AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1996.
REGISTRATION NO. 333-08243
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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>
===============================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001
per share........................ 4,600,000 $13.00 $59,800,000 $20,621
===============================================================================
</TABLE>
(1) Includes 600,000 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.
(3) $1,189 is being paid in connection with this Amendment No. 2; $19,432 has
been previously paid.
------------------------
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.
===============================================================================
<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 SEPTEMBER 10, 1996
[LOGO] 4,000,000 SHARES
CORNELL CORRECTIONS, INC.
COMMON STOCK
Of the 4,000,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby, 3,523,103 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 $11.00 and $13.00 per share. See "Underwriting" for the factors
considered in determining the initial public offering price. The Company has
applied for listing of the Common Stock on the American Stock Exchange under the
symbol "CRN."
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.
------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions* Company+ Stockholders
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>
- ------------
* 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.
A stockholder of the Company has granted the Underwriters a 30-day option to
purchase up to 600,000 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
ING BARINGS
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 AMERICAN STOCK EXCHANGE 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 based on contracted
design capacity. 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 September 1, 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). See
"Business -- General."
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) pre-release correctional services and (iii) juvenile correctional and
detention services. See "Business -- Facility Design, Construction and Finance."
Institutional correctional and detention services primarily consist of the
operation of secure adult incarceration facilities. Pre-release correctional
services primarily consist of providing pre-release and halfway house programs
for adult 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 maximum and
medium security incarceration and minimum security residential services,
institutional food services, certain transportation services, general education
programs (such as high school equivalency and English as a second language
programs), health care (including medical, dental and psychiatric services),
work and recreational programs and chemical dependency and substance abuse
programs. Additional services provided in the Company's pre-release facilities
typically include life skills and employment training and job placement
assistance. Juvenile services provided by the Company will include medical,
educational and counseling programs tailored to meet the special needs of
juveniles. The Company derives substantially all its revenues from operating
correctional, detention and pre-release facilities for federal and state
governmental agencies in the United States. Of the facilities operated by the
Company, two are owned by the Company, 16 are leased by the Company and two are
operated through other arrangements. See "Business -- Properties."
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 ("Private Correctional Facility 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 Private Correctional
Facility 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 September 1, 1996, the Company has
submitted written bids to operate four new projects with an aggregate design
capacity of 760 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
4
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.
As of September 1, 1996, the Company operated six facilities (2,165 beds)
that provide secure institutional correctional and detention services, operated
or had contracted to operate 13 facilities (1,024 beds) that provide pre-release
correctional services, and had contracted to operate one facility (160 beds)
that will provide juvenile short-term correctional and detention services.
On a combined pro forma basis, after giving effect to the Company's
acquisitions of the Reid Center and substantially all the assets of MidTex (the
"Acquisitions"), for the year ended December 31, 1995 and for the six months
ended June 30, 1996, respectively, 71.0% and 72.0% of the Company's revenues
were derived from the operation of institutional correctional and detention
facilities, and 29.0% and 28.0% of the Company's revenues were derived from the
operation of pre-release correctional facilities.
------------------------
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> <C>
Common Stock offered by the Company..................................... 3,523,103 shares
Common Stock offered by the Selling Stockholders........................ 476,897 shares
-----------
Total Common Stock offered......................................... 4,000,000 shares
===========
Common Stock to be outstanding after the Offering....................... 6,765,398 shares(1)
Use of Proceeds by the Company.......................................... For repayment of indebtedness and general
corporate purposes. See "Use of
Proceeds."
Proposed American Stock Exchange symbol................................. CRN
</TABLE>
- ------------
(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
six months ended June 30, 1996 and the Pro Forma Balance Sheet Data as of June
30, 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 June 30,
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 June 30, 1996.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------------------------- -------------------- ------------
SIX MONTHS
ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31,
----------------------------------------------------- -------------------- ------------
1991 1992 1993 1994(1) 1995 1995 1996 1995
------- ------- ------- -------- -------- -------- -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues .................. $ 235 $ 2,540 $ 3,198 $ 15,689 $ 20,692 $ 10,107 $ 11,337 $38,716
Contribution from
operations .................... 232 2,537 355 2,616 3,521 1,710 1,366 7,013
Income (loss) from operations ... (736) 910 (960) (343) (10) 159 (263) 3,182
Interest expense ................ 7 -- -- 294 1,115 269 498 --
Income (loss) before income
taxes ......................... (742) 940 (915) (499) (989) (40) (710) 3,327
Net income (loss) ............... (742) 940 (915) (600) (989) (40) (710) 1,981
Earnings (loss) per
share ......................... $ (.31) $ .38 $ (.34) $ (.16) $ (.25) $ (.01) $ (.20) $ .26
Number of shares used in
per share
computation(2) ................ 2,388 2,491 2,695 3,811 3,983 4,084 3,523 7,506
Supplemental earnings
(loss) per share(3) ........... $ .03 $ (.05)
OPERATING DATA:
Beds under contract (end of
period) ....................... -- -- 282 1,155 1,478 1,135 1,796 3,093
Contracted beds in
operation (end of
period) ....................... -- -- 282 1,155 1,135 1,135 1,561 2,750
Average occupancy based on
contracted beds in
operation(4) .................. -- -- -- 92.1% 98.9% 97.8% 95.8% 91.8%
</TABLE>
SIX MONTHS
ENDED
JUNE 30,
------------
1996
------------
STATEMENT OF OPERATIONS DATA:
Total revenues............. $ 21,071
Contribution from
operations............... 3,206
Income (loss) from operatio 1,427
Interest expense........... --
Income (loss) before income
taxes.................... 1,492
Net income (loss).......... 867
Earnings (loss) per
share.................... $ .12
Number of shares used in
per share
computation(2)........... 7,204
Supplemental earnings (loss) per share(3)......
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(4)............. 94.1%
JUNE 30, 1996
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.................... $ 2,098 $ 8,663
Total assets....................... 19,773 47,103
Long-term debt, including current
portion.......................... 13,868 68
Stockholders' equity............... 2,367 41,875
- ------------
(1) Includes operations purchased by the Company on March 31, 1994.
(2) 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.
(3) Supplemental per share data is presented to show what the earnings (loss)
would have been if the repayment of debt with proceeds from the Offering had
taken place at the beginning of the respective periods.
(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, $600,000 and $989,000 for the
years ended December 31, 1993, 1994 and 1995, respectively, and a net loss of
$710,000 for the six-month period ended June 30, 1996. No assurance can be given
that the Company will not continue to incur losses in future periods. The
Company expects to charge $1.3 million of total deferred financing costs, of
which $725,000 will be noncash, to interest expense prior to December 31, 1996
in connection with the early retirement of certain indebtedness using the net
proceeds to be received by the Company in the Offering. The Company also expects
to record noncash compensation expense of $870,000 during the third quarter of
1996 in connection with the grant of stock options to certain officers of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
ABSENCE OF COMBINED OPERATING HISTORY
As a result of 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.
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.
NEED FOR ADDITIONAL FINANCING
The Company's ability to compete effectively in bidding for new contracts
will depend on certain factors, including, in certain circumstances, the ability
of the Company to make capital investments and finance construction costs
relating to institutional contract awards. In addition, the Company's
acquisition strategy will require the Company to obtain financing for such
acquisitions on terms the Company deems acceptable. The Company currently
intends to use debt to finance such activities although, in certain
circumstances, the Company may use shares of its Common Stock in making future
acquisitions. No assurance can be given that the Company will be able to obtain
debt financing on terms it considers acceptable or in the amounts it would need
to finance construction of new facilities or acquisitions. The extent to which
the Company will be able or willing to use Common Stock as a financing source
for acquisitions will depend on its market value from time to time and the
willingness of potential sellers to accept it as full or partial payment. The
use of a significant amount of debt financing would increase interest expense
and could adversely affect operating results. In the event the Company issues
additional Common Stock 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.
The Company is currently seeking to obtain 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 working capital requirements over the
next 24 months. No assurance can be given, however, that the Company will be
able to enter into the New Credit Facility 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. For each of its facilities, the Company
is, therefore, dependent on a single contracting governmental agency (or, in the
case of four of its facilities, two contracting governmental agencies) to supply
the facility with a sufficient number of inmates to meet and exceed the
facility's break-even design capacities, and in most cases the applicable
governmental agency or agencies are under no obligation to do so. In most cases,
soliciting additional inmates from other governmental agencies to meet capacity
shortfalls in Company facilities is not a viable alternative. 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
8
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.
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
9
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, 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.
The Company has in the past worked with governmental agencies and placement
agents to obtain and structure financing for construction of facilities. In some
cases, an unrelated special purpose corporation is established to incur
borrowings to finance construction and, in other cases, the Company directly
incurs borrowings for construction financing. A growing trend in the
privatization industry is the requirement by governmental agencies that private
operators make capital investments in new facilities and enter into direct
financing arrangements in connection with the development of such facilities.
There can be no assurance that the Company will have available capital if and
when required to make such an investment to secure a contract for developing a
facility. 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
10
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. Typically, the Company must obtain and comply with zoning approvals
and/or land use permits from local governmental entities with respect to a
facility. These approvals and permits provide for the type of facility and, in
certain cases, the types of inmates that can be housed in the facility. In
certain circumstances, public hearings are required before obtaining such
approvals and permits.
In addition to possible negative publicity about privatization in general,
an escape, riot or other similar 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 a
Company-operated facility may result in publicity adverse to the Company and its
industry, which could materially adversely affect the Company's business. In
February 1996, four inmates escaped from the Company's Donald W. Wyatt Federal
Detention Facility in Central Falls, Rhode Island (the "Wyatt Facility"). The
inmates were apprehended within 48 hours. Although the Company did not
experience any material adverse effect on its business or results of operations
as a result of the escape from the Wyatt Facility, should escapes occur in the
future, no assurance can be given that such escapes would not have a material
adverse effect on the Company's business or its results of operations.
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 medium and
minimum security 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 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 ordinary course of business at its
facilities. In the opinion of management of the Company, the outcome of the
proceedings to which the Company is currently a party, in the aggregate, will
not have a material adverse effect upon the Company's operations or financial
condition. 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 Private Correctional
11
Facility 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 (David M. Cornell, Chairman of the Board, President and Chief
Executive Officer of the Company, Marvin H. Wiebe, Jr., Vice President of the
Company, and Steven W. Logan, Chief Financial Officer, Treasurer and Secretary
of the Company) 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. 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 Common Stock. Upon
completion of the Offering, 6,765,398 shares of Common Stock will be
outstanding, and 978,109 shares will be issuable upon exercise of outstanding
warrants and stock options. The 4,000,000 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.
12
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 at least 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 American Stock Exchange, Inc., 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 $6.46 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."
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 41.6% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 33.2% 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 3,523,103 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$38.6 million, assuming an initial public offering price of $12.00 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.
Substantially all the net proceeds received by the Company in the Offering
will be used to repay all the Company's borrowings outstanding under a credit
agreement dated July 3, 1996 (the "1996 Credit Facility") with Internationale
Nederlanden (U.S.) Capital Corporation ("ING") and a short-term convertible note
dated July 3, 1996 and issued by the Company to ING (the "Convertible Bridge
Note"). As of September 1, 1996, the outstanding borrowings under the 1996
Credit Facility and the balance on the Convertible Bridge Note in the aggregate
were $34.9 million. 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 September 1, 1996, the outstanding indebtedness under the 1996 Credit
Facility totaled $28.9 million, of which $3.7 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. As of September 1,
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."
The Company does not currently intend to use any of the net proceeds from
the Offering for 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, and the
Company is not currently involved in any negotiations for acquisitions.
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 June 30, 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 June 30, 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 3,523,103 shares of Common Stock offered by the
Company hereby at an assumed offering price of $12.00 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.
JUNE 30, 1996
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(DOLLARS IN THOUSANDS)
Long-term debt, including current portion:
1995 Credit Facility............... $ 13,800 $ -- $ --
1996 Credit Facility............... -- 29,288 --
Other.............................. 68 68 68
---------- --------- -----------
Total long-term debt,
including current
portion.................... 13,868 29,356 68
---------- --------- -----------
Convertible Bridge Note................. -- 6,000 --
Stockholders' equity:
Preferred Stock, par value $.001
per share, 10,000,000 shares
authorized pro forma as adjusted,
none issued and outstanding....... -- -- --
Common stock:
Class A Common Stock, par value $.001 per share, 9,000,000 shares
authorized historical and pro forma, 3,194,042 shares issued and
outstanding historical and 3,226,792 shares issued and
outstanding pro forma(1)... 3 3 --
Class B Common Stock, par value $.001 per share, 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, par value $.001
per share, 30,000,000
shares authorized pro forma
as adjusted, 7,320,398
shares issued and
outstanding(3)............. -- -- 7
Additional paid-in capital......... 7,008 7,263 46,512
Retained deficit................... (2,041) (2,041) (2,041)
Treasury stock (555,000 shares of
Class A Common Stock, at cost).... (2,603) (2,603) (2,603)
---------- --------- -----------
Total stockholders' equity.... 2,367 2,622 41,875
---------- --------- -----------
Total capitalization..... $ 16,235 $37,978 $41,943
========== ========= ===========
- ------------
(1) Par value decreased from $.01 to $.001 per share on July 3, 1996. Excludes
147,062 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 per share
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 June 30, 1996 (pro forma for the Acquisitions) was $(3,463,000), or
approximately $(1.18) 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 3,523,103 shares
of Common Stock offered hereby at the estimated initial public offering price of
$12.00 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 of the Company as of June 30, 1996 would have been
$35,790,000, or approximately $5.54 per share. This represents an immediate
increase in pro forma net tangible book value of $6.72 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$6.46 per share to new investors in the Offering.
