to terminate, then this Agreement shall remain in
full force and effect, and the transaction hereby contemplated shall close in
accordance with the terms and conditions of this Agreement except that Sellers
shall assign to Purchaser at Closing all of Sellers' rights and interests in and
to any condemnation awards which have been paid or are payable to Sellers, less
reasonable costs and attorneys fees of Sellers in connection therewith.
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Section 7.13 LOSS DUE TO CASUALTY. In the event of a Substantial Loss or
Damage (defined below) to the Acquired Property or Improvements by fire or other
casualty prior to the Closing Date, unless such Substantial Loss or Damage
results from the negligence of Purchaser, Purchaser may, upon written notice to
the Sellers within 10 days of receipt of notice of such event, terminate this
Agreement pursuant to Article X of this Agreement. In the event that Purchaser
does not elect to terminate, then this Agreement shall remain in full force and
effect, and the transaction hereby contemplated shall close in accordance with
the terms and conditions of this Agreement except that Sellers shall assign to
Purchaser at Closing all of Sellers' rights and interests in and to any
insurance proceeds which have been or are payable to Sellers as a result of such
damage or loss, less reasonable costs and attorneys fees of Sellers in
connection therewith. "SUBSTANTIAL LOSS OR DAMAGE" shall mean a loss or damage
of 20% or more of the square footage of the Improvements or material damage to
the Acquired Property. In the event of a loss or damage arising prior to the
Closing Date that constitutes less than a Substantial Loss or Damage by fire or
other casualty, Purchaser shall not have the right to terminate this Agreement
pursuant to this Section 7.13, however, Sellers shall assign to Purchaser at
Closing all of Sellers' rights and interests in and to any insurance proceeds
which have been or are payable to Sellers as a result of such damage or loss,
less reasonable costs and attorneys fees of Sellers in connection therewith
ARTICLE VIII
COVENANTS
Section 8.1 SELLERS' COVENANTS. Sellers jointly and severally covenant
and agree with Purchaser as follows:
(a) CONDUCT OF BUSINESS. Except as permitted hereunder or
contemplated hereby or as consented to in writing by Purchaser, through
the Closing Date each Seller will (i) conduct the Business in the usual
and ordinary course thereof, including, without limitation, the making
of proposals, quotations, bids and solicitations, and the entering into
of contracts for the purchase of products and purchase and sale of
services; (ii) communicate regularly with Purchaser and keep Purchaser
closely advised of any material developments relating to the Business;
(iii) permit Purchaser to have reasonable access to the Acquired
Property and to review and copy the books and records of the Business;
(iv) maintain and preserve the assets of such Seller in customary
repair, order and condition, reasonable wear and tear and loss by fire
and casualty (which loss shall be governed by Section 7.13 hereof)
excepted, and proceed with any improvements in progress at the
Improvements associated with the Business; (v) use its Best Efforts to
preserve Seller's business organization intact, to retain the services
of Seller's officers and employees and to preserve Seller's
relationships with its suppliers and the TDCJ and other Governmental
Authorities with which Sellers have engaged in business related to the
Business; (vi) use its Best Efforts to cause all of the representations
and warranties in Article V hereof to continue to be true and correct;
(vii) continue to purchase inventories, supplies and similar items in
the ordinary course in order to have as of May 1, 1996 and to maintain
thereafter through the Closing Date adequate and historical levels of
such items; and (viii) not make contract bids for a value greater than
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$10,000; PROVIDED, HOWEVER, that nothing in this Section 8.1(a) shall
prohibit or restrict a Seller from repaying any of its indebtedness from
funds not included among the Acquisition Assets.
(b) MAINTENANCE OF INSURANCE. Each Seller will (i) maintain or
cause to be maintained the insurance policies or risk retention programs
(or policies or programs of substantially the same nature) of each
Seller in full force and effect at all times until the Closing Date and
(ii) cause Purchaser to receive the benefit of such policies, programs
or coverage (including self-insurance or any insurance reserves) from
and after the Closing with respect to incidents occurring prior to the
Closing.
(c) INFORMATION AND ACCESS. Each Seller will afford
representatives of Purchaser reasonable access during normal business
hours to its offices, personnel, Improvements, equipment and records,
for the purpose of conducting an investigation thereof. Each Seller will
furnish to Purchaser such additional financial and operating data and
other information as Purchaser may reasonably request; PROVIDED,
HOWEVER, that the confidentiality of any data or information so acquired
shall be maintained by Purchaser and its representatives in accordance
with Section 8.2(a) hereof.
(d) BEST EFFORTS. Each Seller will use its Best Efforts to
obtain the satisfaction of the conditions to Closing set forth in
Section 9.1 hereof.
(e) PUBLIC ANNOUNCEMENTS AND DISCLOSURE OF COMPANY INFORMATION.
Subject to applicable law, at all times until the Closing each Seller
will promptly advise, and obtain the approval of, Purchaser before (i)
issuing, or permitting any of such Seller's directors or officers to
issue, any press release with respect to this Agreement or the
transactions contemplated hereby or (ii) disclosing, or permitting any
of such Seller's directors or officers to disclose, to any Person (other
than Sellers or Purchaser or their respective directors, officers,
employees, representatives or agents) nonpublic information regarding
Purchaser.
(f) OTHER OFFERS. Except in connection with the transactions
contemplated by this Agreement, from and after the date hereof, each
Seller shall not, and shall not knowingly permit any of its officers,
directors, employees, Affiliates, representatives or agents to, directly
or indirectly, (i) solicit, initiate or knowingly encourage any offer or
proposal for, or any indication of interest in, a merger or business
combination involving a Seller or the acquisition of an equity interest
in, or a substantial portion of the assets of, Seller or (ii) engage in
negotiations with or disclose any nonpublic information relating to a
Seller, or afford access to the properties, books or records of a
Seller, to any Person.
(g) NOTIFICATION OF CERTAIN MATTERS. Each Seller shall give
prompt notice to Purchaser of (i) the occurrence or nonoccurrence of any
event the occurrence or nonoccurrence of which would be likely to cause
any representation or warranty of such party contained in this Agreement
to be untrue or inaccurate in any material respect at or prior to the
Closing Date and (ii) any material failure by a Seller to comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder;
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PROVIDED, that the delivery of any notice pursuant to this Section
8.1(g) shall not limit or otherwise affect the remedies available
hereunder to Purchaser; and PROVIDED, FURTHER that this provision shall
not affect Sections 5.24 and 6.5 hereof.
Section 8.2 PURCHASER'S COVENANTS. Purchaser covenants and agrees with
Sellers as follows:
(a) PUBLIC ANNOUNCEMENTS AND DISCLOSURE OF COMPANY INFORMATION.
Subject to applicable law, at all times until the Closing Purchaser will
promptly advise, and obtain the approval of, each Seller before (i)
issuing, or permitting any of Purchaser's directors, officers,
employees, representatives, agents or subsidiaries to issue, any press
release with respect to this Agreement or the transactions contemplated
hereby or (ii) disclosing, or permitting any of Purchaser's directors,
officers, employees, representatives, agents or subsidiaries to
disclose, to any Person (other than Purchaser or Sellers or their
respective directors, officers, employees, representatives or agents)
nonpublic information regarding Sellers.
(b) BEST EFFORTS. Purchaser will use its Best Efforts to cause
the representations and warranties contained in Article VI hereof to
continue to be true and correct through the Closing Date and to obtain
the satisfaction of the conditions to Closing set forth in Section 9.2
hereof.