The following table illustrates this per share dilution:
Public offering price per share......... $ 12.00
Pro forma net tangible book value
(deficit) per share before
the Offering.......................... $ (1.18)
Increase per share attributable to new
investors............................. 6.72
---------
Pro forma net tangible book value per
share after the Offering.............. 5.54
---------
Dilution per share to new investors..... $ 6.46
=========
The following table sets forth, on an unaudited pro forma basis at June 30,
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 $12.00
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 2,932,104 45.4% $ 8,051,000 16.0% $ 2.75
New investors........................... 3,523,103 54.6 42,277,000 84.0 12.00
--------- ------- ----------- -------
Total.............................. 6,455,207 100.0% $50,328,000 100.0%
========= ======= =========== =======
</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 June 30, 1996 and the unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 1995 and for the three months
ended June 30, 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 June 30, 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 June 30, 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
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA OFFERING
THE COMPANY MIDTEX ADJUSTMENTS FOR THE ACQUISITIONS ADJUSTMENTS
----------- ------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............. $ 556 $ 952 $ (466)(1) $ 1,297 $ 3,280(9)
255(2) 685(10)
Receivables, net...................... 4,206 2,726 -- 6,932 --
Other current assets.................. 592 755 -- 1,347 --
----------- ------- ----------- -------- -----------
Total current assets........... 5,354 4,433 (211) 9,576 3,965
Property and equipment, net:
Prepaid facility use.................. -- -- 21,710(3) 21,710 --
Other................................. 4,241 22,127 (22,117)(4) 4,251 --
Goodwill.............................. 6,034 -- -- 6,034 --
Other assets............................ 4,144 5 (2,182)(5) 1,967 (400)(9)
----------- ------- ----------- -------- -----------
Total assets........................ $19,773 $26,565 $ (2,800) $ 43,538 $ 3,565
=========== ======= =========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 3,232 $ 2,022 $ -- $ 5,254 $ (400)(9)
Current portion of capital lease
obligations......................... -- 1,254 (1,254)(6) -- --
Current portion of long-term debt..... 24 -- 3,743(7) 3,767 (3,743)(9)
----------- ------- ----------- -------- -----------
Total current liabilities...... 3,256 3,276 2,489 9,021 (4,143)
Long-term capital lease obligations..... -- 15,110 (15,110)(6) -- --
Other long-term liabilities............. 306 -- -- 306 --
Long-term debt, excluding current
portion............................... 13,844 -- 11,745(7) 25,589 (25,545)(9)
Convertible bridge note................. -- -- 6,000(7) 6,000 (6,000)(9)
Stockholders' equity.................... 2,367 8,179 (8,179)(8) 2,622 38,568(9)
255(2) 685(10)
----------- ------- ----------- -------- -----------
Total liabilities and
stockholders' equity......... $19,773 $26,565 $ (2,800) $ 43,538 $ 3,565
=========== ======= =========== ======== ===========
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
ASSETS:
Current assets:
Cash and cash equivalents............. $ 5,262
Receivables, net...................... 6,932
Other current assets.................. 1,347
--------
Total current assets........... 13,541
Property and equipment, net:
Prepaid facility use.................. 21,710
Other................................. 4,251
Goodwill.............................. 6,034
Other assets............................ 1,567
--------
Total assets........................ $ 47,103
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 4,854
Current portion of capital lease
obligations......................... --
Current portion of long-term debt..... 24
--------
Total current liabilities...... 4,878
Long-term capital lease obligations..... --
Other long-term liabilities............. 306
Long-term debt, excluding current
portion............................... 44
Convertible bridge note................. --
Stockholders' equity.................... 41,875
--------
Total liabilities and
stockholders' equity......... $ 47,103
========
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 cash not acquired in the MidTex
acquisition.
(2) Records the increase to equity from the proceeds of the issuance of 90,331
shares to existing stockholders in connection with the financing for the
MidTex Acquisition.
(3) Reflects an allocation of $21.7 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, which may be exercised
unilaterally by the Company. The Company currently intends to exercise
these extensions.
(4) Records a reduction in net property and equipment of $22.1 million due to
the elimination of capital leases related to the three detention facilities
(see Note 7 below).
(5) Reflects an adjustment to eliminate $2.2 million of deferred MidTex
acquisition costs.
(6) Records the elimination of capital leases of $1.3 million (current) and
$15.1 million (long-term) resulting from the MidTex acquisition.
(7) Reflects the increase in long-term debt of $21.5 million, which relates to
financing the MidTex acquisition.
(8) Records the elimination of net assets of MidTex prior to the acquisition.
(9) Records the sale of 3,523,103 shares of Common Stock, par value $.001 per
share, at $12.00 per share, net of estimated aggregate offering expenses of
$3.5 million, the use of $35.3 million of the net proceeds thereof to repay
outstanding indebtedness, and the use of the remaining proceeds of $3.3
million as an increase to cash. Deferred offering costs of $400,000 as of
June 30, 1996 are reclassified to equity.
(10) Records the assumed proceeds upon the exercise, concurrently with the
Offering, of stock options and warrants by certain Selling Stockholders in
order to purchase shares of Common Stock that will be sold by such Selling
Stockholders in the Offering.
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 OFFERING
THE COMPANY MIDTEX CENTER ADJUSTMENTS FOR 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) 30,327 --
1,527(2)
(284)(3)
Depreciation and amortization........ 820 682 71 (211)(4) 1,376 --
(6)(5)
20(6)
----------- ------- ------- ----------- -------------------- -----------
Contribution from operations... 3,521 4,993 (291) (1,210) 7,013 --
General and administrative expenses.. 3,531 1,527 -- (1,527)(2) 3,531 300(10)
----------- ------- ------- ----------- -------------------- -----------
Income (loss) from operations........ (10) 3,466 (291) 317 3,482 (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... (989) 2,019 (291) (221) 518 2,809
Provision for income taxes........... -- -- -- 279(9) 279 1,067(9)
----------- ------- ------- ----------- -------------------- -----------
Net income (loss).................... $ (989) $ 2,019 $ (291) $ (500) $ 239 $ 1,742
=========== ======= ======= =========== ==================== ===========
Earnings (loss) per share............ $ (.25) $ .06
=========== ====================
Number of shares used in per share
computation (thousands)............ 3,983 3,983
=========== ====================
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
Revenues................................ $ 38,716
Operating expenses...................... 30,327
Depreciation and amortization........... 1,376
----------------
Contribution from operations... 7,013
General and administrative expenses..... 3,831
----------------
Income (loss) from operations........... 3,182
Interest expense........................ --
Interest income......................... (145)
----------------
Income (loss) before
provision for income taxes... 3,327
Provision for income taxes.............. 1,346
----------------
Net income (loss)....................... $ 1,981
================
Earnings (loss) per share............... $ .26
================
Number of shares used in per share
computation (thousands)............... 7,506
================
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 SIX MONTHS ENDED JUNE 30, 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................................ $11,337 $8,603 $1,131 $ -- $ 21,071 $ --
Operating expenses...................... 9,461 5,774 997 108(1) 17,012 --
672(2)
Depreciation and amortization........... 510 407 22 (97)(4) 853 --
1(5)
10(6)
----------- ------ ------ ----------- -------- -----------
Contribution from operations............ 1,366 2,422 112 (694) 3,206 --
General and administrative expenses..... 1,629 672 -- (672)(2) 1,629 150(10)
----------- ------ ------ ----------- -------- -----------
Income (loss) from operations........... (263) 1,750 112 (22) 1,577 (150)
Interest expense........................ 498 843 -- 372(7) 1,796 (1,796)(11)
83(8)
Interest income......................... (51) (14 ) -- -- (65) --
----------- ------ ------ ----------- -------- -----------
Income (loss) before provision for
income taxes.......................... (710) 921 112 (477) (154) 1,646
Provision for income taxes.............. -- -- -- --(9) -- 625(9)
----------- ------ ------ ----------- -------- -----------
Net income (loss)....................... $ (710) $ 921 $ 112 $(477) $ (154) $ 1,021
=========== ====== ====== =========== ======== ===========
Earnings (loss) per share............... $ (.20) $ (.04)
=========== ========
Number of shares used in per share
computation (thousands)............... 3,523 3,523
=========== ========
</TABLE>
PRO FORMA
AS ADJUSTED
FOR THE OFFERING
----------------
Revenues................................ $ 21,071
Operating expenses...................... 17,012
Depreciation and amortization........... 853
--------
Contribution from operations............ 3,206
General and administrative expenses..... 1,779
--------
Income (loss) from operations........... 1,427
Interest expense........................ --
Interest income......................... (65)
--------
Income (loss) before provision for
income taxes.......................... 1,492
Provision for income taxes.............. 625
--------
Net income (loss)....................... $ 867
========
Earnings (loss) per share............... $ .12
========
Number of shares used in per share
computation (thousands)............... 7,204
========
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 property taxes to the City of Big Spring, Texas resulting from the
acquisition of substantially all the assets of MidTex. Such payments were
not incurred by MidTex and were negotiated between the Company and the City
of Big Spring.
(2) Records reclassification of MidTex's general and administrative expenses to
operating expenses to conform to the Company's policy.
(3) Records an adjustment to reduce operating expenses for the compensation of
a MidTex executive less the cost of a new management advisory services
consulting agreement for such executive, which was entered into as part of
the closing of the acquisition of substantially all the assets of MidTex.
The duties of the executive have been and will continue to be primarily
developing contracts and maintaining relationships with governmental
officials. Management of the Company does not anticipate the permanent
replacement of the executive nor does management of the Company believe an
adjustment to revenues is necessary as a result of the absence of this
executive.
(4) Records adjustments to depreciation and amortization as follows for MidTex:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
and amortization expense.............. $(682) $ (407)
Amortization of prepaid facility use
costs................................. 471 310
------ ------
$(211) $ (97)
====== ======
(5) Records adjustments to depreciation for revised basis in depreciable assets
as follows for Reid Center:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
expense............................... $ (71) $(22)
Depreciation expense for revised basis
in depreciable assets................. 65 23
----- -----
$ (6) $ 1
===== =====
(6) Records additional depreciation expense based upon the Company's revised
estimate of the useful lives of the Reid Center facilities from 30 to 20
years (facilities are currently 30 or more years old and in management's
opinion have a remaining life of approximately 20 years) as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(DOLLARS IN THOUSANDS)
Elimination of historical depreciation
expense of the buildings.............. $ (55) $(27)
Depreciation expense based on revised
useful lives of the buildings......... 75 37
----- -----
$ 20 $ 10
===== =====
(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 six months ended June 30, 1996,
respectively. The assumed weighted average borrowings by MidTex for the
year ended December 31, 1995 were reduced by the cost of a new MidTex
facility which was placed in service during 1995.
(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 six months ended June 30, 1996.
(9) Records adjustments to record income tax effects of the foregoing
adjustments.
(10) Records adjustments to increase general and administrative expenses of
$300,000 for the year ended December 31, 1995, and $150,000 for the six
months ended June 30, 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 $1.8 million for the six months ended June 30, 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.
Reference is made to Note 7 of Notes to the Company's Consolidated
Financial Statements for a discussion of certain financing and compensation
charges that will be recorded subsequent to June 30, 1996 related to the
Company's issuance of certain equity securities.
In March 1996, MidTex amended its contract with the FBOP to decrease per
diem rates from $36.92 to $34.92. In connection with this decrease, management
anticipates a corresponding reduction in revenues. The Company's negotiated
purchase price for the acquisition of substantially all the assets of MidTex
took into consideration the per diem rate reduction. Management is considering
certain cost reduction strategies in connection with the MidTex acquisition
which are expected to substantially mitigate the reduction in revenues. The
impact on income from operations is not expected to be significant.
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 six month periods ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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 June 30, 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 June 30, 1996 gives effect to such events as if they had occurred on June 30,
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>
HISTORICAL PRO FORMA
--------------------------------------------------------------------------- ------------
SIX MONTHS ENDED
YEAR ENDED
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31,
----------------------------------------------------- -------------------- ------------
1991 1992 1993 1994(1) 1995 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Occupancy fees................... $ -- $ -- $ 107 $ 15,389 $ 20,594 $ 10,104 $ 10,967 $ 37,229
Other income..................... 235 2,540 3,091 300 98 3 370 1,487
--------- --------- --------- --------- --------- --------- --------- ------------
Total revenues............... 235 2,540 3,198 15,689 20,692 10,107 11,337 38,716
Operating expenses................. -- -- 2,827 12,315 16,351 8,030 9,461 30,327
Depreciation and amortization...... 3 3 16 758 820 367 510 1,376
--------- --------- --------- --------- --------- --------- --------- ------------
Contribution from operations....... 232 2,537 355 2,616 3,521 1,710 1,366 7,013
General and administrative
expenses......................... 968 1,627 1,315 2,959 3,531 1,551 1,629 3,831
--------- --------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations...... (736) 910 (960) (343) (10) 159 (263) 3,182
Interest expense................... 7 -- -- 294 1,115 269 498 --
Interest income.................... (1) (30) (45) (138) (136) (70) (51) (145)
--------- --------- --------- --------- --------- --------- --------- ------------
Income (loss) before income
taxes............................ (742) 940 (915) (499) (989) (40) (710) 3,327
Provision for income taxes(2)...... -- -- -- 101 -- -- -- 1,346
--------- --------- --------- --------- --------- --------- --------- ------------
Net income (loss).................. $ (742) $ 940 $ (915) $ (600) $ (989) $ (40) $ (710) $ 1,981
========= ========= ========= ========= ========= ========= ========= ============
Earnings (loss) per share.......... $ (.31) $ .38 $ (.34) $ (.16) $ (.25) $ (.01) $ (.20) $ .26
========= ========= ========= ========= ========= ========= ========= ============
Number of shares used in per share
computation(3)................... 2,388 2,491 2,695 3,811 3,983 4,084 3,523 7,506
Supplemental earnings (loss) per
share(4)......................... $ .03 $ (.05)
========= =========
OPERATING DATA:
Beds under contract (end of
period).......................... -- -- 282 1,155 1,478 1,135 1,796 3,093
Contracted beds in operation (end
of period)....................... -- -- 282 1,155 1,135 1,135 1,561 2,750
Average occupancy based on
contracted beds in
operation(5)..................... -- -- -- 92.1% 98.9% 97.8% 95.8% 91.8%
BALANCE SHEET DATA:
Working capital (deficit).......... $ (293) $ 812 $ 810 $ 2,015 $ 1,525 $ 2,295 $ 2,098
Total assets....................... 44 1,300 2,048 13,095 14,184 13,847 19,773
Long-term debt..................... -- -- -- 3,447 7,649 4,685 13,868
Stockholders' equity (deficit)..... (289) 896 1,085 6,631 3,053 6,714 2,367
</TABLE>
SIX
MONTHS
ENDED
JUNE 30,
---------
1996
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Occupancy fees................... $20,701
Other income..................... 370
---------
Total revenues............... 21,071
Operating expenses................. 17,012
Depreciation and amortization...... 853
---------
Contribution from operations....... 3,206
General and administrative
expenses......................... 1,779
---------
Income (loss) from operations...... 1,427
Interest expense................... --
Interest income.................... (65)
---------
Income (loss) before income
taxes............................ 1,492
Provision for income taxes(2)...... 625
---------
Net income (loss).................. $ 867
=========
Earnings (loss) per share.......... $ .12
=========
Number of shares used in per share
computation(3)................... 7,204
Supplemental earnings (loss) per
share(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)..................... 94.1%
BALANCE SHEET DATA:
Working capital (deficit).......... $ 8,663
Total assets....................... 47,103
Long-term debt..................... 68
Stockholders' equity (deficit)..... 41,875
- ------------
(1) Includes operations purchased by the Company on March 31, 1994.
(2) 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.
(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) Supplemental per share data is presented to show what the earnings (loss)
would have been if the repayment of debt with proceeds from the Offering had
taken place at the beginning of the respective periods.
(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 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,
--------------------------------- JUNE 30,
1993 1994 1995 1996
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Contracts (1)........................... 1 16 19 23
Facilities in operation................. 1 13 12 15
Design capacity of facilities in
operation............................. 302 1,281 1,347 1,809
Beds under contract (end of period)..... 282 1,155 1,478 1,796
Contracted beds in operation (end of
period)............................... 282 1,155 1,135 1,561
Average occupancy based on contracted
beds in operation(2).................. -- 92.1% 98.9% 95.8%
</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 September 1, 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
fourth quarter of 1996, and the other is scheduled to commence operations during
the first quarter of 1997. In addition, as of August 20, 1996, the Company has
submitted written bids to operate four new projects with an aggregate design
capacity of 760 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.
On a combined pro forma basis, after giving effect to the Acquisitions, for
the year ended December 31, 1995 and for the six months ended June 30, 1996,
respectively, 71.0% and 72.0% of the Company's revenues were derived from the
operation of institutional correctional and detention facilities, and 29.0% and
28.0% of the Company's revenues were derived from the operation of pre-release
correctional facilities. The Company's operating margins generally vary from
facility to facility (regardless of whether the facility is institutional,
pre-release or juvenile) depending on the terms negotiated with each contracting
governmental agency.
In 1992 and 1993, the Company recognized substantial development fees
related to the development, design and supervision of facility construction
activities. Since that time, competitive bidding practices in the industry have
required the Company to submit bids that include no fee or only a minimal fee
for development activities. Future development fee revenues are not anticipated
to be significant. As such, the Company currently derives revenues from
development, design and construction activities primarily through occupancy fees
that are paid over the term of the contract once a facility begins operations.
See "-- Liquidity and Capital Resources -- General."
24
Factors which the Company considers in determining the per diem rate to
charge include (i) the programs specified by the contract and the related
staffing levels, (ii) wage levels customary in the respective geographic areas,
(iii) whether the proposed facility is to be leased or purchased and (iv) if the
contract is currently being operated by a competitor, the historical average
occupancy levels maintained or, if a new contract, the anticipated average
occupancy levels which the Company believes could reasonably be maintained.
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." MidTex
generated income from operations of $2.0 million, $1.8 million and $3.5 million
for the fiscal years ended September 30, 1993, 1994 and 1995, respectively, and
$3.1 million for the nine months ended June 30, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
MidTex and BSCC -- Combined Results of Operations-MidTex and BSCC." The addition
of the operations of MidTex to the Company should improve the Company's results
of operations in future periods.
A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company's variable operating expenses depends on occupancy levels at the
facilities operated by the Company. These variable operating expenses include
food, medical services, supplies and clothing. The Company's largest single
operating expense, facility payroll expense and related employment taxes and
costs, have both a fixed and a variable component. The Company can adjust the
staffing and payroll to a certain extent based on occupancy at a facility, but a
minimum fixed number of employees is required to operate and maintain any
facility regardless of occupancy levels. Since a majority of the Company's
operating expenses are fixed, to the extent that the Company can increase
revenues at a facility through higher occupancy or expansion of the number of
beds under contract, the Company should be able to improve operating results.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
accounting, finance, personnel and other services and costs of developing new
contracts.
Newly opened facilities are staffed according to contract requirements when
the Company begins receiving 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. However, the Company
does not have a calculable break-even occupancy level for the Company as a
whole. 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.
As a result of the Company's existing indebtedness, including indebtedness
incurred in the acquisition of substantially all assets of MidTex, the Company
is incurring monthly interest expense of approximately $300,000. The Company
will utilize the net proceeds from the Offering to retire the outstanding
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. The substantial reduction
in outstanding indebtedness will substantially reduce interest expense and
improve the Company's results of operations. In addition to a substantial
reduction in interest expense after the
25
completion of the Offering, the addition of the operations of MidTex, which
generated income from operations of $3.5 million for the fiscal year ended
September 30, 1995 and $3.1 million for the nine months ended June 30, 1996 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- MidTex and BSCC -- Combined Results of Operations-MidTex and
BSCC"), and the operations of the Reid Center should allow the Company to spread
its general and administrative expenses over a larger operating base of
revenues, thereby improving the Company's operating results. See "Pro Forma
Financial Data."
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 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
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.
Subsequent to June 30, 1996, in connection with the 1996 Credit Facility,
the Company incurred expenses, issued certain options and warrants, and sold
shares of Class B Common Stock, for which the Company recognized total deferred
financing costs of $1.3 million, of which $725,000 was noncash, to be amortized
over the life of the 1996 Credit Facility. Since the use of proceeds from the
Offering is intended to retire the outstanding indebtedness under the 1996
Credit Facility, the total deferred financing costs are expected to be charged
to interest expense prior to December 31, 1996 in connection with the early
retirement of the borrowings under 1996 Credit Facility. In addition, the
Company will recognize noncash compensation expense of $870,000 during the third
quarter of 1996 in connection with options to purchase shares of Common Stock
granted in July 1996 to certain officers of the Company based upon the estimated
valuation of the shares of Common Stock compared to the exercise price on the
date of grant.
26
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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
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 79.5 83.5
Depreciation and amortization........... 0.5 4.8 4.0 3.6 4.5
--------- --------- --------- --------- ---------
Contribution from operations............ 11.1 16.7 17.0 16.9 12.0
General and administrative expenses..... 41.1 18.9 17.0 15.3 14.3
--------- --------- --------- --------- ---------
Income (loss) from operations........... (30.0) (2.2) 0.0 1.6 (2.3)
Interest expense (income)............... (1.4) 1.0 4.8 2.0 4.0
--------- --------- --------- --------- ---------
Income (loss) before income taxes....... (28.6) (3.2) (4.8) (0.4) (6.3)
Provision for income taxes.............. 0.0 0.6 0.0 0.0 0.0
--------- --------- --------- --------- ---------
Net income (loss)....................... (28.6) (3.8) (4.8) (0.4) (6.3)
========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
TOTAL REVENUES. Total revenues increased by 12.2% to $11.3 million for the
six months ended June 30, 1996 from $10.1 million for the six months ended June
30, 1995. The increase in occupancy fees of $863,000, or 8.5%, was due
principally to the opening of two new pre-release facilities during the first
quarter of 1996 and the acquisition of the Reid Center effective as of May 1,
1996. Revenues were lower than expected as a result of lower than anticipated
occupancy levels at the Wyatt Facility during the first quarter of 1996 and
certain pre-release facilities. The increase in other income for the six months
ended June 30, 1996 to $370,000 from $3,000 for the six months ended June 30,
1995 was due primarily to the recognition of the revenue related to a previously
reserved note receivable of $206,000 pertaining to 1994 operations of the Wyatt
Facility, the realization of which has improved from prior periods due to
payments received on the note and due to the additional operating experience
with the facility.
OPERATING EXPENSES. Operating expenses increased by 17.8% to $9.5 million
for the six months ended June 30, 1996 from $8.0 million for the six months
ended June 30, 1995. This increase is principally attributable to the opening of
two new pre-release facilities during the first quarter of 1996 and the
acquisition of the Reid Center as of May 1, 1996. As a percentage of revenues,
operating expenses increased to 83.5% from 79.5%. 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 the unanticipated reduced occupancy at the Wyatt
Facility during the first quarter of 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
39.0% to $510,000 for the six months ended June 30, 1996 from $367,000 for the
six months ended June 30, 1995. The increase was primarily due to an accounting
adjustment in the first quarter of 1995 to adjust depreciation expense in prior
periods, to the opening of a new pre-release facility in January 1996 and to the
acquisition of the Reid Center in May 1996.
CONTRIBUTION FROM OPERATIONS. Contribution from operations decreased by
20.1% to $1.4 million for the six months ended June 30, 1996 from $1.7 million
for the six months ended June 30, 1995. As a percentage of revenues,
contribution from operations decreased to 12.0% from 16.9% 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 and certain other pre-release facilities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 5.0% to $1.6 million for the six months ended June 30, 1996 from
$1.5 million for the six months ended June 30, 1995. As a percentage of
revenues, general and administrative expenses decreased to 14.3% from 15.3% due
principally to spreading fixed costs over a larger revenue base. Salary expense
increased by $95,000 or 18.4% for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995.
27
Development costs increased by $98,000 or 31.4% for the six months ended June
30, 1996 compared to the six months ended June 30, 1995.
INTEREST. Interest expense, net of interest income, increased to $447,000
for the six months ended June 30, 1996 from $199,000 for the six months ended
June 30, 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, the construction and development
of the two new pre-release facilities which opened during the first quarter of
1996, and the acquisition of the Reid Center in May 1996.
INCOME TAXES. The Company did not recognize any provision for income taxes
due to a taxable loss in both periods. As of June 30, 1996, the Company had
recognized a deferred tax asset of $436,000. Management of the Company believes
that this deferred tax asset is realizable.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
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 1995. As a
percentage of revenues, operating expenses increased to 79.0% from 78.5%
principally for the same reason.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
8.2% to $820,000 for the year ended December 31, 1995 from $758,000 for the year
ended December 31, 1994. The increase was due principally to recognizing 12
months of contract value and goodwill amortization in 1995 as compared to nine
months of amortization in 1994 resulting from the acquisition of Eclectic,
offset in part by an accounting adjustment in the first quarter of 1995 to
adjust depreciation expense in prior periods.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased 34.6%
to $3.5 million for the year ended December 31, 1995 from $2.6 million for the
year ended December 31, 1994. As a percentage of revenues, contribution from
operations increased to 17.0% from 16.7%.
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 17.0% from 18.9% due
principally to spreading fixed costs over a larger revenue base. Salary expense
increased by $9,000 or 0.1% for the year ended December 31, 1995 compared to the
year ended December 31, 1994. Development costs increased by $457,000 or 113.9%
for the year ended December 31, 1995 compared to the year ended December 31,
1994.
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.
28
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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$758,000 for 1994 from $16,000 in 1993. The increase was due to recognizing nine
months of amortization and depreciation in 1994 resulting from the Eclectic
acquisition.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased to
$2.6 million for 1994 from $355,000 for 1993. As a percentage of revenues,
contribution from operations increased to 16.7% 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.
Working capital requirements generally increase immediately prior to the Company
commencing management of a new facility as the Company incurs start-up costs and
purchases necessary equipment and supplies before facility management revenue
(through occupancy fees) is realized. Some of the Company's management contracts
have required the Company to make substantial initial expenditures of cash in
connection with the opening or renovating of a facility. Substantially all these
start-up expenditures are fully or partially recoverable as pass-through costs
or are reimbursable from the contracting governmental agency over the term of
the contract.
The Company typically incurs costs ranging from $10,000 to $75,000 to
prepare a response to an RFP. RFP costs are typically recovered from the
contracting governmental agency over the term of the contract if the Company is
awarded the contract. Otherwise, the RFP costs are unreimbursed expenses. See
"Business -- Marketing." Facility start-up costs vary by contract and can range
between $30,000 and $1.0 million. See "Business -- Facility Management
Contracts."
In the past, certain expenses from development, design and construction of
new or renovated facilities were reimbursed through development fees. More
recently, the Company has derived revenues from
29
development, design and construction activities primarily through occupancy fees
that are paid over the term of the contract once a facility begins operations.
As such, the Company is often required to incur initial expenditures for
development, design or construction of facilities, which are not necessarily
immediately reimbursed.
WORKING CAPITAL. The Company's working capital increased to $2.1 million at
June 30, 1996 from $1.5 million at December 31, 1995. This increase was
principally due to an increase in receivables resulting from the acquisition of
the Reid Center in May 1996 and 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 September 1, 1996, the outstanding indebtedness under the
1996 Credit Facility totaled $28.9 million, of which $3.7 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 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 the outstanding 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 six
months ended June 30, 1996 were $467,000 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 $952,000 for the six months ended June 30, 1996 was primarily due
to a loss from operations and to the increase in receivables resulting from the
acquisition of the Reid Center in May 1996. 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
30
currently seeking to obtain 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 working
capital 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. See "Risk Factors -- Need for Additional Financing."
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.
MIDTEX AND BSCC
MidTex was formed in November 1987 to provide executive management to
construct prison facilities and operate prison activities for the City of Big
Spring, Texas. The Big Spring Correctional Center ("BSCC") is an enterprise fund
set up by the City to operate these prison facilities. Since 1987, the three Big
Spring Facilities (the Airpark Unit, the Flightline Unit and the Interstate
Unit) have been established to house approximately 1,305 inmates for the FBOP.
COMBINED RESULTS OF OPERATIONS - MIDTEX AND BSCC
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands) for MidTex and BSCC combined:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------- (UNAUDITED)
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......................... $ 10,407 100.0% $ 10,437 100.0% $ 14,682 100.0% $ 9,770 100.0%
Operating expenses...................... 6,826 65.6 7,047 67.5 9,007 61.3 6,066 62.1
Depreciation and amortization........... 502 4.8 466 4.5 682 4.6 478 4.9
Contribution from operations............ 3,079 29.6 2,924 28.0 4,993 34.1 3,226 33.0
General and administrative expenses..... 1,084 10.4 1,089 10.4 1,527 10.5 862 8.8
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. $ 1,995 19.2 $ 1,835 17.6 $ 3,466 23.6 $ 2,364 24.2
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Total revenues.......................... $ 12,794 100.0%
Operating expenses...................... 8,016 62.6
Depreciation and amortization........... 608 4.8
Contribution from operations............ 4,170 32.6
General and administrative expenses..... 1,067 8.3
--------- ---------
Income from operations.................. $ 3,103 24.3
========= =========
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
TOTAL REVENUES. Total revenues increased by 31.0% to $12.8 million for the
nine months ended
June 30, 1996 from $9.8 million for the nine months ended June 30, 1995. The
increase was due principally to the addition of the 560-bed Flightline Unit
which began operation in February 1995 and achieved its expected occupancy
levels in April 1995. Effective March 1996, MidTex amended its contract with the
FBOP, which decreased per diem rates from $36.92 to $34.92, a reduction of 5.4%.
OPERATING EXPENSES. Operating expenses increased by 32.1% to $8.0 million
for the nine months ended June 30, 1996 from $6.1 million for the nine months
ended June 30, 1995. The increase was due principally to the addition of the
Flightline Unit and due to general wage increases for personnel.
31
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
27.2% to $608,000 for the nine months ended June 30, 1996 from $478,000 for the
nine months ended June 30, 1995. The increase was due principally to the
addition of the Flightline Unit.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased 29%
to $4.2 million for the nine months ended June 30, 1996 from $3.2 million for
the nine months ended June 30, 1995. The increase was due principally to the
addition of the Flightline Unit.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 23.8% to $1.1 million for the nine months ended June 30, 1996 from
$862,000 for the nine months ended June 30, 1995. The increase was due
principally to the payment of executive bonuses. YEAR ENDED SEPTEMBER 30, 1995
COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
TOTAL REVENUES. Total revenues increased by 40.7% to $14.7 million for the
fiscal year ended September 30, 1995 from $10.4 million for the fiscal year
ended September 30, 1994. The increase was due principally to the addition of
the Flightline Unit which began operation in February 1995 and achieved its
expected occupancy levels in April 1995.