ARTICLE IX
CONDITIONS TO CLOSING
Section 9.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of
Purchaser to consummate the transactions contemplated herein are subject, at the
option of Purchaser, to satisfaction of the following conditions:
(a) COMPLIANCE. Sellers shall have complied with their covenants
and agreements contained herein, and the representations and warranties
contained in Article V hereof shall be true and correct in all material
respects on the date hereof and as of the Closing Date;
(b) OFFICERS' CERTIFICATE. Purchaser shall have received a
certificate, substantially in the form of EXHIBIT C hereof, dated the
Closing Date, of an executive officer of each Seller certifying as to
the matters specified in Section 9.1(a) hereof;
(c) SELLERS' RESOLUTIONS. Each Seller shall deliver to Purchaser
certified copies of resolutions duly adopted by the board of directors
of each Seller, as the case may be, authorizing and approving the
execution and delivery of this Agreement, including the exhibits and
schedules hereto, and the consummation of the transactions contemplated
herein;
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(d) RENEWAL OF OPERATING CONTRACTS. All operating contracts of
TAF listed on SCHEDULE 3.2(B) hereto shall have been renewed, extended
or finalized, as the case may be, at the minimum per diems specified
opposite each such operating contract listed on SCHEDULE 3.2(B), through
at least August 31, 1997;
(e) TRANSFER DOCUMENTS. Each Seller shall execute and deliver to
Purchaser such bills of sale and other instruments of sale, transfer,
conveyance, assignment and delivery covering the Acquisition Assets or
any part thereof, executed by Sellers or other appropriate parties, as
Purchaser may reasonably require to assure the full and effective sale,
transfer, conveyance, assignment and delivery to Purchaser of the
Acquisition Assets free and clear of any rights and claims of third
parties (other than Permitted Encumbrances) no later than the close of
business on the Closing Date, including, but not limited to, the
following:
(i) special warranty deed (the "DEED"), substantially in
the form of EXHIBIT D hereto and acceptable to Purchaser, duly
executed by THF, duly acknowledged and in form for recording,
conveying the Land and Improvements to Purchaser, which Deeds
shall convey to Purchaser good, and indefeasible fee simple title
to the Land and Improvements and all of Sellers' right, title and
interest in and to the Appurtenances, free and clear of all
liens, encumbrances, covenants, conditions, restrictions,
rights-of-way, easements and other matters affecting the title to
the Land and Improvements except for the Permitted Encumbrances;
(ii) the standard form of Texas Owner's Policy of Title
Insurance as set forth on SCHEDULE 7.4(A) issued by the Title
Company, at the sole cost and expense of Seller (except as
provided below in this Section 9.1(e)(ii)), insuring Purchaser's
good and indefeasible fee simple title to the Land and
Improvements in the amount of One Million Eight Hundred Thousand
Dollars ($1,800,000), subject only to the Permitted Encumbrances
with such endorsements and/or deletions thereto as are set forth
on SCHEDULE 7.4(A) hereto, such endorsements and/or deletions
being at Purchaser's cost and expense;
(iii) a general conveyance by each Seller transferring to
Purchaser good and indefeasible title to all of the Acquisition
Assets, substantially in the form of EXHIBITS E-1 AND E-2 hereto;
(iv) all documents reasonably required for the assignment
of Sellers' rights under all registrations, permits and licenses
(to the extent permitted by law), equipment or motor vehicle
leasing agreements, motor vehicle and rolling stock titles,
rights under sales and/or purchase orders and of Sellers' rights
under all other Contracts (including the operating contracts of
TAF listed on SCHEDULE 3.2(B) hereto) constituting a part of the
Acquisition Assets;
(v) copies of all of the contracts, agreements,
commitments, books, records, files and other data that (x) are
included in the Acquisition Assets or
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(y) relate to or affect the Acquisition Assets and are
reasonably necessary for the continued conduct of the Business;
and
(vi) such other instruments of transfer and assignment in
respect of the Acquisition Assets as Purchaser shall reasonably
require and as shall be consistent with the terms and provisions
of this Agreement. Prior to the Closing Date, Sellers will take
such reasonable steps as may be requisite or appropriate so that
no later than the close of Business on the Closing Date,
Purchaser will be in actual ownership and control of all of the
Acquisition Assets;
(f) ABSENCE OF MATERIAL ADVERSE EFFECT. No Material
Adverse Effect shall have occurred since the date hereof;
(g) RESIDENT POPULATION OF THE BUSINESS AND CORRECTIONAL FACILITY
PERMIT. Purchaser, in its sole discretion, shall be satisfied that the
resident population of the halfwayhouse operated on the Acquired
Property will be maintained at a level in excess of 300 residents, and
shall have received a correctional facility permit from the City of
Houston allowing the Business to have in excess of 300 beds at the
halfway-house at 10950 Beaumont Highway, or a letter from the City of
Houston satisfactory to Purchaser regarding the issuance of such
approval subsequent to Closing;
(h) CONSULTING AGREEMENT. Joe Knauth shall have executed and
delivered to Purchaser a consulting agreement, substantially in the form
of EXHIBIT F hereto;
(i) ENVIRONMENTAL REVIEW AND REMEDIATION. Purchaser shall have
received a current Phase I environmental review, prepared at Purchaser's
expense, with respect to the Acquired Property and such survey shall not
have raised any questions as to the accuracy of Sellers' representations
and warranties in Section 5.11 hereof;
(j) ORDERS, ETC. No action, suit or proceeding shall have been
commenced or shall be pending or, to the knowledge of Sellers,
threatened, and no statute, rule, regulation or order shall have been
enacted, promulgated, issued or deemed applicable to the transactions
contemplated by this Agreement, by any Governmental Authority or court
that reasonably may be expected to (i) prohibit Purchaser's ownership or
operation of all or a material portion of the Business or the
Acquisition Assets, or compel Purchaser to dispose of or hold separate
all or a material portion of Purchaser's or Sellers' business or assets,
as a result of the transactions contemplated by this Agreement or (ii)
prohibit consummation of the transactions contemplated by this
Agreement;
(k) REMOVAL OF LIENS. Sellers shall have caused any and all Liens
on the Acquisition Assets, other than Permitted Encumbrances, to be
released and shall have provided Purchaser with documentary evidence to
such effect;
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(l) ADDITIONAL REAL PROPERTY MATTERS.
(i) Purchaser shall have timely received the Title
Commitment, the Survey, and each of those items described in Section 7.4
herein and any objections of Purchaser thereto shall have been waived
pursuant to such Section;
(ii) There shall be no unpaid ad valorem taxes or
assessments levied or assessed against the Acquired Property for five
(5) years prior to the year in which Closing occurs. If the Acquired
Property, or any part thereof, shall be or shall have been affected by
any such assessments for five (5) years prior to the year of Closing,
which are or may become payable in installments, then for the purposes
of this Agreement all the installments of any such assessment whether
due or payable prior to or after the date of Closing shall be paid and
discharged by Sellers at the Closing and Purchaser shall take title free
of the lien of all the unpaid installments of any such assessment;
(m) CONSENTS. All consents and approvals required in connection
with the execution, delivery and performance of this Agreement shall
have been obtained; and
(n) OTHER DOCUMENTS; VERIFICATION BY INDEPENDENT AUDITOR. Sellers
shall deliver to Purchaser such other documents, instruments and
certificates as may be reasonably requested by Purchaser. Purchaser, at
its sole cost and expense, shall have the right to have an independent
public auditing firm verify the accuracy of Sellers' representations and
warranties which relate the financial condition of the Business.
Section 9.2 CONDITIONS TO OBLIGATIONS OF SELLERS. The obligations of
Sellers to consummate the transactions contemplated herein are subject, at the
option of Sellers, to satisfaction of the following conditions:
(a) COMPLIANCE. Purchaser shall have complied with its covenants
and agreements contained herein, and the representations and warranties
contained in Article VI hereof shall be true and correct in all material
respects on the date hereof and as of the Closing Date;
(b) PURCHASER'S CERTIFICATE. Sellers shall have received a
certificate, substantially in the form of EXHIBIT G hereof, dated the
Closing Date, of an executive officer of Purchaser certifying as to the
matters specified in Section 9.2(a) hereof;
(c) PURCHASER'S RESOLUTIONS. Purchaser shall deliver to Sellers
certified copies of resolutions duly adopted by the board of directors
of Purchaser authorizing and approving the execution and delivery of
this Agreement and the consummation of the transactions contemplated
herein;
(d) ORDERS, ETC. No action, suit or proceeding shall have been
commenced or shall be pending or, to the actual knowledge of the
officers and directors of Purchaser, threatened, and no statute, rule,
regulation or order shall have been enacted, promulgated,
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issued or deemed applicable to the transactions contemplated by this
Agreement, by any Governmental Authority or court that reasonably may be
expected to (i) prohibit Purchaser's ownership or operation of all or a
material portion of the Business or the Acquisition Assets, or compel
Purchaser to dispose of or hold separate all or a material portion of
Sellers' business or assets, as a result of the transactions
contemplated by this Agreement or (ii) prohibit consummation of the
transactions contemplated by this Agreement.
ARTICLE X
TERMINATION
Section 10.1 GROUNDS FOR TERMINATION. This Agreement may be terminated
at any time prior to the Closing Date:
(a) by the mutual written agreement of Sellers and Purchaser;
(b) by Purchaser by written notice thereof to Sellers if any of
the conditions set forth in Section 9.1 hereof shall have become
incapable of fulfillment by or before 12:00 p.m., Houston time, on May
20, 1996, and shall not have been waived by Purchaser;
(c) by Purchaser, as set forth in Sections 7.12 and 7.13;
(d) by Sellers by written notice thereof to Purchaser if any of
the conditions set forth in Section 9.2 hereof shall have become
incapable of fulfillment by or before 12:00 p.m., Houston time, on May
20, 1996, and shall not have been waived by Sellers;
(e) by Sellers or Purchaser by written notice thereof to the
other if the transactions contemplated hereby shall not have been
consummated by 12:00 p.m., Houston time, on May 20, 1996, or such other
date, if any, as Sellers and Purchaser shall agree upon in writing; or
(f) by Sellers or Purchaser by written notice thereof to the
other if the consummation of the transactions contemplated hereby would
violate any nonappealable final order, decree or judgment of any court
or Governmental Authority having competent jurisdiction enjoining,
restraining or otherwise preventing, or awarding substantial damages in
connection with, or imposing a material adverse condition upon, the
consummation of this Agreement or the transactions contemplated hereby;
PROVIDED, HOWEVER, that a party (treating the Sellers as one party) shall not be
allowed to exercise any right of termination pursuant to this Section 10.1 if
the event giving rise to such termination right shall be due to the negligent or
willful failure of the party seeking to terminate this Agreement to perform or
observe in any material respect any of the covenants or agreements set forth
herein to be performed or observed by such party.
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Section 10.2 EFFECT OF TERMINATION. The following provisions shall apply
in the event of a termination of this Agreement:
(a) Subject to subsections (b) and (c) of this Section 10.2, if
this Agreement is terminated by Sellers or by Purchaser as permitted
under Section 10.1 hereof, such termination shall be without liability
to any party to this Agreement or any stockholder, director, officer,
employee, agent or representative of such party; PROVIDED, that if this
Agreement is terminated by Sellers or Purchaser as permitted by Section
10.1, unless the event giving rise to such termination right shall be
due to the negligent or willful failure of Purchaser, Sellers shall
refund the Option Fee to Purchaser promptly after such termination of
this Agreement;
(b) If this Agreement is terminated as a result of the negligent
or willful failure of Purchaser to perform its obligations hereunder,
Purchaser shall forfeit the Option Fee to Sellers as full payment for
damages for such negligent or willful failure. The parties hereto
acknowledge and agree that the actual damages that Sellers might sustain
by reason of such negligent or willful failure of Purchaser to perform
its obligations hereunder are uncertain and would be difficult, if not
impossible, to ascertain, and that the Option Fee would be reasonable
compensation for any such negligent or willful failure;
(c) If this Agreement is terminated as a result of the negligent
or willful failure of a Seller to perform its obligations hereunder,
Sellers shall promptly refund to Purchaser the Option Fee. The parties
hereto acknowledge and agree that Purchaser, as a result of the actual
damages Purchaser would sustain by reason of such negligent or willful
failure of a Seller to perform its obligations hereunder, could not be
made whole by monetary damages, and it is accordingly agreed that
Purchaser shall have the right to elect to enforce specific performance
under this Agreement as Purchaser's sole and exclusive remedy and
Sellers waive the defense in any such action for specific performance
that a remedy at law would be adequate;
(d) If this Agreement is terminated for any reason, Purchaser
agrees that it will not compete with Sellers for any of the Contracts
for a period of one year after the termination of this Agreement; and
(e) The parties hereto hereby agree that the provisions of
Sections 10.2, 13.1, 13.3, 13.5 and 13.7 hereof and Article XI hereof
shall survive any termination of this Agreement.
ARTICLE XI
INDEMNIFICATION
Section 11.1 SELLERS' INDEMNITY OBLIGATIONS. Sellers, jointly and
severally, shall indemnify and hold Purchaser and Purchaser's officers,
directors, stockholders, employees, agents and
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Affiliates (each a "PURCHASER INDEMNIFIED PARTY") harmless from and against any
and all claims, actions, causes of action, arbitrations, proceedings, losses,
damages, liabilities, judgments and expenses (including, without limitation,
reasonable attorneys' fees) ("INDEMNIFIED AMOUNTS") incurred by a Purchaser
Indemnified Party as a result of (a) any material breach or misrepresentation in
any of the representations and warranties made by or on behalf of any Seller in
this Agreement or any certificate or instrument delivered in connection with
this Agreement, (b) any material violation or breach by any Seller of or default
by any Seller under the terms of this Agreement or any certificate or instrument
delivered in connection with this Agreement, (c) except for liabilities and
obligations expressly assumed by Purchaser pursuant to this Agreement, any act
or omission by any Seller or any officer, director, employee, agent or
representative of any Seller, occurring on or prior to the Closing Date with
respect to the Business or the Acquisition Assets (including any claim by a
third party, including employees and Inmates, arising out of or related to any
act or omission by any Seller or any officer, director, employee, agent or
representative of any Seller occurring on or prior to the Closing Date with
respect to the Business or Acquisition Assets), or (d) any liabilities or
obligations of any Seller or any officer, director, employee, agent or
representative of any Seller not expressly assumed by Purchaser pursuant to this
Agreement.
Section 11.2 PURCHASER'S INDEMNITY OBLIGATIONS. Purchaser shall
indemnify and hold Sellers and Sellers' officers, directors, employees, agents
and Affiliates (each a "SELLER INDEMNIFIED PARTY") harmless from and against any
and all Indemnified Amounts incurred by a Seller Indemnified Party as a result
of (a) any material breach or misrepresentation in any of the representations
and warranties made by or on behalf of Purchaser in this Agreement or any
certificate or instrument delivered in connection with this Agreement, (b) any
material violation or breach by Purchaser of or default by Purchaser under the
terms of this Agreement or any certificate or instrument delivered in connection
with this Agreement, (c) except for liabilities and obligations retained by
Sellers pursuant to this Agreement, any act or omission by Purchaser or any
officer, director, stockholder, employee, agent or representative of Purchaser
occurring after May 1, 1996 with respect to the Business or the Acquisition
Assets (including any claim by a third party, including employees and Inmates,
arising out of any act or omission by Purchaser or any officer, director,
stockholder, employee, agent or representative of Purchaser occurring after May
1, 1996 with respect to the Business or the Acquisition Assets), or (d) any
liabilities or obligations of Sellers expressly assumed by Purchaser pursuant to
this Agreement other than the liabilities and obligations assumed by Purchaser
pursuant to Section 4.1(c), for which liabilities and obligations Purchaser
shall indemnify a Seller Indemnified Party only to the extent such liabilities
and obligations result from the actions or use of the Acquired Property by
Purchaser or any officer, director, stockholder, employee, agent or
representative of Purchaser subsequent to the Closing Date.
Section 11.3 THRESHOLD. No party shall be liable under or with respect
to this Article XI or otherwise with respect to the breach of any representation
or warranty except to the extent the aggregate amount of such liability (for all
such claims) exceeds $10,000 ("THRESHOLD AMOUNT"), and then only to the extent
of such excess; PROVIDED, HOWEVER, that it is understood that this Threshold
Amount shall not apply to the payment of vendor bills occurring in the ordinary
course of business.
Section 11.4 INDEMNIFICATION PROCEDURES. All claims for indemnification
under this Agreement shall be asserted and resolved as follows:
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(a) A party claiming indemnification under this Agreement (an
"INDEMNIFIED PARTY") shall with reasonable promptness (i) notify the party from
whom indemnification is sought (the "INDEMNIFYING PARTY") of any third-party
claim or claims asserted against the Indemnified Party ("THIRD PARTY CLAIM") for
which indemnification is sought and (ii) transmit to the Indemnifying Party a
copy of all papers served with respect to such claim (if any) and a written
notice ("CLAIM NOTICE") containing a description in reasonable detail of the
nature of the Third Party Claim, an estimate of the amount of damages
attributable to the Third Party Claim to the extent feasible (which estimate
shall not be conclusive of the final amount of such claim) and the basis of the
Indemnified Party's request for indemnification under this Agreement.