OPERATING EXPENSES. Operating expenses increased by 27.8% to $9.0 million
for the fiscal year ended September 30, 1995 from $7.0 million for the fiscal
year ended September 30, 1994. The increase was due principally to the addition
of the Flightline Unit.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
46.4% to $682,000 for the fiscal year ended September 30, 1995 from $466,000 for
the fiscal year ended September 30, 1994. The increase was due principally to
the addition of the Flightline Unit.
CONTRIBUTION FROM OPERATIONS. Contribution from operations increased 71%
to $5.0 million for the fiscal year ended September 30, 1995 from $2.9 million
for the fiscal year ended September 30, 1994. The increase was due principally
to the addition of the Flightline Unit.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 40.2% to $1.5 million for the fiscal year ended September 30, 1995
from $1.1 million for the fiscal year ended September 30, 1994. The increase was
due principally to the payment of executive bonuses and the addition of
management personnel.
LIQUIDITY AND CAPITAL RESOURCES - MIDTEX AND BSCC
From October 1, 1994 through the nine months ended June 30, 1996, MidTex
generated $6.6 million of cash from operating activities. During the same
period, MidTex used $1.4 million in investment activities primarily for
purchases and replacements of furniture and equipment, and used $4.3 million in
investing activities which were principally payments on capital lease
obligations pertaining to the facilities.
MidTex had working capital of $1.2 million as of June 30, 1996. MidTex has
historically funded its operations with cash flows from operations.
REID CENTER
The Reid Center is a 310-bed residential rehabilitation and drug treatment
pre-release center which has been in operation since the mid-1960's as a
nonprofit organization. The Reid Center has a contract with the Texas Department
of Criminal Justice to provide residential services, reintegration programs and
counseling for state parolees.
32
RESULTS OF OPERATIONS - REID CENTER
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands) for the Reid Center:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED ------------------------------------------
DECEMBER 31,
-------------------- (UNAUDITED)
1995 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues.......................... $ 3,342 100.0% $ 828 100.0% $ 838 100.0%
Operating expenses...................... 3,562 106.6 906 109.4 743 88.7
Depreciation and amortization........... 71 2.1 17 2.1 17 2.0
--------- --------- --------- --------- --------- ---------
Income (loss)........................... $ (291) (8.7) $ (95) (11.5) $ 78 9.3
========= ========= ========= ========= ========= =========
</TABLE>
Operating expenses for the three months ended March 31, 1996 decreased
$163,000, or 18.0%, as compared to the three months ended March 31, 1995. This
decrease was due principally to a significant reduction in personnel during the
fourth quarter of 1995 in response to a decrease in residents at the facility.
The results of operations of the Reid Center have been included with the
Company's since May 1996. LIQUIDITY AND CAPITAL RESOURCES_-_REID CENTER
From January 1, 1995 through March 31, 1996, the Reid Center used $137,000
of cash in operating activities and made $47,000 in capital expenditures. The
Reid Center had working capital of $696,000 as of March 31, 1996. The Reid
Center has historically funded its operations with cash flows from operations.
33
BUSINESS
GENERAL
Based on the information in the Private Correctional Facility Census
regarding combined capacities of adult, pre-release and juvenile facilities
under contract with private correctional and detention providers in the United
States at December 31, 1995, and after giving effect to the Acquisitions
occurring after December 31, 1995 (see " -- Acquisition History" below), the
Company is one of the leading providers of privatized correctional, detention
and pre-release services in the United States based on contracted design
capacity. 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 September 1,
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) 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. 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 maximum and
medium security incarceration and minimum security residential services,
institutional food services, certain transportation services, general education
programs (such as high school equivalency and English as a second language
programs), health care (including medical, dental and psychiatric services),
work and recreational programs and chemical dependency and substance abuse
programs. Additional services provided in the Company's pre-release facilities
typically include life skills and employment training and job placement
assistance. Juvenile services provided by the Company 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
34
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 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 Private Correctional Facility 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 Private Correctional
Facility Census, numerous counties, various agencies of the federal government
and 20 states had awarded management contracts to private companies. According
to the Private Correctional Facility 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 Private Correctional
Facility 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.
35
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.
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.
PRE-RELEASE. The Company's business historically centered around the
operation of 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 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 minimum
security residential services, institutional food services, general education
programs, life skills and employment training, job placement assistance and
chemical dependency and substance abuse counseling. About 20% of the 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
36
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
September 1, 1996, the Company has submitted written bids to operate four new
projects with an aggregate design capacity of over 760 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, and the Company is not currently involved in any negotiations for
acquisitions. The timing, size and success of the Company's acquisition program
efforts and the associated potential capital commitments are not predictable.
37
FACILITIES
As of September 1, 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 fourth
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 September 1, 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)
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)
38
- ------------
(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
39
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.
40
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 September 1, 1996, the Company has submitted written bids for
operating four new projects with an aggregate design capacity of 760 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.
41
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; (v) the development, design and construction
of the 58-bed FBOP facility in Salt Lake City, Utah; (vi) the development,
design and construction of the 94-bed Leidel Center in Houston, Texas; and (vii)
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 developed, designed and constructed with the exception
of the detention center in Plymouth, Massachusetts, which is operated by the
Sheriff's Department of the County of Plymouth, Massachusetts.
The Company utilizes an experienced team of outside professional
architectural consultants as part of the group that participates from conceptual
design through final construction of a project. When designing a facility, the
Company's outside architects utilize, with appropriate modifications, prototype
designs the Company has previously used in developing projects. Management of
the Company believes that the use of such proven designs allows the Company to
reduce cost overruns and avoid construction delays. Additionally, the Company
designs its facilities with the intention to improve security and minimize the
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 governmental agencies and placement
agents to obtain and structure financing for construction of facilities. In some
cases, an unrelated special purpose corporation is established to incur
borrowings to finance construction and, in other cases, the Company directly
incurs borrowings for construction financing. A growing trend in the
privatization industry is the requirement by governmental agencies that private
operators make capital investments in new facilities and enter into direct
financing arrangements in connection with the development of such facilities.
There can be no assurance that the Company will have available capital if and
when required to make such an investment to secure a contract for developing a
facility.
42
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 beds under contract in the United States,
according to the Private Correctional Facility 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 June 30, 1996, the Company had 373 full-time employees and 87 part-time
employees. After giving effect to the acquisition of substantially all the
assets of MidTex, at September 1, 1996, the Company had approximately 630
full-time employees and 110 part-time employees. Of such full-time employees,
approximately 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 $10 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 of the Company, the outcome of the
43
proceedings to which the Company is currently a party will not have a material
adverse effect upon the Company's operations or financial condition.
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."
44
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth the names, ages (as of September 1, 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
David M. Cornell........................ 61 Chairman of the Board, President and
Chief Executive Officer (1)
William J. Schoeffield, Jr.............. 46 Chief Operating Officer (1)(2)
Marvin H. Wiebe, Jr..................... 49 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................. 67 Director (3)
Tucker Taylor........................... 56 Director (3)
</TABLE>
- ------------
(1) Executive officer of the Company.
(2) Appointment as Chief Operating Officer will become effective October 16,
1996.
(3) 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.
WILLIAM J. SCHOEFFIELD, JR. will become Chief Operating Officer of the
Company effective October 16, 1996. Mr. Schoeffield has been Vice
President -- Eastern Regional Ground Operations of Federal Express Corp. since
1990. Prior thereto, Mr. Schoeffield was Vice President -- Western Regional
Ground Operations of Federal Express from 1988 to 1990 and has held numerous
positions with Federal Express since 1976.
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.
45
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 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
46
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 American Arbitration Association, 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 Vice President of a division 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. Prior thereto, 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. Griffin 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. Leidel 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.
47
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 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.
Mr. Schoeffield will become Chief Operating Officer of the Company
effective October 16, 1996. The Board of Directors of the Company has approved
an annual salary of $160,000 for Mr. Schoeffield with a guaranteed bonus of
$40,000 for the first twelve months of employment. Mr. Schoeffield will also
receive options to purchase 100,000 shares of Common Stock under the Stock
Option Plan. The options will vest 20% upon commencement of employment and 20%
every twelve months thereafter. The exercise price of the options will be the
initial public offering price in the Offering.
48
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
49
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 September 9, 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, 323,478 were outstanding and 278,498 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.
50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
MANAGING UNDERWRITERS
Dillon Read is a managing underwriter in the Offering. 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 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
completion of the Offering, such persons will own an aggregate of 19.7% 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). 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."
ING Baring (U.S.) Securities, Inc. ("ING Baring") is a managing underwriter
in the Offering. Immediately prior to the Offering, ING, an affiliate of ING
Baring, owned 14.1% of the outstanding shares of Common Stock (assuming the
exercise of its options and warrants, but not the options or warrants of other
persons, into shares of Common Stock). In connection with the Offering, ING is
exercising warrants to purchase 250,000 shares of Common Stock for an aggregate
exercise price of $360,870 and is selling the 250,000 shares of Common Stock as
a Selling Stockholder in the Offering. See "Principal and Selling Stockholders."
Immediately after the completion of the Offering, ING will own 3.4% of the
outstanding shares of Common Stock (assuming the exercise of its options and
warrants, but not the options or warrants of other persons, into shares of
Common Stock). In addition, ING is a party to the 1996 Credit Facility and the
lender under the Convertible Bridge Note and was a party to the 1995 Credit
Facility. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations_-- Liquidity and Capital Resources
- -- Existing Credit Facilities," "-- 1995 Credit Facility" and "Underwriting."
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,
51
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.
1995 CREDIT FACILITY. On March 14, 1995, the Company and its subsidiaries
entered into the 1995 Credit Facility with ING to obtain credit in an aggregate
principal amount not exceeding $15 million primarily to refinance certain
indebtedness of the Company and its subsidiaries and to pay certain accounts
payable and for working capital purposes and certain capital expenditures. In
connection with the 1995 Credit Facility, the Company issued warrants to ING to
purchase 162,500 shares of Class B Common Stock at an exercise price of $1.00
per share. The warrants expire March 14, 2002.
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 ING (59,000), which
provided the financing for the Stock Repurchase pursuant to an amendment to the
1995 Credit Facility. 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 ING) 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 ING. Additionally, pursuant to the Investors
Agreement, if any holder of Repurchase Options (excluding ING) 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 with ING and issued the Convertible Bridge Note to ING.
As part of the consideration to ING for the 1996 Credit Facility and the
proceeds under the Convertible Bridge Note, the Company issued warrants to ING
to purchase 264,000 shares of Class B Common Stock at an exercise price of $2.82
per share. The warrants expire July 3, 2003. 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, ING, 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 ING 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 ING 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
52
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 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
ING 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
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.
53
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 41.6% of the outstanding Common
Stock assuming exercise of their outstanding stock options (and 33.2% 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.
54
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)..................... 888,234 126,124 28.9 62,500 704,399 126,124
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......................... 243,624 139,874 7.9 -- 243,624 139,874
Marvin H. Wiebe, Jr..................... 8,407 3,750 * -- 8,407 3,750
All executive officers and directors as
a group (seven persons)(8)............ 1,140,265 269,748 35.3 62,500 963,930 277,248
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)....... 19.7%
535 Madison Avenue
New York, NY 10022
Charterhouse Equity Partners II, L.P.... 13.3
c/o Charterhouse Group
International, Inc.(1)(3)
535 Madison Avenue
New York, NY 10022
Internationale Nederlanden (U.S.)
Capital Corporation................... 3.4
135 E. 57th St.
New York, NY 10022
David M. Cornell(4)..................... 10.2
Jane B. Cornell(4)...................... 1.8
Richard T. Henshaw III(5)............... --
Peter A. Leidel(6)...................... --
Campbell A. Griffin, Jr.(7)............. *
Tucker Taylor(7)........................ *
Steven W. Logan......................... 3.5
Marvin H. Wiebe, Jr..................... *
All executive officers and directors as
a group (seven persons)(8)............ 13.7
Other Selling Stockholders:
Rauscher Pierce Refsnes, Inc............ --
1001 Fannin, Suite 700
Houston, Texas 77002
(NOTES ON FOLLOWING PAGE)
55
- ------------
* Less than one percent.
(1) If the Underwriters' over-allotment option is exercised, CEP II will sell up
to 600,000 shares of Common Stock.
(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 1,839 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.
56
DESCRIPTION OF CAPITAL STOCK
Upon the completion of the Offering, the Company's authorized capital stock
will consist of 30,000,000 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 6,765,398 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
57
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 American Security
Transfer & Trust, Inc.
58
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, 6,765,398 shares of Common Stock will
be outstanding and 978,109 shares will be issuable upon exercise of outstanding
warrants and stock options. The 4,000,000 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., 67,654 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 at least 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.
59
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........
ING Baring (U.S.) Securities, Inc. .....
----------------
Total.............................. 4,000,000
================
The Managing Underwriters are Dillon, Read & Co. Inc., Equitable Securities
Corporation ("Equitable Securities") and ING Baring (U.S.) Securities, Inc.
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.
A stockholder of the Company has granted to the Underwriters an option for
30 days from the date of the Underwriting Agreement to purchase up to an
additional 600,000 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 at
least 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
60
Company's employees, officers and directors pursuant to the Stock Option Plan,
provided that the Company 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 own an aggregate of 19.7% 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."
Immediately prior to the Offering, ING, an affiliate of ING Baring, owned
14.1% of the outstanding shares of Common Stock (assuming the exercise of its
options and warrants, but not the options or warrants of other persons, into
shares of Common Stock). Immediately after the completion of the Offering, ING
will own 3.4% of the outstanding shares of Common Stock (assuming the exercise
of its options and warrants, but not the options or warrants of other persons,
into shares of Common Stock.) In addition, ING is a party to the 1996 Credit
Facility and the lender under the Convertible Bridge Note and was a party to the
1995 Credit Facility. See "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Existing Credit Facility," "Certain Relationships and
Related Party Transactions -- Managing Underwriters" and "Principal and Selling
Stockholders."
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 and/or
ING Baring under the Rule, the Offering is being conducted in accordance with
the applicable provisions of the Rule. In addition, as described under "Use of
Proceeds," the net proceeds of the Offering, after deducting underwriting
discounts and commissions and offering expenses, will be applied to repay the
Company's borrowings outstanding under the 1996 Credit Facility and the
Convertible Bridge Note. ING, an affiliate of ING Baring, is a party to the 1996
Credit Facility and the lender under the Convertible Bridge Note and will
receive more than 10% of the net proceeds of the Offering. Under Rule 2710(c)(8)
of the Conduct Rules of the NASD, when an NASD member participates in the
distribution of a company's equity securities for which a bona fide independent
market does not exist and where more than 10% of the net proceeds of such
distribution is to be paid to such member or affiliates thereof, 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. 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."