Within 30 days after receipt of any Claim Notice (the "ELECTION
PERIOD"), the Indemnifying Party shall notify the Indemnified Party (i) whether
the Indemnifying Party disputes its potential liability to the Indemnified Party
with respect to such Third Party Claim and (ii) whether the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying Party, to defend the
Indemnified Party against such Third Party Claim.
If the Indemnifying Party notifies the Indemnified Party within
the Election Period that the Indemnifying Party elects to assume the defense of
the Third Party Claim, then the Indemnifying Party shall have the right to
defend, at its sole cost and expense (if the Indemnified Party is entitled to
indemnification hereunder), such Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 11.5(a). The Indemnifying
Party shall have full control of such defense and proceedings. The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party (but only if the Indemnified Party is entitled to indemnification
hereunder), to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall reasonably deem necessary or
appropriate to protect its interests or those of the Indemnifying Party and not
prejudicial to the Indemnifying Party (it being understood and agreed that if an
Indemnified Party takes any such action that is materially prejudicial and
causes a final adjudication that is adverse to the Indemnifying Party, the
Indemnifying Part shall be relieved of its obligations hereunder with respect to
such Third Party Claim). If requested by the Indemnifying Party, the Indemnified
Party agrees to cooperate with the Indemnifying Party and its counsel in
contesting any Third Party Claim that the Indemnifying Party elects to contest,
including, without limitation, the making of any related counterclaim against
the person asserting the Third Party Claim or any cross-complaint against any
person. Except as otherwise provided herein, the Indemnified Party may
participate in, but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Party pursuant to this Section 11.4 and
shall bear its own costs and expenses with respect to such participation.
If the Indemnifying Party fails to notify the Indemnified Party
within the Election Period that the Indemnifying Party elects to defend the
Indemnified Party pursuant to the preceding paragraph, or if the Indemnifying
Party elects to defend the Indemnified Party but fails to prosecute or settle
the Third Party Claim as herein provided, then the Indemnified Party shall have
the right to defend, at the sole cost and expense of the Indemnifying Party (if
the Indemnified Party is entitled to indemnification hereunder), the Third Party
Claim by all appropriate proceedings, which
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proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. The Indemnifying Party may participate in, but
not control, any defense or settlement controlled by the Indemnified Party
pursuant to this Section 11.4, and the Indemnifying Party shall bear its own
costs and expenses with respect to such participation.
Notwithstanding the foregoing, if the Indemnifying Party has
delivered a written notice to the Indemnified Party to the effect that the
Indemnifying Party disputes its potential liability to the Indemnified Party
under this Article XI and if such dispute is resolved in favor of the
Indemnifying Party, the Indemnifying Party shall not be required to bear the
costs and expenses of the Indemnified Party's defense pursuant to this Section
11.4 or of the Indemnifying Party's participation therein at the Indemnified
Party's request, and the Indemnified Party shall reimburse the Indemnifying
Party in full for all costs and expenses of such litigation.
The Indemnifying Party shall not settle or compromise any Third
Party Claim unless (i) the terms of such compromise or settlement require no
more than the payment of money (I.E., such compromise or settlement does not
require the Indemnified Party to admit any wrongdoing or take or refrain from
taking any action), (ii) the full amount of such monetary compromise or
settlement will be paid by the Indemnifying Party, and (iii) the Indemnified
Party receives as part of such settlement a legal, binding and enforceable
unconditional satisfaction and/or release, in form and substance reasonably
satisfactory to it, providing that such Third Party Claim and any claimed
lability of the Indemnified Party with respect thereto is being fully satisfied
by reason of such compromise or settlement and that the Indemnified Party is
being released from any and all obligations or liabilities it may have with
respect thereto. The Indemnified Party shall not settle or admit liability to
any Third Party Claim without the prior written consent of the Indemnifying
Party unless (x) the Indemnifying Party has disputed its potential liability to
the Indemnified Party, and such dispute either has not been resolved or has been
resolved in favor of the Indemnifying Party or (y) the Indemnifying Party has
failed to respond to the Indemnified Party's Claim Notice.
(b) In the event any Indemnified Party should have a claim against any
Indemnifying Party hereunder that does not involve a Third Party Claim, the
Indemnified Party shall transmit to the Indemnifying Party a written notice (the
"INDEMNITY NOTICE") describing in reasonable detail the nature of the claim, an
estimate of the amount of damages attributable to such claim to the extent
feasible (which estimate shall not be conclusive of the final amount of such
claim) and the basis of the Indemnified Party's request for indemnification
under this Agreement.
Section 11.5 DETERMINATION OF INDEMNIFIED AMOUNTS. The Indemnified
Amounts payable by an Indemnifying Party hereunder shall be determined (i) by
the written agreement of the parties, (ii) by binding arbitration pursuant to
Section 13.7 of this Agreement, (iii) by a final judgment or decree of any court
of competent jurisdiction, or (iv) by any other means agreed to in writing by
the parties. A judgment or decree of a court shall be deemed final when the time
for appeal, if any, shall have expired and no appeal shall have been taken or
when all appeals taken have been fully determined. The Indemnified Party shall
have the burden of proving the Indemnified Amounts suffered by the Indemnified
Party.
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Section 11.6 ESCROW. Sellers and Purchaser expressly acknowledge that
the indemnification obligations of Sellers and Purchaser and the payment of
Indemnified Amounts pursuant to this Article XI shall not be limited to or by
the Escrowed Purchase Price or the terms of the Escrow Agreement.
ARTICLE XII
COVENANTS NOT TO COMPETE
Section 12.1 SELLERS' COVENANTS NOT TO COMPETE. Except as otherwise
consented to or approved in writing by Purchaser and except with respect to
operations related to Sellers' business as currently conducted on the Excluded
Land, Sellers will not (A) at any time for a period of five years following the
Closing Date, directly or indirectly, acting alone or as a member of a
partnership, as a shareholder of any security, as an agent, owner in full or in
part, advisor, consultant to or representative of, any Person:
(a) engage in any business in competition with the Business or
any other business operation of Purchaser in the prison or halfway-house
construction or management field in the State of Texas; or
(b) request any present or future customer or supplier of the
Business to curtail or cancel its business with Purchaser in respect to
the Business; or
(c) unless otherwise required by law, disclose to any person,
firm or corporation any details of organization or business affairs of
the Business, any names of past or present customers of Sellers or any
other nonpublic information concerning the Business; or
(d) induce or attempt to influence any employee of Purchaser
engaged in the conduct of the Business to terminate his or her
employment; or
(B) at any time following the date hereof, disclose to any person, firm or
corporation any trade, technical or technological secrets used by the Business
or any other knowledge or information of a confidential nature (which knowledge
and information is not otherwise in the public domain) with respect to the
Business.
Sellers acknowledge that this covenant not to compete is being provided
as an inducement to Purchaser to acquire the Acquisition Assets and that this
Article XII contains reasonable limitations as to time, geographical area and
scope of activity to be restrained and no broader than necessary to protect
legitimate business interests of Purchaser directly or indirectly associated
with the transactions pursuant to this Agreement. Sellers acknowledge that, in
the event the scope of the covenants set forth in this Article XII is deemed to
be too broad in any court proceeding, the court may reduce such scope to that
which it deems reasonable under the circumstances. The parties hereto agree and
acknowledge that Purchaser does not have any adequate remedy at law for the
breach or threatened breach by Sellers of the covenants and agreements set forth
in this Article XII
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and, accordingly, Sellers further agree that Purchaser may, in addition to the
other remedies which may be available to it hereunder, file a suit in equity to
enjoin Sellers from such breach or threatened breach and consent to the issuance
of injunctive relief hereunder. If Sellers are found to have violated this
Article XII, then the party having been found to have violated this Article XII
shall pay all costs and reasonable attorney's fees incurred by Purchaser to
enforce its rights under this Article XII.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 COMMISSIONS. Sellers each represent and warrant that they
have done nothing to create any liability for the payment of any commission or
compensation in the nature of a finder's fee or similar fee to any broker or any
other Person in connection with this Agreement and the transactions contemplated
hereby. Sellers, jointly and severally, shall indemnify and hold Purchaser
harmless from and against any and all claims for finders' fees, brokers'
commissions or similar fees made by any party as a result of this Agreement and
the transactions contemplated hereunder to the extent that any such commission
or fee was incurred, or alleged to have been incurred, by, through or under
Sellers. Purchaser shall indemnify and hold Sellers harmless from and against
any and all claims for finders' fees, brokers' commissions or similar fees made
by any party as a result of this Agreement and transactions contemplated
hereunder to the extent that any such commission was incurred, or alleged to
have been incurred, by, through or under Purchaser.
Section 13.2 SURVIVAL. The representations and warranties set forth in
this Agreement and in any certificate or instrument delivered in connection
herewith shall be continuing and shall survive the Closing for a period of the
lesser of the statutory survival period or two years following the Closing Date,
but shall thereafter terminate and be of no further force or effect; PROVIDED,
HOWEVER, that in the case of all representations and warranties, there shall be
no such termination with respect to any such representation or warranty as to
which a bona fide claim has been asserted by written notice of such claim
delivered to the party or parties making such representation or warranty prior
to the expiration of the survival period; PROVIDED, FURTHER, that the
representations and warranties set forth in Sections 5.2, 5.9, 5.10, 5.11 and
5.13 shall survive the Closing indefinitely.
Section 13.3 EXPENSES. Except as otherwise expressly provided herein,
each party shall bear its own respective expenses incurred in connection with
the negotiation, preparation and execution of this Agreement and the
transactions contemplated hereby, including its own consultant's fees,
attorneys' fees, accountants' fees, investment banking and loan fees and other
similar costs and expenses.
Section 13.4 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been received only if and when
(i) personally delivered or (ii) on receipt after mailing, by United States
mail, first class, postage prepaid, by certified mail return receipt requested,
or by facsimile transmission to the respective parties, addressed in each case
as follows (or to such other address as may be specified by like notice):
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(1) If to Sellers, to: Texas Alcoholism Foundation, Inc. and
The Texas House Foundation, Inc.
2208 West 34th Street
Houston, Texas 77018
Attention: Joe Knauth
Facsimile: (713) 686-7785
With a copy (which shall
not constitute notice) to: Dow, Cogburn & Friedman, P.C.
9 Greenway Plaza
Suite 2300 Coastal Tower
Houston, Texas 77046
Attention: Abraham P. Friedman
Facsimile: (713) 940-6099
(2) If to Purchaser, to: Cornell Corrections of Texas, Inc.
4801 Woodway, Suite 400W
Houston, Texas 77056
Attention: Steven W. Logan
Facsimile: (713) 623-2853
With a copy (which shall
not constitute notice) to: Baker & Botts, L.L.P.
910 Louisiana
One Shell Plaza
Houston, Texas 77002-4995
Attention: Wade H. Whilden
Facsimile: (713) 229-1522
Section 13.5 ENTIRE AGREEMENT. This Agreement, including all schedules
and exhibits hereto, which schedules or exhibits are incorporated herein by
reference and deemed to be a part of this Agreement, constitutes the entire
agreement of the parties with respect to the subject matter hereof, and may not
be modified, amended or terminated except by a written instrument specifically
referring to this Agreement signed by all the parties hereto.
Section 13.6 GOVERNING LAW. This Agreement shall be governed, construed
and enforced in accordance with the laws of the State of Texas without giving
effect to the principles of conflicts of laws thereof.
Section 13.7 ARBITRATION.
(a) Any issue, controversy or claim arising out of or relating to this
Agreement or its alleged breach that cannot be resolved by mutual agreement
within sixty (60) days' notice thereof shall be resolved exclusively by final
and binding arbitration in Houston, Texas in accordance with the commercial
arbitration rules of the American Arbitration Association ("AAA"), and judgment
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on the award rendered by the arbitrator may be entered by any court having
jurisdiction thereof; PROVIDED, HOWEVER, that the parties shall have the right
to agree among themselves as to the amount of the claim.
(b) The arbitrators shall be selected by mutual agreement of the
parties, if possible. If the parties fail to reach agreement upon appointment of
arbitrators within thirty (30) days following receipt by one party of the other
party's notice of arbitration, each party shall select one arbitrator and the
two resulting arbitrators shall mutually agree on a third arbitrator from a list
or lists of proposed arbitrators submitted by AAA. The selection process shall
be that which is set forth in the AAA commercial arbitration rules then
prevailing, except that (i) the number of preemptory strikes shall not be
limited and (ii) if the parties' arbitrators fail to select an arbitrator from
one or more lists, AAA shall not have the power to make an appointment but,
subject to Section 13.7(c) hereof, shall continue to submit additional lists
until an arbitrator has been selected. Initially, however, promptly following
its receipt of a request to submit a list of proposed arbitrators, AAA shall
convene the parties' arbitrators in person or by telephone and attempt to
facilitate their selection of the third arbitrator by agreement. If an
arbitrator should die, withdraw or otherwise become incapable of serving, a
replacement shall be selected and appointed in the same manner as the initial
third arbitrator.
(c) If the third (or successor) arbitrator has not been selected
following submission of three or more lists by AAA, either party may declare the
existence of an impasse by giving written notice to the other. In that event,
the third (or successor) arbitrator shall be selected in the following manner:
Each party shall designate three proposed arbitrators whose names appear on any
of the lists previously submitted by AAA. The parties shall then eliminate five
of the designated names by alternately striking one, and the person whose name
remains shall serve as arbitrator. If necessary, the party to make the first
strike shall be designated by lot.
(d) All aspects of the arbitration shall be confidential, and the
parties and arbitrators shall not disclose to others, or permit disclosure of,
any information related to the proceedings, including but not limited to
discovery, testimony and other evidence, briefs and the award.
(e) Upon the motion of either party, and for good cause shown, the
arbitrators, by majority vote, may make any order which justice requires to
protect a party from the disclosure of proprietary, privileged or confidential
business information, including orders (i) that depositions or hearings be
conducted with no one present except persons designated by a majority of the
arbitrators, and (ii) that depositions, exhibits, other documents filed with the
arbitrators or transcripts of the hearing be sealed and not disclosed except as
specified by the arbitrators.
Section 13.8 ASSIGNMENTS AND THIRD PARTIES. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. No party hereto
shall assign this Agreement or any part hereof without the prior written consent
of the other party; PROVIDED, HOWEVER, that it is understood and agreed that
Purchaser may assign all or any portion of its rights and delegate all or any
portion of its duties hereunder to an Affiliate of Purchaser, in which event the
assignee of Purchaser shall execute and deliver all documents, certificates and
other instruments to be executed and delivered by Purchaser
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at the Closing in lieu of Purchaser, which documents, certificates and other
instruments shall be appropriately modified to conform to such assignee's
organizational status. No assignment shall release a party of any of its
obligations under this Agreement.
Section 13.9 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any of the parties hereto. Upon such determination that
any term or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
Section 13.10 AMENDMENTS; NO WAIVERS. Any provision of this Agreement
may be amended or waived prior to the Closing Date if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
all parties hereto, or in the case of a waiver, by the party against whom the
waiver is to be effective. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 13.11 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement
shall entitle any Person other than the parties hereto or their respective
successors and assigns permitted hereby to any claim, cause of action, remedy or
right of any kind.
Section 13.12 HEADINGS; USE OF CERTAIN TERMS. The headings and table of
contents herein are for convenience only and shall have no significance in the
interpretation hereof. Unless the context shall otherwise require, the singular
shall include the plural and vice versa, and each pronoun in any gender shall
include all other genders.
Section 13.13 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed for all purposes to be an
original, but all of which together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
TEXAS ALCOHOLISM FOUNDATION, INC.
By: /s/ JOE KNAUTH
PRESIDENT
THE TEXAS HOUSE FOUNDATION, INC.
By: /s/ JOE KNAUTH
PRESIDENT
CORNELL CORRECTIONS OF TEXAS, INC.
By: /s/ STEVEN W. LOGAN
TREASURER
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EXHIBIT 10.31
Investors Agreement
AGREEMENT dated as of November 1, 1995 among CORNELL CORRECTIONS, INC.,
a Delaware corporation (the "COMPANY"); each of the holders of options to
purchase Class B Common Stock of the Company that is a signatory hereto
identified under the caption "INVESTORS" on the signature pages hereto
(individually, an "INVESTOR" and, collectively, the "INVESTORS"); CONCORD
PARTNERS II, L.P.; and INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, a
Delaware corporation, as agent for the lenders (in such capacity, together with
its successors in such capacity, the "AGENT") party to the Credit Agreement,
dated as of March 14, 1995, among Cornell Cox, Inc. (the predecessor of the
Company), the Subsidiary Guarantors (as defined therein), the Lenders (as
defined therein) and the Agent (such Agreement, as amended, supplemented or
modified from time to time, the "CREDIT AGREEMENT").