61
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. In connection with the 1996 Credit
Facility and the Convertible Bridge Note and the 1995 Credit Facility, ING has
received financing fees. See "Certain Relationships and Related Party
Transactions -- Certain Equity Transactions -- 1995 Credit Facility" and "--
MidTex Acquisition Financing." 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.
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.
62
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.
63
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 June 30, 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 Six Months Ended June 30, 1995
and 1996 (Unaudited)...............
Consolidated Statements of F-5
Stockholders' Equity of Cornell
Corrections, Inc. for the Years
Ended December 31, 1993, 1994 and
1995 (Audited), and for the Six
Months Ended June 30, 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 Six Months Ended June 30, 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
June 30, 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 Nine
Months Ended June 30, 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 Nine Months Ended June 30, 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 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,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 928 $ 390 $ 556
Restricted cash.................... 279 284 325
Accounts receivable, net........... 2,148 3,436 4,007
Current portion of amount
receivable from the California
Department of Corrections........ 206 216 199
Deferred tax asset................. 266 27 27
Prepaids and other................. 579 187 240
--------- --------- -----------
Total current assets.......... 4,406 4,540 5,354
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $271, $430
and $650, respectively................ 564 1,909 4,241
OTHER ASSETS:
Contract value, net................ 516 206 51
Goodwill, net of accumulated
amortization of $255, $599 and
$769, respectively............... 6,544 6,204 6,034
Amount receivable from the
California Department of
Corrections, noncurrent.......... 731 519 437
Deferred tax asset, noncurrent..... 170 409 409
Deferred MidTex acquisition
costs............................ -- -- 2,182
Deferred costs and other........... 164 397 1,065
--------- --------- -----------
Total assets.................. $ 13,095 $ 14,184 $19,773
========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities...................... $ 2,391 $ 2,991 $ 3,232
Current portion of long-term
debt............................. -- 24 24
--------- --------- -----------
Total current liabilities..... 2,391 3,015 3,256
LONG-TERM DEBT, net of current
portion............................... 3,447 7,625 13,844
OTHER LONG-TERM LIABILITIES............. 626 491 306
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $.01 par
value, 9,000 shares authorized,
3,188, 3,189 and 3,194 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 6,979
Retained deficit................... (342) (1,331) (2,041)
Treasury stock (555 shares of Class
A Common Stock, at cost).. -- (2,603) (2,603)
--------- --------- -----------
Total stockholders' equity.... 6,631 3,053 2,367
--------- --------- -----------
Total liabilities and
stockholders' equity....... $ 13,095 $ 14,184 $19,773
========= ========= ===========
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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Occupancy fees..................... $ 107 $ 15,389 $ 20,594 $ 10,104 $ 10,967
Other income....................... 3,091 300 98 3 370
--------- --------- --------- --------- ---------
3,198 15,689 20,692 10,107 11,337
OPERATING EXPENSES...................... 2,827 12,315 16,351 8,030 9,461
DEPRECIATION AND AMORTIZATION........... 16 758 820 367 510
--------- --------- --------- --------- ---------
CONTRIBUTION FROM OPERATIONS............ 355 2,616 3,521 1,710 1,366
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,315 2,959 3,531 1,551 1,629
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........... (960) (343) (10) 159 (263)
INTEREST EXPENSE........................ -- 294 1,115 269 498
INTEREST INCOME......................... (45) (138) (136) (70) (51)
--------- --------- --------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME
TAXES................................. (915) (499) (989) (40) (710)
PROVISION FOR INCOME TAXES.............. -- 101 -- -- --
--------- --------- --------- --------- ---------
NET LOSS................................ $ (915) $ (600) $ (989) $ (40) $ (710)
========= ========= ========= ========= =========
LOSS PER SHARE.......................... $ (.34) $ (.16) $ (.25) $ (.01) $ (.20)
========= ========= ========= ========= =========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION........................... 2,695 3,811 3,983 4,084 3,523
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CORNELL CORRECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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
----------- ------ ------ ---------- -------- -------- -------------
<S> <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................................ -- -- -- -- (600) -- (600)
----------- ------ ------ ---------- -------- -------- -------------
BALANCES AT DECEMBER 31, 1994........... -- 3,188 32 6,941 (342) -- 6,631
EXERCISE OF STOCK OPTIONS............... -- 1 -- 3 -- -- 3
PURCHASE OF TREASURY STOCK (555 shares,
at cost).............................. -- -- -- -- -- (2,603) (2,603)
ISSUANCE OF WARRANTS.................... -- -- -- 11 -- -- 11
NET LOSS................................ -- -- -- -- (989) -- (989)
----------- ------ ------ ---------- -------- -------- -------------
BALANCES AT DECEMBER 31, 1995........... -- 3,189 32 6,955 (1,331) (2,603) 3,053
ISSUANCE OF COMMON STOCK................ -- 5 -- 24 -- -- 24
NET LOSS (Unaudited).................... -- -- -- -- (710) -- (710)
----------- ------ ------ ---------- -------- -------- -------------
BALANCES AT JUNE 30, 1996 (Unaudited). . $ -- 3,194 $ 32 $6,979 $ (2,041) $ (2,603) $ 2,367
=========== ====== ====== ========== ======== ======== =============
</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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (915) $ (600) $ (989) $ (40) $ (710)
Adjustments to reconcile net loss to
net cash used in
operating activities --
Depreciation........................ 16 271 166 36 185
Amortization........................ -- 487 654 331 325
Deferred income taxes............... -- 101 -- -- --
Compensation expense for common and
preferred units issued in lieu of
salary............................ 100 -- -- -- --
Change in assets and liabilities,
net of effects from acquisition of
businesses --
Accounts receivable............ (465) (1,161) (1,086) (1,531) (472)
Restricted cash................ -- (71) (5) 54 (41)
Other assets................... (49) 779 166 (97) (282)
Accounts payable and accrued
liabilities.................. 386 92 (137) (384) 43
--------- --------- --------- --------- ---------
Net cash used in operating
activities........................ (927) (102) (1,231) (1,631) (952)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (20) (167) (1,159) (134) (467)
Acquisition of businesses, less cash
acquired............................ -- (5,921) -- -- (4,251)
Redemption of commercial paper and
U.S. Treasury notes................. 419 585 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities.............. 399 (5,503) (1,159) (134) (4,718)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.......... -- -- 11,360 4,500 9,520
Payments on long-term debt............ -- (239) (7,158) (3,447) (3,301)
Issuance of common stock.............. 1,002 6,501 3 -- 24
Direct costs related to issuance of
common stock........................ -- (355) -- -- (407)
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 1,053 5,836
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 462 307 (538) (712) 166
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 159 621 928 928 390
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 621 $ 928 $ 390 $ 216 $ 556
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period....... $ 4 $ 293 $ 520 $ 260 $ 460
========= ========= ========= ========= =========
</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)
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 an
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
Contract value....................... 748
Goodwill............................. 6,799
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 June 30, 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 as operating expenses
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 paid to
unrelated third parties incurred in securing new facilities, including certain
costs of responding to requests for proposal ("RFPs"), are capitalized as
deferred costs and amortized as part of start-up costs. Internal payroll and
other costs incurred in securing new facilities are expensed to general and
administrative expenses. Development costs are charged to general administrative
expenses 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.
CONTRACT VALUE
Contract value represents the estimated fair value of the Eclectic
contracts acquired and is being amortized over the remaining term of the
contracts. Accumulated amortization was $232,000 and $542,000, as of December
31, 1994 and 1995, respectively.
F-9
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and identifiable intangible assets
acquired. Goodwill is being amortized on a straight-line basis over 20 years,
which represents management's estimation of the related benefit to be derived
from the acquired business. Under Accounting Principles Board ("APB") Opinion
No. 17, the Company periodically evaluates whether events and circumstances
after the acquisition date indicate that the remaining balance of goodwill may
not be recoverable. If factors indicated that goodwill should be evaluated for
possible impairment, the Company would compare estimated undiscounted future
cash flow from the related operations to the carrying amount of goodwill. If the
carrying amount of goodwill were greater than undiscounted future cash flow, an
impairment loss would be recognized. Any impairment loss would be computed as
the excess of the carrying amount of goodwill over the estimated fair value of
the goodwill (calculated based on discounting estimated future cash flows).
Reference is made to Note 1 as well as "Risk Factors" elsewhere in the
Prospectus.
REALIZATION OF LONG-LIVED ASSETS
In March 1995, the Financial 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."
SFAS No. 121 requires that long-lived assets be probable of future recovery in
their respective carrying amounts as of each balance sheet date. The Company
adopted SFAS No. 121 effective January 1, 1996. Management believes its
long-lived assets are realizable and that no impairment allowance is necessary
pursuant to the provision of SFAS 121.
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 other income include development fees, consulting fees
and miscellaneous other income. The development fees relate to the development,
design and supervision of facility construction activities. Revenues are
recognized as services are provided.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
required by SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying values of existing assets and liabilities and their respective tax
bases based on enacted tax rates.
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........................... $ (170) $ (336)
Amortization of non-deductible
intangibles.......................... 166 162
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 $25.7 million. 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 property taxes) per year for approximately the next 35
years.
The acquisition costs and the estimated fair market value of the assets
acquired and liabilities assumed associated with the above-mentioned
acquisitions are as follows (in thousands):
MIDTEX REID CENTER
------- -----------
Cash paid............................... $23,200 $ 1,986
Transaction costs....................... 470 90
------- -----------
Total purchase price.......... $23,670 $ 2,076
======= ===========
Net assets acquired --
Cash............................... $ 486 $ --
Receivables, net................... 2,726 --
Other current assets............... 755 --
Property and equipment, net:.......
Prepaid facility use.......... 21,710 --
Other......................... 10 2,090
Other assets....................... 5 --
Accounts payable and accrued
liabilities...................... (2,022) (14)
------- -----------
$23,670 $ 2,076
======= ===========
The carrying value of the prepaid facility use relates to the right to use
the three detention facilities retained by the City of Big Spring for 19, 20,
and 23 years, respectively, plus three five-year extensions. Extensions of the
lease agreement are at the option of the Company. The costs will be amortized
over the respective periods, including the option periods. The Company currently
intends to exercise these extensions.
The 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
F-16
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. Any difference between the exercise price and fair
market value at the date additional options are earned pursuant to the terms of
the Extension Agreement will be recorded as additional financing costs in the
period the additional options are earned. 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. Total financing
costs of $1,261,000 (which includes (i) transaction costs of $535,000, (ii) the
$568,000 difference between the exercise price of the warrants granted to the
lender and an existing stockholder and the estimated fair market value of the
shares of Common Stock underlying such options and (iii) the $158,000 difference
between the purchase price and the estimated fair market value of the 90,331
shares of Common Stock purchased by an existing stockholder) will be capitalized
as deferred financing costs and amortized over the term of the debt. Since the
use of proceeds from the Offering is intended to retire the outstanding
indebtedness under the 1996
F-17
CORNELL CORRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility, the total deferred financing costs are expected to be charged
to interest expense prior to December 31, 1996.
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.
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. These options expire in 2006. The
Company will recognize noncash compensation expense of $870,000 during the third
quarter of 1996 in connection with options to purchase shares of Common Stock
granted in July 1996 to certain officers of the Company based upon the estimated
valuation of the shares of Common Stock compared to the exercise price on the
date of grant.
On July 12, 1996, 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.
CAPITALIZATION
Upon the completion of the Offering, the Company's authorized stock will be
as follows:
CLASS AUTHORIZED PAR VALUE
- ---------------------------------------- -------------- ---------
(IN THOUSANDS)
Common Stock............................ 30,000 $.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 per share (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 per share.
8. EVENTS SUBSEQUENT TO AUDITORS REPORT (UNAUDITED):
The Board of Directors of the Company has approved the issuance of options
to purchase 100,000 shares of Common Stock to an individual who is expected to
commence employment as a Company officer effective October 16, 1996. The options
will vest 20% upon commencement of employment and 20% every twelve months
thereafter. The exercise price of the options will be the initial public
offering price in the Offering.
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,
-------------------- JUNE 30,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 74 $ 66 $ 952
Restricted cash and cash
equivalents................... 244 361 451
Accounts receivable............. 1,673 2,960 2,726
Prepaids and other.............. 74 155 148
Commissary and inmate fund
assets........................ 116 197 156
--------- --------- -----------
Total current assets....... 2,181 3,739 4,433
PROPERTY AND EQUIPMENT, net of
accumulated
depreciation of $1,902, $2,532 and
$3,145, respectively............... 11,350 22,422 22,127
OTHER ASSETS......................... -- 8 5
--------- --------- -----------
Total assets............... $ 13,531 $ 26,169 $26,565
========= ========= ===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities................... $ 1,138 $ 1,856 $ 1,889
Current portion of capital lease
obligations................... 1,096 1,169 1,254
Advances payable to owner....... 275 550 --
Restricted commissary and inmate
fund liabilities.............. 83 189 133
--------- --------- -----------
Total current
liabilities............. 2,592 3,764 3,276
LONG-TERM CAPITAL LEASE OBLIGATIONS,
net of current portion............. 6,614 16,061 15,110
CONTINGENCIES
EQUITY............................... 4,325 6,344 8,179
--------- --------- -----------
Total liabilities and
equity.................. $ 13,531 $ 26,169 $26,565
========= ========= ===========
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 NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Occupancy fees..................... $ 9,026 $ 9,277 $ 13,293 $ 9,043 $ 11,720
Other income....................... 1,381 1,160 1,389 727 1,074
--------- --------- --------- --------- ---------
Total revenues................ 10,407 10,437 14,682 9,770 12,794
OPERATING EXPENSES...................... 6,826 7,047 9,007 6,066 8,016
DEPRECIATION AND AMORTIZATION........... 502 466 682 478 608
--------- --------- --------- --------- ---------
CONTRIBUTION FROM OPERATIONS............ 3,079 2,924 4,993 3,226 4,170
GENERAL AND ADMINISTRATIVE EXPENSES..... 1,084 1,089 1,527 862 1,067
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS.................. 1,995 1,835 3,466 2,364 3,103
INTEREST EXPENSE........................ 913 784 1,456 993 1,287
INTEREST INCOME......................... -- -- (9) (4) (19)
--------- --------- --------- --------- ---------
NET INCOME.............................. 1,082 1,051 2,019 1,375 1,835
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 $ 5,700 $ 8,179
========= ========= ========= ========= =========
</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 NINE MONTHS
SEPTEMBER 30, ENDED JUNE 30,
------------------------------- --------------------
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 $ 1,375 $ 1,835
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 502 466 682 478 607
Loss on write-off of property and
equipment..................... 71 -- -- (9) 6
Change in assets and
liabilities --
Decrease (increase) in
accounts receivable...... (901) (25) (1,286) (1,177) 234
Increase in restricted
cash..................... (71) (90) (117) (88) (90)
Decrease (increase) in
other assets............. (32) (17) (88) (60) 10
Decrease (increase) in
restricted commissary and
inmate fund assets....... 18 (24) (82) (55) 41
Increase (decrease) in
accounts payable and
accrued liabilities...... (202) 701 718 206 33
Increase (decrease) in
restricted commissary and
inmate fund
liabilities.............. 22 (16) 106 77 (56)
--------- --------- --------- --------- ---------
Net cash provided by
operating
activities............ 489 2,046 1,952 747 2,620
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (171) (226) (846) (657) (318)
--------- --------- --------- --------- ---------
Net cash used in investing activities.. (171) (226) (846) (657) (318)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations...................... (1,054) (1,214) (1,389) (1,113) (866)
Proceeds from note payable......... 2,570 910 1,175 1,165 125
Payments on note payable........... (1,730) (1,475) (900) (175) (675)
Distributions to owner............. (100) (2) -- -- --
--------- --------- --------- --------- ---------
Net cash used in financing activities.. (314) (1,781) (1,114) (123) (1,416)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 4 39 (8) (33) 886
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................. 31 35 74 74 66
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 35 $ 74 $ 66 $ 41 $ 952
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid during the period.... $ 918 $ 799 $ 1,468 $ 994 $ 1,287
Acquisition of capital assets under
capital leases................... -- -- 10,909 10,909 --
</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 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) 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 June 30, 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 an S Corporation; accordingly, income tax liabilities are the
responsibility of the owners. Big Spring Correctional Center is exempt from
federal income tax as it is a governmental entity.