Each of the Investors is party to a Stock Option Agreement, dated as of
November 1, 1995, between the Company and such Investor (each such agreement, a
"STOCK OPTION AGREEMENT", and, collectively, the "STOCK OPTION AGREEMENTS").
Subject to the execution and delivery of this Agreement, the Lenders under the
Credit Agreement have agreed to amend the Credit Agreement to permit the Company
to enter into the Stock Option Agreements and certain related transactions.
Accordingly, in consideration of the Lenders agreeing to amend the Credit
Agreement and for other good and valuable consideration, the parties hereto
agree as follows:
Section 1. EXERCISE OF OPTIONS.
(a) Unless the Repurchase Transaction Loans (as defined in the Credit
Agreement), and all accrued interest thereon, shall have been indefeasibly paid
in full in cash on or prior to December 31, 1996 (the "TRIGGERING DATE"), on the
Triggering Date each Investor (other than Internationale Nederlanden (U.S.)
Capital Corporation ("ING")) hereby unconditionally and irrevocably agrees to
exercise for the Exercise Price (as defined in the Stock Option Agreement to
which such Investor is a party) all of the Options (as defined in such Stock
Option Agreement) granted to such Investor pursuant to such Stock Option
Agreement.
(b) The Company hereby instructs each Investor, and each Investor hereby
agrees, to pay to the Agent on the Triggering Date, in immediately available
funds and without deduction, setoff or counterclaim, the aggregate Exercise
Price (as defined in the Stock Option Agreement to which such Investor is a
party) for all Options (as so defined) that such Investor has agreed to exercise
pursuant to Section 1(a) hereof. All payments to be made by Investors shall be
made to account number 600-06-116 (ABA No. 021000238) maintained by the Agent
with Morgan Guaranty Company or New York (or any other account as may be
notified by the Agent to the Investors) not later than 2:00 p.m. New York time.
The Company hereby instructs the Agent to apply all such payments received by
the Agent to the payment of principal of the Repurchase Transaction Loans (as
that term is defined in the Credit Agreement).
1
(c) The obligations of the Investors under this Section 1 are absolute
and unconditional, irrespective of the value, genuineness, validity, regularity
or enforceability of the obligations of the Company under the Stock Option
Agreements, and, to the fullest extent permitted by applicable law, irrespective
of any other circumstance whatsoever that might otherwise constitute a legal or
equitable discharge or defense, it being the intent of this Section 1 that the
obligations of the Investors hereunder shall be absolute and unconditional,
under any and all circumstances. Without in any way limiting the generality of
the foregoing, none of the Investors' obligations under this Section 1 shall be
modified, discharged or terminated as a result of, and each Investor agrees to
perform its obligations under this Section 1 notwithstanding, the occurrence of
any of the following:
(i) the bankruptcy or insolvency of the Company or any of its
subsidiaries;
(ii) any default by the Company under any of the Stock Option
Agreements, or any default by any other Investor under the Stock Option
Agreement to which it is a party; or
(iii) the failure of the Company to authorize the issuance of,
the failure of the Company to tender the certificates representing, or
the inability of the Company to tender any of the certificates
representing, any of the Series B common stock of the Company pursuant
to any Stock Option Agreement.
Section 2. MANDATORY PURCHASE BY CHARTERHOUSE AND DILLON READ.
(a) Charterhouse Equity Partners II, L.P. ("CHARTERHOUSE") and Concord
Partners II, L.P. ("DILLON READ") hereby severally agree, for the benefit of the
Agent and the Company, that, if any Investor (other than ING) shall fail to
exercise all of its options under the Stock Option Agreement to which it is a
party or to pay the aggregate Exercise Price (as defined in such Stock Option
Agreement) to the Agent on the Triggering Date, in each case as provided in
Section 1 hereof (each such Investor, a "DEFAULTING INVESTOR"), then:
(i) effective as of the Triggering Date, each such Defaulting
Investor shall be deemed to have assigned to Charterhouse and Dillon
Read, ratably in accordance with their respective Pro Rata Interests,
all of such Defaulting Investor's right, title and interest in and to
the Stock Option Agreement to which such Defaulting Investor is a party
and the options underlying such Stock Option Agreement (and the Company
hereby consents to such assignment and each Investor (other than ING)
hereby agrees that, in such circumstance, it shall assign such right,
title and interest in the Stock Option Agreement to which it is a party
and such underlying options to Charterhouse and Dillon Read as herein
provided);
2
(ii) on the Triggering Date, Charterhouse and Dillon Read shall,
ratably in accordance with their respective Pro Rata Interests, promptly
pay in full the aggregate Exercise Price payable by such Defaulting
Investor under the Stock Option Agreement to which it is a party
strictly in accordance with the terms of this Agreement.
(such obligations in the foregoing clauses (i) and (ii) being herein
collectively called the "PURCHASE OBLIGATIONS"). Each assignment pursuant to
this Section 2(a) shall be deemed to have occurred automatically on the
Triggering Date without any action on the part of any party. As used in this
Agreement, "PRO RATA INTEREST" shall mean, (x) in the case of Charterhouse,
40.279%, and (y) in the case of Dillon Read, 59.721%.
(b) The obligations of Charterhouse and Dillon Read under this Section 2
are absolute and unconditional, irrespective of the value, genuineness,
validity, regularity or enforceability of the obligations of the Investors under
this Agreement or the obligations of any Defaulting Investor under the Stock
Option Agreement to which it is a party, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever that might
otherwise constitute a legal or equitable discharge or defense (including,
without limitation, any refusal by any Defaulting Investor to assign any of its
right, title and interest under the Stock Option Agreement to which it is a
party and the occurrence of any of the events described in the last sentence of
Section 1(c) hereof), it being the intent of this Section 2 that the obligations
of Charterhouse and Dillon Read hereunder shall be absolute and unconditional
under any and all circumstances.
Section 3. SECURITY INTEREST
(a) The Company confirms that the obligations of the Investors under
the Stock Option Agreement and under this Agreement are subject to the Lien of
the Security Agreement (as that term is defined in the Credit Agreement).
(b) Each Investor hereby acknowledges that the Company's rights under
the Stock Option Agreements have been assigned to the Agent and that pursuant to
the Credit Agreement and the Security Documents (as defined in the Credit
Agreement) the Agent has a security interest therein.
Section 4. MISCELLANEOUS
(a) The Company hereby agrees to indemnify the Agent and each Lender (as
defined in the Credit Agreement) and their respective directors, officers,
employees, attorneys and agents from, and hold each of them harmless (to the
fullest extent permitted by law) against, any and all losses, liabilities,
claims, damages or expenses incurred by any of them arising out of or by reason
of any investigation or litigation or other proceedings (including any
threatened investigation or litigation or other proceeds) relating to this
Agreement, the Stock Option Agreements and the transactions contemplated hereby
and thereby, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by
3
reason of the gross negligence or willful misconduct of the person to be
indemnified).
(b) Each of the parties to this Agreement represents and warrants to all
other parties hereto that (i) it is duly organized, validly existing, and in
good standing under the laws of the State in which it is organized, (ii) it has
the full power and authority to enter into this Agreement, (iii) the execution,
delivery and performance by such party of this Agreement have been duly
authorized by all necessary actions, and this Agreement constitutes the valid
and binding obligation of such party enforceable against it in accordance with
its terms, except to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights in general and subject to general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law), and (iv) the execution, delivery and performance of this
Agreement by such party will not violate or conflict with its organizational
documents, or conflict with or result in a breach, termination or acceleration
of, or constitute a default under, any other agreement to which it is a party,
or violate any law, regulation, order, writ, judgment, injunction or decree
applicable to it.
(c) If any term or provision of this Agreement or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
(d) This Agreement may be amended, modified or terminated only in a
writing signed by the Agent, the Company and any Investor against whom
enforcement of any such amendment or modification is sought.
(e) This Agreement shall be binding upon, shall inure to the benefit of
and shall be enforceable by the respective successors and assigns of the parties
hereto. Notwithstanding the foregoing, no Investor may, without the written
consent of the Company and the Agent, assign any rights hereunder except to a
successor by operation of law.