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
F-24
MIDTEX DETENTIONS, INC. AND
BIG SPRING CORRECTIONAL CENTER
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1995
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 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) 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.
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
F-31
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
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
======
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.
F-32
TEXAS ALCOHOLISM FOUNDATION, INC.
AND THE TEXAS HOUSE FOUNDATION, INC.
(TEXAS NONPROFIT CORPORATIONS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995
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 the combined financial statements 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.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission and are not intended to be a complete presentation of the combined
financial statements of ECI and ISSI.
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
=========
F-38
ECLECTIC COMMUNICATIONS, INC. AND
INTERNATIONAL SELF-HELP SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1994
STOCKHOLDERS' EQUITY
Equity includes the capital stock and retained earnings of Eclectic.
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....................................... 34
Management..................................... 45
Certain Relationships and Related Party
Transactions................................. 51
Principal and Selling Stockholders............. 55
Description of Capital Stock................... 57
Shares Eligible for Future Sale................ 59
Underwriting................................... 60
Legal Matters.................................. 62
Experts........................................ 62
Additional Information......................... 63
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.
------------------------
4,000,000 SHARES
COMMON STOCK
PROSPECTUS
, 1996
------------------------
DILLON, READ & CO. INC.
EQUITABLE SECURITIES
CORPORATION
ING BARINGS
================================================================================
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..................... $ 20,621
NASD Filing Fee...................... 6,882
American Stock Exchange, Inc. 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
II-1
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.
II-2
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 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 3, 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 June 30, 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, 1996, 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(2) 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 -- Form of Restated Certificate of Incorporation of the Company.
II-5
+3.2 -- Form of Amended and Restated 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 and executive officers.
+10.4 -- Form of 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 -- Operating Agreement by and between each of MidTex Detentions,
Inc., the City of Big Spring, Texas ("Big Spring") and
Cornell Corrections of Texas ("CCTI") dated as of July 1,
1996 and related Assignment and Assumption of Operating
Agreement.
+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 -- [Intentionally Omitted]
10.10 -- [Intentionally Omitted]
10.11 -- [Intentionally Omitted]
+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 -- [Intentionally Omitted]
10.14 -- Form of 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 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 Big Spring and Ed Davenport dated as
of July 1, 1996 for the Interstate Unit and related
Assignment and Assumption of Leases.
+10.20 -- Secondary Sublease Agreement between Big Spring and Ed
Davenport dated as of July 1, 1996 for the Airpark Unit and
related Assignment and Assumption of Leases.
+10.21 -- Secondary Sublease Agreement between Big Spring and Ed
Davenport dated as of July 1, 1996 for the Flightline Unit
and related Assignment and Assumption of Leases.
II-6
10.22 -- [Intentionally Omitted]
+10.23 -- Amended and Restated Credit Agreement among the Company,
subsidiaries of the Company, the lenders listed therein (the
"Lenders"), and 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 Per Share Earnings.
+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.
- ------------
+ Previously filed.
* 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 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
II-7
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 AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON SEPTEMBER 10, 1996.
CORNELL CORRECTIONS, INC.
By: /s/ DAVID M. CORNELL
David M. Cornell
Chairman of the Board, President
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE 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 September 10, 1996
David M. Cornell and Chief Executive Officer
(Principal Executive Officer)
STEVEN W. LOGAN Chief Financial Officer, September 10, 1996
Steven W. Logan Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
RICHARD T. HENSHAW III* Director September 10, 1996
Richard T. Henshaw III
PETER A. LEIDEL* Director September 10, 1996
Peter A. Leidel
*By: DAVID M. CORNELL
David M. Cornell
ATTORNEY-IN-FACT
II-9
CORNELL CORRECTIONS, INC.
3,500,000 Shares
Common Stock
($.001 Par Value)
UNDERWRITING AGREEMENT
, 1996
DILLON, READ & CO. INC.
EQUITABLE SECURITIES CORPORATION
ING BARINGS (U.S.) SECURITIES, INC.
as Managing Underwriters
c/o Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022
Ladies and Gentlemen:
Cornell Corrections, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell, and the persons named in Schedule B annexed hereto
(the "Selling Stockholders") propose to sell, to the underwriters named in
Schedule A annexed hereto (the "Underwriters") an aggregate of 3,500,000 shares
(the "Firm Shares") of Common Stock, par value $.001 per share (the "Common
Stock"), of the Company, of which 3,023,103 shares are to be issued and sold by
the Company and an aggregate of 476,897 shares are to be sold by the Selling
Stockholders in the respective amounts set forth under the caption "Number of
Firm Shares" in Schedule B annexed hereto.
In addition, solely for the purpose of covering over-allotments,
certain of the Selling Stockholders propose to grant to the Underwriters the
option to purchase from such Selling Stockholders up to an additional 525,000
shares of Common Stock (the "Additional Shares") in the respective amounts set
forth under the caption "Maximum Number of Additional Shares" in Schedule B
annexed hereto. The Firm Shares and the Additional Shares are hereinafter
collectively sometimes referred to as the "Shares." The Shares are described in
the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Act"), with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (333-08243), including a
prospectus, relating to the Shares. The Company has furnished to you, for use by
the Underwriters and by dealers, copies of one or more preliminary prospectuses
(each, a "Preliminary Prospectus") relating to the Shares. Except where the
context otherwise requires, the registration statement, as amended when it
becomes effective, including all documents filed as a part thereof, and
including any information contained in a prospectus subsequently filed with the
Commission pursuant to Rule 424(b) under the Act and deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is herein called the "Registration Statement," and the prospectus, in
the form filed by the Company with the Commission pursuant to Rule 424(b) under
the Act or, if no such filing is required, the form of final prospectus included
in the Registration Statement at the time it became effective, is herein called
the "Prospectus." If the Company has filed an abbreviated registration statement
to register additional shares of Common Stock pursuant to Rule 462(b) under the
Act, then any reference herein to Registration Statement shall be deemed to
include such Rule 462(b) registration statement.
The Company, the Selling Stockholders and the Underwriters agree as
follows:
1. (a) Sale and Purchase. Upon the basis of the warranties and
representations and the other terms and conditions herein set forth, the Company
and each of the Selling Stockholders, severally and not jointly, agree to sell
to the respective Underwriters and each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and each Selling Stockholder the
respective number of Firm Shares (subject to such adjustment as you may
determine to avoid fractional shares) which bears the same proportion to the
number of Firm Shares to be sold by the Company or by such Selling Stockholder,
as the case may be, as the number of Firm Shares set forth opposite the name of
such Underwriter in Schedule A annexed hereto bears to the total number of Firm
Shares to be sold by the Company and the Selling Stockholders, in each case at a
purchase price of $ per Share. You shall release the Firm Shares for public sale
promptly after this Agreement becomes effective. You may from time to time
increase or decrease the public offering price after the initial public offering
to such extent as you may determine.
In addition, certain of the Selling Stockholders hereby grant to the
several Underwriters the option to purchase, and upon the basis of the
warranties and representations and the other terms and conditions herein set
forth, the Underwriters shall have the right to purchase, severally and not
jointly, from such Selling Stockholders, all or a portion of the Additional
Shares as may be necessary to cover over-allotments made in connection with the
offering of the Firm Shares, at the same purchase price per share to be paid by
the Underwriters to the Company and the Selling Stockholders for the Firm
Shares. This option may be exercised at any time (but not more than once) on or
before the thirtieth day following the date hereof, by written notice from
Dillon, Read & Co. Inc. ("Dillon Read") to the Company and such Selling
Stockholders. Such notice shall set forth the aggregate number of Additional
Shares as to which the option is being exercised, and the date and time when the
Additional Shares are to be delivered (such date and time, the "additional time
of purchase"); provided, however, that the additional time of purchase shall not
be earlier than the time of purchase (as defined below) nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the eighth business day after the date on which the option shall
have been exercised. As used herein, "business day" shall mean a day on which
the American Stock Exchange, Inc. (the "American Stock Exchange") is open for
trading. The number of Additional Shares to be sold to each Underwriter shall be
the number which bears the same proportion to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule A annexed hereto bears to the total number of
Firm Shares (subject, in each case, to such adjustment as you may determine to
avoid fractional shares). The number of Additional Shares to be sold by each
applicable Selling Stockholder shall be the number which bears the same
proportion to the aggregate number of Additional Shares being sold by all such
Selling Stockholders as the maximum number of Additional Shares set forth
opposite the name of such Selling Stockholder in Schedule B annexed hereto bears
to 525,000 (subject, in each case, to such adjustment as you may determine to
avoid fractional shares).
Pursuant to a power of attorney, which shall be satisfactory to the
Underwriters, granted by [Jane B. Cornell], a Selling Stockholder
("Power-of-Attorney"), and will act as representatives of such Selling
Stockholder. The foregoing representatives (the "Representatives of the Selling
Stockholder") are authorized, on behalf of such Selling Stockholder, to execute
any documents necessary or desirable in connection with the sale of the Shares
to be sold hereunder by such Selling Stockholder, to make delivery of the
certificates for such Shares, to receive the proceeds of the sale of such
Shares, to give receipts for such proceeds, to pay therefrom the expenses to be
borne by such Selling Stockholder in connection with the sale and public
offering of the Shares, to distribute the balance of such proceeds to such
Selling Stockholder in proportion to the number of Shares sold by such Selling
Stockholder, to receive notices on behalf of such Selling Stockholder and to
take such other action as may be necessary or desirable in connection with the
transactions contemplated by this Agreement.
(b) Qualified Independent Underwriter. The Company hereby confirms
its engagement of Equitable Securities Corporation ("Equitable") as, and
Equitable hereby confirms its agreement with the Company to render services as,
a "qualified independent underwriter" within the meaning of Rule 2720(b)(15) of
the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD") with respect to the sale and purchase of the Shares. Equitable, solely
in its capacity as qualified independent underwriter and not otherwise, is
referred to herein as the "QIU."
2. Payment and Delivery. Payment of the purchase price for the Firm
Shares shall be made to the Company and each of the Selling Stockholders by
certified or official bank check, in New York Clearing House funds, at the
office of Dillon Read in New York City, against delivery of the certificates for
the Firm Shares to you for the respective accounts of the Underwriters. Such
payment and delivery shall be made at 10:00 A.M., New York City time, on , 1996
(unless another time shall be agreed to by you and the Company or unless
postponed in accordance with the provisions of Section 10 hereof). The time at
which such payment and delivery are actually made is hereinafter sometimes
called the "time of purchase." Certificates for the Firm Shares shall be
delivered to you in definitive form in such names and in such denominations as
you shall specify on the second business day preceding the time of purchase. For
the purpose of expediting the checking of the certificates for the Firm Shares
by you, the Company and the Selling Stockholders agree to make such certificates
available to you for such purpose at least one full business day preceding the
time of purchase.
Payment of the purchase price for the Additional Shares shall be
made at the additional time of purchase in the same manner and at the same
office as the payment for the Firm Shares. Certificates for the Additional
Shares shall be delivered to you in definitive form in such names and in such
denominations as you shall specify on the second business day preceding the
additional time of purchase. For the purpose of expediting the checking of the
certificates for the Additional Shares by you, the applicable Selling
Stockholders agree to make such certificates available to you for such purpose
at least one full business day preceding the additional time of purchase.
The Selling Stockholders will pay all applicable state transfer
taxes, if any, involved in the transfer to the several Underwriters of the
Shares to be purchased by them from the Selling Stockholders.