(f) THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED, APPLIED
AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES
THEREOF. Each of the parties hereto hereby submits to the nonexclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York State Court sitting in the Borough of Manhattan in
the City of New York for the purposes of all legal proceedings arising out of or
relating to this Agreement or the transactions contemplated hereby. Each of the
parties hereto irrevocably waives, to the fullest extent permitted by applicable
law, any objection that it may now or hereafter have to the laying of the venue
of any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum.
(g) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(h) This Agreement shall terminate and be of no further force or effect
after the indefeasible payment in full in cash of all Repurchase Transaction
Loans (as that term is defined in the Credit Agreement), and accrued interest
thereon.
5
IN WITNESS, WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
CORNELL CORRECTIONS, INC.
By: /s/ STEVEN W. LOGAN
INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION,
as Agent
By: /s/ DAVID P. SCOPELLITI
CONCORD PARTNERS II, L.P.
By: /s/ PETER A. LEIDEL
6
INVESTORS
INTERNATIONAL NEDERLANDEN
(U.S.) CAPITAL CORPORATION
By: /s/ DAVID P. SCOPELLITI
BROWN UNIVERSITY THIRD CENTURY
FUND
By: /s/ ROBERT J. KOLYER, JR.
CONCORD PARTNERS II, L.P.
By: /s/ PETER A. LEIDEL
CHARTERHOUSE EQUITY
PARTNERS, II, L.P.
By: Chusa Equity Investors II, L.P.
By: Charterhouse Equity II, Inc.
By: /s/ RICHARD T. HENSHAW III
7
DAVID M. CORNELL
/s/ DAVID M. CORNELL
STEVEN LOGAN
/s/ STEVEN LOGAN
WADE WHILDEN
/s/ WADE WHILDEN
JANE CORNELL
/s/ JANE CORNELL
8
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT ("Agreement") dated as of November 1,
1995 between CORNELL CORRECTIONS, INC., a Delaware corporation (the "Company")
and INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION ("Holder").
1. Subject to the terms and conditions set forth below, the
Company, for value received, hereby grants to Holder stock options (the
"Options") to purchase a total of 59,000 shares of the Class B Common Stock, par
value $.01 per share, of the Company (the "Class B Common Stock"), at a price of
$2.00 per share (the "Exercise Price"). The Options will be exercisable in whole
or in part at any time on or before October 31, 2002 (the "Expiration Date").
Any Options not exercised on or before the Expiration Date shall terminate and
be of no value.
2. Prior to the Expiration Date, Holder may exercise Options
by delivering to the Company, from time to time, a written notice specifying the
number of Options which Holder then desires to exercise together with cash or a
certified check to the order of the Company for an amount in United States
dollars equal to the Exercise Price multiplied by the number of shares being
purchased pursuant to the exercise of the Option. Upon receipt of such funds,
and in no event later than ten days after the effective date of such written
notice (as determined in accordance with Section 12 hereof), the Company will
issue and deliver to Holder a certificate representing those shares of Class B
Common Stock issued upon exercise of the Options (the "Shares"). Such
certificate shall bear a legend substantially similar to the legend set forth in
Section 10 hereof.
3. The Company covenants that (a) from the date hereof until
the Expiration Date, it will at all times have authorized, and keep reserved and
available, for the purpose of enabling
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it to satisfy its obligation to issue the Shares upon exercise of the Options,
the number of Shares deliverable upon exercise of all of the Options and (b) the
Shares will, upon issuance in accordance with the terms of this Agreement, be
duly authorized, fully paid and non-assessable
4. The Options are not transferable by Holder other than (i)
to its affiliates or its successor by operation of law or (ii) to Charterhouse
Equity Partners II, L.P. or Concord Partners II, L.P. (or their respective
affiliates), and are exercisable only by Holder or its permitted transferees.
Except as expressly permitted above, no assignment or transfer of the Options or
of the rights represented thereby, whether voluntary or involuntary, by
operation of law or otherwise, shall vest in the assignee or transferee any
interest or right therein whatsoever, but immediately upon any such assignment
or transfer the Options so assigned or transferred shall terminate and become of
no further effect.
5. Holder, as holder of the Options, shall not be deemed to be
a stockholder of the Company and shall not have the rights of a stockholder of
the Company including, without limitation, the right to vote or to receive
dividends, until the Options are exercised.
6. The existence of the Options granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company or any issue of bonds, debentures, preferred or
prior preference stocks ahead of or affecting the Class B Common Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
7. The Shares are shares of Class B Common Stock of the
Company as presently
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constituted, but if, and whenever, prior to the issuance and delivery by the
Company of all of the Shares with respect to which Options are granted, the
Company shall effect a subdivision or consolidation of shares or other capital
adjustment, the payment of a stock dividend, or other issuance of shares of the
Class B Common Stock, then the aggregate number of shares which may be purchased
pursuant to the Options and the Exercise Price shall be proportionally adjusted.
Notwithstanding the foregoing, no adjustment shall be made upon the issuance of
new shares of Class B Common Stock for fair consideration.
8. In the event the Company shall at any time prior to the
Expiration Date merge with or into, consolidate with or sell or otherwise
transfer all or substantially all of its assets to another entity (a "Business
Combination") then the Options shall entitle Holder to receive upon exercise, in
lieu of shares of Class B Common Stock, the consideration which a holder of the
number of shares of the Class B Common Stock subject to the Options would have
been entitled to receive pursuant to the Business Combination.
9. Holder represents and warrants that it is acquiring the
Options and will acquire the Shares, for its own account, for investment with no
present intention of selling or otherwise distributing the same. Holder hereby
acknowledges its understanding that the Options and the Shares are not being
registered under the Securities Act of 1933, as amended ("Act"), on the ground
that the issuance and sale of the Options and the Shares to Holder are exempt
under Section 4(2) of the Act as not involving a public offering. Holder further
acknowledges its understanding that the Company's reliance on such exemption is,
in part, based upon the foregoing intention of Holder and that the statutory
basis for such exemption would not be present if, notwithstanding such
representation and warranty, Holder were acquiring the Options and the Shares
for resale on the
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occurrence or nonoccurrence of some predetermined event. Holder hereby
acknowledges that (i) the Shares may be sold by Holder only (a) pursuant to an
effective registration statement under the Act filed by the Company with the
Securities and Exchange Commission (the "Commission") relating to such sale or
(b) in a transaction which is otherwise exempt from registration under the Act
and (ii) the Company will be under no obligation to file such registration
statement with the Commission.
10. On the first to occur of (i) the closing of an initial
public offering of shares of common equity of the Company, (ii) the repayment by
the Company of the Repurchase Transaction Loans as such term is defined in
Amendment No. 1 to the Loan Agreement among the Company, Holder and certain
other parties, or (iii) December 31, 1996 Holder shall have the right to "put"
to the Company and require the Company to purchase from Holder Options to
purchase 31,250 shares of Class B Common Stock for an aggregate price of
$250,000. Such put right shall expire if not exercised by Holder prior to the
close of business on January 2, 1997.
11. All certificates representing Shares to be issued pursuant
to the terms of this Agreement shall bear a legend in substantially the
following form:
"The shares represented by this Certificate have not been
registered under the Securities Act of 1933, as amended. The shares
have been acquired for investment and may not be offered for sale,
sold, or otherwise distributed within the meaning of said Act in the
absence of an effective registration statement for the shares under
said Act or an opinion of counsel to the Corporation that
registration is not required thereunder."
12. Any notice required hereunder shall be in writing and
delivered by hand or sent by registered or certified mail, addressed to the
other party hereto at its address set forth below:
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If to the Company: Cornell Corrections, Inc.
4801 Woodway - Suite 400W
Houston, TX 77056; and
If to Holder: As set forth in the Company's stock
transfer records.
Any such notice shall become effective (a) when mailed, three days after having
been deposited in the mails, postage prepaid, and (b) in the case of delivery by
hand, upon delivery.
13. This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto and represents their
entire understanding and agreement with respect to the subject matter hereof and
can be amended, supplemented or changed, and any provision hereof can be waived,
only by written instrument making specific reference to this Agreement signed by
the party against whom enforcement of any such amendment, supplement,
modification or waiver is sought.
14. Any waiver or any breach of this Agreement shall not be
construed to be a continuing waiver or consent to any subsequent breach by any
party hereto.
15. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
16. This Agreement is not assignable without the consent of
each party hereto except that Holder may assign this Agreement to an affiliate
or to its successor by operation of law. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
successors, legal representatives and permitted assigns.
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17. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
18. This Agreement has been executed and delivered in, and
shall be construed and enforced in accordance with, the laws of the State of
Delaware applicable to contracts made and performed therein, without giving
effect to the choice of law principles thereof.
19. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
CORNELL CORRECTIONS, INC.
By: /S/ STEVEN W. LOGAN
Treasurer
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By: /S/ DAVID SCOPELITTI
Vice President
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EXHIBIT 10.33
STOCK OPTION AGREEMENT
AGREEMENT dated November 1, 1995 between CORNELL CORRECTIONS,
INC., a Delaware corporation (the "Company") and [name of holder] ("Holder").
1. Subject to the terms and conditions set forth below, the
Company, for value received, hereby grants to Holder stock options (the
"Options") to purchase a total of ______ shares of the Class B Common Stock, par
value $.01 per share, of the Company (the "Class B Common Stock"), at a price of
$2.00 per share (the "Exercise Price"). The Options will be exercisable in whole
or in part at any time on or before October 31, 2002 (the "Expiration Date").
Any Options not exercised on or before the Expiration Date shall terminate and
be of no value.
2. Prior to the Expiration Date, Holder may exercise Options by
delivering to the Company, from time to time, a written notice specifying the
number of Options which Holder then desires to exercise together with cash or a
certified check to the order of the Company for an amount in United States
dollars equal to the Exercise Price multiplied by the number of shares being
purchased pursuant to the exercise of the Option. Upon receipt of such funds,
and in no event later than ten days after the effective date of such written
notice (as determined in accordance with Section 11 hereof), the Company will
issue and deliver to Holder a certificate representing those shares of Class B
Common Stock issued upon exercise of the Options (the "Shares"). Such
certificate shall bear a legend substantially similar to the legend set forth in
Section 10 hereof.
3. The Company covenants that (a) from the date hereof until the
Expiration Date, it will at all times have authorized, and keep reserved and
available, for the purpose of enabling it to satisfy its obligation to issue the
Shares upon exercise of the Options, the number of Shares deliverable upon
exercise of all of the Options and (b) the Shares will, upon issuance in
accordance with the terms of this Agreement, be duly authorized, fully paid and
non-assessable.
4. The Options are not transferable by Holder other than (i) to
its affiliates or its successor by operation of law or (ii) to Charterhouse
Equity Partners II, L.P. or Concord Partners II, L.P. (or their respective
affiliates), and are exercisable only by Holder or its permitted transferees.
Except as expressly permitted above, no assignment or transfer of the Options or
of the rights represented thereby, whether voluntary or involuntary, by
operation of law or otherwise, shall vest in the assignee or transferee any
interest or right therein whatsoever, but immediately upon any such assignment
or transfer the Options so assigned or transferred shall terminate and become of
no further effect.
5. Holder, as holder of the Options, shall not be deemed to be a
stockholder of the Company and shall not have the rights of a stockholder of the
Company including, without limitation, the right to vote or to receive
dividends, until the Options are exercised.
6. The existence of the Options granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company or any issue of bonds, debentures, preferred or
prior preference stocks ahead of or affecting the Class B Common Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
7. The Shares are shares of Class B Common Stock of the Company
as presently constituted, but if, and whenever, prior to the issuance and
delivery by the Company of all of the Shares with respect to which Options are
granted, the Company shall effect a subdivision or consolidation of shares or
other capital adjustment, the payment of a stock dividend, or other issuance of
shares of the Class B Common Stock, then the aggregate number of shares which
may be purchased pursuant to the Options and the Exercise Price shall be
proportionally adjusted. Notwithstanding the foregoing, no adjustment shall be
made upon the issuance of new shares of Class B Common Stock for fair
consideration.
8. In the event the Company shall at any time prior to the
Expiration Date merge with or into, consolidate with or sell or otherwise
transfer all or substantially all of its assets to another entity (a "Business
Combination") then the Options shall entitle Holder to receive upon exercise, in
lieu of shares of Class B Common Stock, the consideration which a holder of the
number of shares of the Class B Common Stock subject to the Options would have
been entitled to receive pursuant to the Business Combination.
9. Holder represents and warrants that it is acquiring the
Options and will acquire the Shares, for its own account, for investment with no
present intention of selling or otherwise distributing the same. Holder hereby
acknowledges its understanding that the Options and the Shares are not being
registered under the Securities Act of 1933, as amended ("Act"), on the ground
that the issuance and sale of the Options and the Shares to Holder are exempt
under Section 4(2) of the Act as not involving a public offering. Holder further
acknowledges its understanding that the Company's reliance on such exemption is,
in part, based upon the foregoing intention of Holder and that the statutory
basis for such exemption would not be present if, notwithstanding such
representation and warranty, Holder were acquiring the Options and the Shares
for resale on the occurrence or nonoccurrence of some predetermined event.
Holder hereby acknowledges that (i) the Shares may be sold by Holder only (a)
pursuant to an effective registration statement under the Act filed by the
Company with the Securities and Exchange Commission (the "Commission") relating
to such sale or (b) in a transaction which is otherwise exempt from registration
under the Act and (ii) the Company will be under no obligation to file such
registration statement with the Commission.
10. All certificates representing Shares to be issued pursuant to
the terms of this Agreement shall bear a legend in substantially the following
form:
"The shares represented by this Certificate have not been
registered under the Securities Act of 1933, as amended. The
shares have been acquired for investment and may not be offered
for sale, sold, or otherwise distributed within the meaning of
said Act in the absence of an effective registration statement
for the shares under said Act or an opinion of counsel to the
Corporation that registration is not required thereunder."
11. Any notice required hereunder shall be in writing and
delivered by hand or sent by registered or certified mail, addressed to the
other party hereto at its address set forth below:
If to the Company: Cornell Corrections, Inc.
4801 Woodway - Suite 400W
Houston, TX 77056; and
If to Holder: As set forth in the Company's stock
transfer records.
Any such notice shall become effective (a) when mailed, three days after having
been deposited in the mails, postage prepaid, and (b) in the case of delivery by
hand, upon delivery.
12. This Agreement supersedes any prior agreements or
understandings, oral or written, between the parties hereto and represents their
entire understanding and agreement with respect to the subject matter hereof and
can be amended, supplemented or changed, and any provision hereof can be waived,
only by written instrument making specific reference to this Agreement signed by
the party against whom enforcement of any such amendment, supplement,
modification or waiver is sought.
13. Any waiver or any breach of this Agreement shall not be
construed to be a continuing waiver or consent to any subsequent breach by any
party hereto.
14. If any term or provision of this Agreement or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
15. This Agreement is not assignable without the consent of each
party hereto except that Holder may assign this Agreement to an affiliate or to
its successor by operation of law. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
successors, legal representatives and permitted assigns.
16. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. This Agreement has been executed and delivered in, and shall
be construed and enforced in accordance with, the laws of the State of Delaware
applicable to contracts made and performed therein, without giving effect to the
choice of law principles thereof.
18. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
CORNELL CORRECTIONS, INC.
By: /s/ STEVEN W. LOGAN
[Holder]
/s/ HOLDER
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of (a) our
report dated March 15, 1996 (except as to Notes 1 and 7, for which the date is
July 16, 1996) with respect to the consolidated balance sheets of Cornell
Corrections, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1995, (b) our report dated May 16, 1996 with respect to the combined balance
sheets of MidTex Detention, Inc. and Big Spring Correctional Center as of
September 30, 1994 and 1995, and the related combined statements of operations
and changes in equity and cash flows for the years ended September 30, 1993,
1994 and 1995, (c) our report dated May 20, 1996 with respect to the combined
balance sheet of the Reid Center division of Texas Alcoholism Foundation, Inc.
and The Texas House Foundation, Inc. as of December 31, 1995, and the related
combined statements of operations and fund balance and cash flows for the year
then ended and (d) our report dated May 16, 1996 with respect to the combined
statements of operations, stockholders' equity and cash flows of Eclectic
Communications, Inc. and International Self-Help Services, Inc. for the year
ended March 31, 1994 included in or made a part of this Registration Statement
on Form S-1.
Houston, Texas
July 16, 1996