3. Representations and Warranties of the Company. The
Company represents and warrants to each of the Underwriters that:
(a) (i) each Preliminary Prospectus when filed as a part of the
Registration Statement, or filed pursuant to Rule 424 under the Act, and
the Registration Statement and the Prospectus at the time the Registration
Statement became or becomes effective, including at the time of
effectiveness of any post-effective amendment, complied when so filed and
will fully comply in all material respects with the provisions of the Act,
(ii) the Registration Statement at all such times did not and will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and (iii) the Prospectus at all such times did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Company makes no
warranty or representation with respect to any statement contained in the
Registration Statement or the Prospectus in reliance upon and in
conformity with information concerning the Underwriters and furnished in
writing by or on behalf of any Underwriter through you to the Company
expressly for use in the Registration Statement or the Prospectus;
(b) as of the date of this Agreement, the Company has an authorized
capitalization as set forth under the heading entitled "Pro Forma" in the
section of the Registration Statement and the Prospectus entitled
"Capitalization" and, as of the time of purchase, the Company shall have
an authorized capitalization as set forth under the heading "Pro Forma As
Adjusted" in the section of the Registration Statement and Prospectus
entitled "Capitalization." Except as described in the Registration
Statement and the Prospectus, there are no outstanding options, warrants
or other rights to acquire any capital stock of the Company and the
Company has no shares of capital stock reserved for issuance; all of the
issued and outstanding shares of capital stock including Common Stock of
the Company have been duly authorized and validly issued and are fully
paid and non-assessable; none of the issued shares of capital stock of the
Company have been issued or are owned or held in violation of any
preemptive rights of stockholders; the Company has been duly incorporated
and is validly existing as a corporation in good standing under the laws
of the State of Delaware, with full power and authority to own its
properties and conduct its business as described in the Registration
Statement and the Prospectus, to execute and deliver this Agreement and to
issue and sell the Shares as herein contemplated;
(c) all of the issued and outstanding shares of capital stock of
each of the subsidiaries of the Company listed on Exhibit 21.1 to the
Registration Statement (the "Subsidiaries") (A) are owned directly by the
Company or by a wholly-owned Subsidiary of the Company, (B) have been duly
authorized and validly issued and are fully paid and nonassessable, and
(C) except as described in the Registration Statement and the Prospectus,
are owned free and clear of any pledge, lien, encumbrance, security
interest or other claim; there are no outstanding rights, subscriptions,
warrants, calls, preemptive rights, options or other agreements of any
kind with respect to the capital stock of any of the Subsidiaries; other
than the Subsidiaries, the Company does not own, directly or indirectly,
any capital stock or other equity securities of any other corporation or
any ownership interest in any partnership, joint venture or other
association; each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation, with full corporate power and
authority to own its respective properties and to conduct its respective
business;
(d) the Company and each of the Subsidiaries are duly qualified or
licensed by and are in good standing in each jurisdiction in which they
conduct their respective businesses and in which the failure to be so
licensed or qualified, singly or in the aggregate with all other such
failures, could have a material adverse effect on the operations,
business, condition (financial or otherwise), or prospects of the Company
and the Subsidiaries taken as a whole (a "Material Adverse Effect"); and
the Company and each of the Subsidiaries are in compliance in all material
respects with the laws, orders, rules, regulations and directives issued
or administered by such jurisdictions;
(e) the Board of Directors of the Company has duly adopted
resolutions authorizing the issuance and sale of the Shares by the
Company; the Shares to be sold by the Company, when issued and delivered
to and paid for by the Underwriters as contemplated hereby, will be duly
authorized and validly issued and fully paid and nonassessable, free and
clear of any pledge, lien, encumbrance, security interest, preemptive
right or other claim;
(f) neither the Company nor any of the Subsidiaries is in breach of,
or in default under (nor has any event occurred that with notice, lapse of
time, or both would constitute a breach of, or default under), (i) its
respective charter or by-laws, (ii) the performance or observance of any
obligation, agreement, covenant or condition contained in any license,
indenture, lease, mortgage, deed of trust, bank loan or credit agreement
or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or their respective
properties may be bound or affected, or (iii) any Federal, state or local
foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or any of the Subsidiaries or any regulation,
guideline or other policy of any Federal, state or local governmental or
regulatory commission, board, body, authority or agency applicable to the
business of the Company or any of the Subsidiaries, except, in the case of
breaches or defaults described in clauses (ii) and (iii) above, where such
breaches or defaults, singly or in the aggregate with all other such
breaches or defaults, would not have a Material Adverse Effect; the
execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with, or result
in any breach of or constitute a default under (nor constitute any event
that with notice, lapse of time, or both would constitute a breach of, or
default under) (i) any provision of the charter or by-laws of the Company
or any of the Subsidiaries, (ii) any provision of any license, indenture,
lease, mortgage, deed of trust, loan or credit agreement or other
agreement or instrument to which the Company or any of the Subsidiaries is
a party or by which any of them or their respective properties may be
bound or affected, or (iii) any Federal, state, local or foreign law,
regulation or rule or any decree, judgment or order applicable to the
Company or any of the Subsidiaries or any regulation, guideline or other
policy of any Federal, state or local governmental or regulatory
commission, board, body, authority or agency applicable to the business of
the Company or any of the Subsidiaries;
(g) this Agreement has been duly authorized, executed and
delivered by the Company;
(h) the capital stock of the Company, including the Shares, conforms
in all material respects to the description thereof contained in the
Registration Statement and the Prospectus and the certificates for the
Shares are in due and proper form and the holders of the Shares will not
be subject to personal liability by reason of being such holders;
(i) no approval, authorization, consent or order of or filing with
any Federal, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the issuance and
sale of the Shares to be sold by the Company as contemplated hereby other
than registration of such Shares under the Act and any necessary
qualification under the securities or blue sky laws of the various
jurisdictions in which such Shares are being offered by the Underwriters;
(j) no person has the right, contractual or otherwise, to cause the
Company to register pursuant to the Act any shares of capital stock or
other securities of the Company upon the issue and sale of the Shares to
the Underwriters hereunder (except pursuant to registration rights which
have been waived and except with respect to Shares registered under the
Registration Statement), nor does any person have preemptive rights,
rights of first refusal or other rights to purchase any of the Shares
which have not been waived;
(k) Arthur Andersen LLP, whose reports on the consolidated financial
statements of the Company and its Subsidiaries are filed with the
Commission as part of the Registration Statement and the Prospectus, are
independent certified public accountants as required by the Act and the
applicable published rules and regulations thereunder;
(l) each of the Company and the Subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all
necessary filings required under any Federal, state, local or foreign law,
regulation or rule, and has obtained all necessary authorizations,
consents and approvals from other persons, in order to conduct its
respective business, except where the failure to have, make or obtain such
licenses, authorizations, consents, approvals or filings, singly or in the
aggregate with all other such failures, would not have a Material Adverse
Effect; neither the Company nor any of the Subsidiaries is in violation
of, or in default under, any such license, authorization, consent or
approval, which violation or default, singly or in the aggregate with all
other such violations and defaults, could have a Material Adverse Effect;
(m) all legal or governmental proceedings, contracts or documents of
a character required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement have
been so described or filed as required;
(n) there is no action, suit or proceeding pending or, to the
Company's knowledge, threatened against the Company or any of the
Subsidiaries or any of their respective properties, at law or in equity,
or before or by any Federal, state, local or foreign governmental or
regulatory commission, board, body, authority or agency that, singly or in
the aggregate with all other such actions, suits and proceedings, could
have a Material Adverse Effect or which seeks to enjoin or restrain the
execution, delivery and performance of this Agreement, the incurrence of
the obligations herein set forth and the consummation of the transactions
contemplated hereby;
(o) the audited and unaudited financial statements included in the
Registration Statement and the Prospectus present fairly the consolidated
financial position of the Company and its Subsidiaries as of the dates
indicated and the consolidated results of operations and changes in
financial position of the Company and the Subsidiaries for the periods
specified; such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
during the periods presented; the pro forma financial information included
in the Registration Statement and the Prospectus has been prepared in
accordance with the applicable requirements of Rule 11-02 of Regulation
S-X and the assumptions used in the preparation thereof are, in the
opinion of the Company, reasonable;
(p) subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may be
otherwise stated in the Registration Statement or Prospectus, there has
not been (A) any material and unfavorable change or any development
involving a prospective material and unfavorable change in or affecting
the business, properties, results of operations or condition (financial or
otherwise), present or prospective, of the Company and the Subsidiaries
taken as a whole, (B) any transaction, which is material to the Company
and its Subsidiaries taken as a whole, contemplated or entered into by the
Company or any of its Subsidiaries or (C) any obligation, contingent or
otherwise, directly or indirectly incurred by the Company or any of the
Subsidiaries which is material to the Company and the Subsidiaries taken
as a whole;
(q) the Company has obtained the written agreement (each, a "Lock-Up
Agreement") of each of its directors and officers and certain of its
stockholders previously specified by the Managing Underwriters not to
sell, contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock or 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
the Prospectus, without the prior written consent of Dillon Read;
(r) except as disclosed in the Registration Statement and the
Prospectus, each material contract, agreement or arrangement to which the
Company or any Subsidiary is a party or by which it is bound is in full
force and effect; neither the Company nor any Subsidiary has received
notice from any of the other parties to any such contract, agreement or
arrangement that such other party intends not to perform or terminate such
contract, agreement or arrangement, and neither the Company nor any
Subsidiary has any reason to believe that any of the other parties to any
such contract, agreement or arrangement will be unable to perform or
intend to terminate such contract, agreement or arrangement;
(s) except as described in the Registration Statement and the
Prospectus, the Company and the Subsidiaries have good title to all
properties and assets owned by them and have good leasehold interests in
each property and asset leased by them, in each case free and clear of all
pledges, liens, encumbrances, security interests, charges, mortgages and
defects, except such as do not materially affect the value of such
property and such as do not interfere with the use made and proposed to be
made of such properties by the Company and the Subsidiaries;
(t) the business, operations and facilities of the Company and each
of the Subsidiaries have been and are being conducted in compliance with
all applicable laws, ordinances, rules, regulations, licenses, permits,
approvals, plans, authorizations or requirements relating to occupational
safety and health, or pollution, or protection of health or the
environment, or reclamation (including, without limitation, those relating
to emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes into
ambient air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid, gaseous
or liquid in nature) or otherwise relating to remediating real property of
any governmental department, commission, board, bureau, agency or
instrumentality of the United States, any state or political subdivision
thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relating thereto, except any violation thereof which would not,
individually or in the aggregate, have a Material Adverse Effect; and
neither the Company nor any of its Subsidiaries has received any notice
from a governmental instrumentality or any third party alleging any
violation thereof or liability thereunder (including, without limitation,
liability for costs of investigating or remediating sites containing
hazardous substances and/or damages to natural resource);
(u) except as described in the Registration Statement and the
Prospectus, to the best of the Company's knowledge, no labor union or any
representative thereof has made any attempt to organize or represent
employees of the Company or the Subsidiaries; neither the Company nor any
of the Subsidiaries has been subject to a strike or other work stoppage
since the respective dates of their organization and, to the best of the
Company's knowledge, no strikes or work stoppages are contemplated against
the Company or the Subsidiaries;
(v) the Company and each of the Subsidiaries have filed all federal
or state income and franchise tax returns required to be filed and have
paid all taxes shown thereon as due and there is no material tax
deficiency which has been or is reasonably likely to be asserted against
the Company or any of the Subsidiaries; all material tax liabilities of
the Company and the Subsidiaries are adequately provided for on the books
of the Company and the Subsidiaries; and
(w) the Company, either directly or through one or more
Subsidiaries, has in effect, with financially sound insurers, insurance
with respect to its business and properties and the business and
properties of the Company and the Subsidiaries against liability, loss or
damage of the kind customarily insured against by corporations engaged in
the same or similar businesses and similarly situated, of such type and in
such amounts as are customarily carried under similar circumstances by
such other corporations.
4. Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder (except with respect to the
representations and warranties in paragraph (e) which are only made by
[Jane B. Cornell]), severally and not jointly, represents and warrants to
each Underwriter that:
(a) such Selling Stockholder now is, and at the time of delivery of
such Shares (whether at the time of purchase or the additional time of
purchase, as the case may be) will be, the lawful owner of the number of
Shares to be sold by such Selling Stockholder pursuant to this Agreement
and has and, at the time of delivery thereof (whether at the time of
purchase or the additional time of purchase, as the case may be), will
have valid and marketable title to such Shares, and upon delivery of and
payment for such Shares, the Underwriters will acquire valid and
marketable title to such Shares free and clear of any claim, lien,
encumbrance, security interest, community property right, restriction on
transfer or other defect in title;
(b) such Selling Stockholder has and at the time of delivery of such
Shares (whether at the time of purchase or the additional time of
purchase, as the case may be) will have full legal right, power and
capacity, and any approval required by law (other than those imposed by
the Act and the securities or blue sky laws), to sell, assign, transfer
and deliver such Shares in the manner provided in this Agreement;
(c) this Agreement, the Custody Agreement, dated as of the date
hereof, among the Company, as custodian, and the Selling Stockholders (the
"Custody Agreement"), and the Lock-Up Agreement executed by such Selling
Stockholder have been duly executed and
delivered by such Selling Stockholder;
(d) when the Registration Statement becomes effective and at all
times subsequent thereto through the latest of the time of purchase,
additional time of purchase and the termination of the offering of the
Shares, the Registration Statement and any amendments thereto, as it
relates to such Selling Stockholder, will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
the Prospectus, and any supplements thereto, as it relates to such Selling
Stockholder, will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(e) the Power-of-Attorney has been duly executed and delivered by
such Selling Stockholder and is a legal, valid and binding agreement of
such Selling Stockholder enforceable in accordance with its terms; such
Selling Stockholder has duly and irrevocably authorized the
Representatives of the Selling Stockholder, on behalf of such Selling
Stockholder, to execute and deliver this Agreement and any other document
necessary or desirable in connection with the transactions contemplated
hereby and to deliver the Shares to be sold by such Selling Stockholder
and receive payment therefor pursuant hereto; and
(f) the sale of such Selling Stockholder's Shares pursuant to this
Agreement is not prompted by any information concerning the Company which
is not set forth in the Prospectus.
5. Certain Covenants of the Company. The Company hereby agrees:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as you may designate and to
maintain such qualifications in effect so long as required for the
distribution of the Shares, provided that the Company shall not be
required to qualify as a foreign corporation or to consent to the service
of process under the laws of any such state in which it is not now subject
to service of process (except service of process with respect to the
offering and sale of the Shares); and to promptly advise you of the
receipt by the Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;
(b) to make available to you in New York City, as soon as
practicable after the Registration Statement becomes effective (but in any
event not later than 1:00 P.M. on the business day immediately following
the date hereof), and thereafter, from time to time to furnish to the
Underwriters, as many copies of the Prospectus (or of the Prospectus as
amended or supplemented if the Company shall have made any amendments or
supplements thereto after the effective date of the Registration
Statement) as the Underwriters may request for the purposes contemplated
by the Act;
(c) to advise you promptly and (if requested by you) to confirm such
advice in writing, (i) when the Registration Statement has become
effective and when any post-effective amendment thereto becomes effective
and (ii) if Rule 430A under the Act is used, when the Prospectus is filed
with the Commission pursuant to Rule 424(b) under the Act (which the
Company agrees to file in a timely manner under such Rule);
(d) to advise you promptly (and to confirm such advice in writing)
of any request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional information
with respect thereto or the issuance by the Commission of a stop order
suspending the effectiveness of the Registration Statement or the
threatening or initiation of any proceedings for that purpose; to make
every reasonable effort to prevent the issuance of any stop order or if
any stop order should have been entered by the Commission, to obtain the
lifting or removal thereof as soon as possible; to advise you promptly of
any proposal to amend or supplement the Registration Statement or the
Prospectus and to file no such amendment or supplement to which you shall
object in writing;
(e) to furnish to you and, upon request, to each of the other
Underwriters, for a period of [three] years from the date of this
Agreement (i) copies of any reports or other communications which the
Company shall send to its stockholders or shall from time to time publish
or publicly disseminate, (ii) copies of all annual, quarterly and current
reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such
other similar form as may be designated by the Commission, and (iii) such
other information as you may reasonably request regarding the Company or
the Subsidiaries;
(f) to advise the Underwriters promptly of the happening of any
event known to the Company within the time during which a prospectus
relating to the Shares is required to be delivered under the Act which, in
the judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not contain an
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading, and, during such
time, to prepare and furnish, at the Company's expense, to the
Underwriters promptly such amendments or supplements to such Prospectus as
may be necessary to reflect any such change and to furnish you a copy of
such proposed amendment or supplement before filing any such amendment or
supplement with the Commission;
(g) to make generally available to its security holders, and to
deliver to you, an earning statement of the Company (which will satisfy
the provisions of Section 11(a) of the Act, including, without limitation,
Rule 158) covering a period of twelve months beginning after the effective
date of the Registration Statement but not later than the last day of the
fifteenth full calendar month following the calendar quarter in which such
effective date falls, as soon as is reasonably practicable after the
termination of such twelve-month period;
(h) to furnish to you three signed copies of the Registration
Statement, as initially filed with the Commission, and of all amendments
thereto (including all exhibits thereto) and sufficient conformed copies
of the foregoing (other than exhibits unless specifically requested) for
distribution of a copy to each of the other Underwriters;
(i) to furnish to you as early as practicable prior to the time of
purchase and the additional time of purchase, as the case may be, but not
later than two business days prior thereto, a copy of the latest available
unaudited interim consolidated financial statements, if any, of the
Company and the Subsidiaries which have been read by the Company's
independent certified public accountants, as stated in their letter to be
furnished pursuant to Section 8(c) of this Agreement;
(j) to apply the net proceeds from the sale of the Shares by the
Company in the manner set forth under the caption "Use of Proceeds" in the
Registration Statement and Prospectus;
(k) to furnish to you, [contemporaneously] with the filing with the
Commission subsequent to the effective date of the Registration Statement
and during the period referred to in paragraph (f) above, a copy of any
document proposed to be filed pursuant to Sections 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (collectively, the "Exchange Act");
(l) to use its best efforts to cause the Common Stock to be
approved for listing on the American Stock Exchange; and
(m) not to take, directly or indirectly, any action designed to
cause or to result in, or that might constitute, the stabilization or
manipulation of the Shares to facilitate the sale or resale of the Shares.
6. Certain Covenants of the Company and the Selling Stockholders.
(a) The Company agrees with each Underwriter that, the Company will
pay all expenses, fees and taxes (other than any transfer taxes and fees
and disbursements of counsel for the Underwriters except as set forth
under Section 7 hereof or (iii) or (iv) below) in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and
the printing and furnishing of copies of each thereof to the Underwriters
and to dealers (including costs of mailing and shipment), (ii) the
issuance, sale and delivery of the Shares by the Company and the Selling
Stockholders, (iii) the word processing and/or printing of this Agreement,
any Agreement Among Underwriters, any dealer agreements, any Statements of
Information, the Custody Agreement and the Power-of-Attorney and the
reproduction and/or printing and furnishing of copies of each thereof to
the Underwriters and dealers (including costs of mailing and shipment),
(iv) the qualification of the Shares for offering and sale under state
laws and the determination of their eligibility for investment under state
law as aforesaid (including the legal fees and filing fees and other
disbursements of counsel to the Underwriters) and the printing and
furnishing of copies of any blue sky surveys or legal investment surveys
to the Underwriters and to dealers, (v) any listing of the Shares on the
American Stock Exchange and any registration thereof under the Exchange
Act, (vi) the filing for review of the public offering of the Shares by
the NASD and (vii) the performance of the Company's and the Selling
Stockholders' other obligations hereunder.
(b) The Company and each of the Selling Stockholders agree with each
Underwriter that, for a period of 180 days after the date of the
Prospectus, the Company will not issue, and the Company and the Selling
Stockholders will not sell, contract to sell, grant any option to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock
or securities convertible into or exchangeable for Common Stock or
warrants or other rights to purchase Common Stock or permit the
registration under the Act of any shares of Common Stock without the prior
written consent of Dillon Read, except that (i) the Company may register
the Shares, and the Company and the Selling Stockholders may sell the
Shares to the Underwriters, pursuant to this Agreement, (ii) the Company
may issue shares of Common Stock upon the exercise of outstanding warrants
or the exercise of outstanding options, provided that the Company shall
have obtained a Lock-Up Agreement from each such person to whom such
shares of Common Stock are issued, and (iii) the Company may grant options
and other rights to purchase up to an aggregate of 306,642 shares of
Common Stock to the Company's employees, officers and directors pursuant
to the 1996 Stock Option Plan described in the Registration Statement and
the Prospectus, provided that the Company shall have obtained a Lock-Up
Agreement from each such employee, officer and director of the Company to
whom such options and rights are granted.
(c) Each of the Selling Stockholders agree with each Underwriter
that such Selling Stockholder shall advise the Company and the
Underwriters promptly of any additional or changed information relating to
such Selling Stockholder known by such Selling Stockholder which, within
the time during which a prospectus relating to the Shares is required to
be delivered under the Act, would require the making of any change in the
Prospectus then being used so that, with respect to the information
concerning such Selling Stockholder, the Prospectus would not contain an
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
7. Reimbursement of Underwriters' Expenses. If the Shares are not
delivered for any reason other than the termination of this Agreement pursuant
to the first two paragraphs of Section 10 hereof or the default by one or more
of the Underwriters in its or their respective obligations hereunder, the
Company shall reimburse the Underwriters for all of their out-of-pocket
expenses, including the reasonable fees and disbursements of their counsel.
8. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Stockholders on the
date hereof and at the time of purchase (and the several obligations of the
Underwriters at the additional time of purchase are subject to the accuracy of
the representations and warranties on the part of the Company and the Selling
Stockholders on the date hereof and at the time of purchase (unless previously
waived) and at the additional time of purchase, as the case may be), the
performance by the Company and the Selling Stockholders of their obligations
hereunder and to the following conditions:
(a) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Baker &
Botts, L.L.P, counsel for the Company, addressed to the Underwriters, and
dated the time of purchase or the additional time of purchase, as the case
may be, with reproduced copies for each of the other Underwriters and in
form satisfactory to Cahill Gordon & Reindel, counsel for the
Underwriters, stating that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement and the Prospectus, to execute and deliver this Agreement
and to issue, sell and deliver the Shares being sold by it as herein
contemplated;
(ii) each of the Subsidiaries [of the Company listed on
Schedule C annexed hereto (each, a "Designated Subsidiary")] has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of its respective jurisdiction of
incorporation with corporate power and authority to own its
respective properties and to conduct its respective business as
described in the Registration Statement and Prospectus;
(iii) the Company and the [Designated] Subsidiaries are duly
qualified to do business, and are in good standing as a corporation,
in each state [listed opposite the name of such corporation on
Schedule C annexed hereto];
(iv) all of the issued and outstanding shares of capital stock
of each of the Subsidiaries (A) are owned directly by the Company or
by a wholly-owned Subsidiary of the Company, (B) have been duly
authorized and validly issued and are fully paid and nonassessable,
and (C) to such counsel's knowledge, except as described in the
Registration Statement and the Prospectus, are owned free and clear
of any claim, security interest, preemptive rights, restriction on
transfer or other defect in title; and, to such counsel's knowledge,
except as described in the Registration Statement and the
Prospectus, there are no outstanding rights, subscriptions,
warrants, calls, options or other agreements of any kind with
respect to the capital stock of the Company or any of the
Subsidiaries;
(v) this Agreement has been duly authorized, executed
and delivered by the Company;
(vi) the Shares have been duly and validly authorized, and the
Shares to be issued by the Company, when issued and delivered to and
paid for by the Underwriters in accordance with this Agreement, will
be duly and validly issued and will be fully paid and
non-assessable;
(vii) as of the date of the opinion, the Company has an
authorized capitalization as set forth in the Registration Statement
and the Prospectus;
(viii) the outstanding shares of capital stock of the Company
have been duly and validly authorized and issued, and are fully
paid, nonassessable and free of statutory and, to such counsel's
knowledge, contractual preemptive rights; the Shares to be sold by
the Company when issued will be free of statutory and contractual
preemptive rights and will not be issued in violation of any rights
of first refusal or similar rights to purchase any Shares which have
not been waived; the certificates for the Shares conform to the
requirements of the Delaware General Corporation Law, the Company's
restated certificate of incorporation and by-laws as in effect on
the date of the opinion and the rules and regulations of the
American Stock Exchange and the holders of the Shares will not be
subject to personal liability by reason of being such holders;
(ix) the capital stock of the Company, including the Shares,
conforms as to legal matters in all material respects to the
description thereof contained in the Registration Statement and
Prospectus;
(x) the Registration Statement and the Prospectus (other than
(a) the financial statements and related schedules contained therein
or omitted therefrom, including the notes thereto and the auditors'
reports thereon, (b) the other financial and statistical data
contained therein or omitted therefrom and (c) the exhibits thereto,
as to which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Act;
(xi) the Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order
proceedings with respect thereto are pending or threatened under the
Act;
(xii) no approval, authorization, consent or order of or filing
with any Federal, state or local governmental or regulatory
commission, board, body, authority or agency is legally required to
be obtained by the Company in connection with the issuance and sale
of the Shares as contemplated hereby other than registration of the
Shares under the Act (except such counsel need express no opinion as
to any necessary qualification under the state securities or blue
sky laws of the various jurisdictions in which the Shares are being
offered by the Underwriters);
(xiii) the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the
transactions contemplated hereby do not and will not result in any
breach of, or constitute a default under (nor constitute any event
which with notice, lapse of time, or both, would constitute a breach
of or default under), (a) any provisions of the charter or by-laws
of the Company or any of the Subsidiaries or (b) any provision of
any license, indenture, lease, mortgage, deed of trust, loan, credit
agreement or other agreement or instrument known to such counsel to
which the Company or any of the Subsidiaries is a party or by which
any of them or their respective properties are bound or affected, or
(c) any law, regulation or rule or any decree, judgment or order
known to such counsel to be applicable to the Company or any of the
Subsidiaries;
(xiv) to such counsel's knowledge, neither the Company nor any
of its Subsidiaries is in breach of, or in default under (nor has
any event occurred which with notice, lapse of time, or both, would
constitute a breach of, or default under), (i) any license,
indenture, lease, mortgage, deed of trust, loan, credit agreement or
any other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or their respective
properties are bound or affected, or (ii) any law, regulation or
rule or any decree, judgment or order applicable to the Company or
any of its Subsidiaries, which breach or default would, singly or in
the aggregate, have a Material Adverse Effect;
(xv) to such counsel's knowledge, there are no contracts,
licenses, agreements, leases or documents of a character which are
required to be filed as exhibits to the Registration Statement which
have not been so filed;
(xvi) to such counsel's knowledge, there are no actions, suits
or proceedings pending or threatened against the Company or any of
the Subsidiaries or any of their respective properties, at law or in
equity or before or by any commission, board, body, authority or
agency which are required to be described in the Prospectus but are
not so described; and
(xvii) to such counsel's knowledge, no person has the right,
contractual or otherwise, to cause the Company to register pursuant
to the Act any shares of capital stock or other securities of the
Company upon the issue and sale of the Shares to the Underwriters
hereunder (except pursuant to registration rights which have been
waived and except with respect to Shares registered under the
Registration Statement).
In addition, such counsel shall state that in connection with the
preparation of the Registration Statement and the Prospectus, such counsel
has participated in various discussions and meetings with officers and
other representatives of the Company, representatives of the independent
public accountants of the Company and representatives of the Underwriters
at which the contents of the Registration Statement and Prospectus were
discussed and, although such counsel is not passing upon and does not
assume responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus (except
as and to the extent stated in subparagraphs (vii) and (ix) above), on the
basis of the foregoing (relying as to materiality to a large extent upon
the opinions of officers and other representatives of the Company) nothing
has come to the attention of such counsel that causes it to believe that
the Registration Statement (other the than (i) financial statements and
related schedules contained therein or omitted therefrom (including the
notes to the financial statements and auditors' reports on the financial
statements), (ii) the other financial and statistical information
contained therein or omitted therefrom and (iii) the exhibits thereto, as
to which such counsel need not express an opinion) at the time such
Registration Statement became effective contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
that the Prospectus (other than (i) the financial statements and related
schedules contained therein or omitted therefrom (including the notes to
the financial statements and the auditors' reports on the financial
statements) and (ii) the other financial or statistical information
contained therein or omitted therefrom, as to which such counsel need not
express an opinion) at the date of such Prospectus, and as of the time of
purchase or additional time of purchase, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
In rendering their opinion, Baker & Botts, L.L.P. may limit their
opinion to the Delaware General Corporation Law, the general contract law
of the State of New York, the laws of the United States of America and the
laws of the State of Texas, in each case as in effect on the date of such
opinion, and may rely as to factual matters on certificates of public
officials and officers of the Company or the Subsidiaries, provided that
copies of such certificates are provided to you.
(b) Each of the Selling Stockholders (except with respect to
paragraphs (ii) and (v) which only shall be included in the opinion
furnished by [Jane B. Cornell]) shall furnish to you at the time of
purchase or the additional time of purchase, as the case may be, an
opinion of ________, counsel for the Selling Stockholders, addressed to
the Underwriters, and dated the time of purchase or the additional time of
purchase, as the case may be, with reproduced copies for each of the other
Underwriters, and in form and substance satisfactory to Cahill Gordon &
Reindel, counsel for the Underwriters, stating that:
(i) this Agreement, the Custody Agreement and a Lock-Up
Agreement have been duly executed and delivered by or on behalf of
each of the Selling Stockholders and each of the Custody Agreement
and the Lock-Up Agreement is a legal, valid and binding agreement of
such Selling Stockholder;
(ii) the Power-of-Attorney has been duly executed and delivered
by such Selling Stockholder and is the legal, valid and binding
agreement of such Selling Stockholder;
(iii) such Selling Stockholder has full legal right and power, and
has obtained any authorization or approval required by law (other
than those imposed by the Act and the securities or blue sky laws of
certain jurisdictions), to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner provided
in this Agreement;
(iv) delivery of certificates for the Shares by such Selling
Stockholder pursuant hereto will pass valid and marketable title
thereto to the Underwriters, free and clear of any claim, lien,
encumbrance, security interest, community property right,
restriction on transfer or other defect in title;
(v) each of the Representatives of the Selling Stockholder has
been duly authorized by such Selling Stockholder to execute and
deliver on behalf of such Selling Stockholder this Agreement and any
other document necessary or desirable in connection with the
transactions contemplated hereby and to deliver the Shares to be
sold by such Selling Stockholder; and
(vi) to the best of such counsel's knowledge, the statements in
the Prospectus under the caption "Principal and Selling
Stockholders" insofar as such statements constitute a summary of the
matters referred to therein present fairly the information called
for with respect to such matters.
(c) You shall have received from Arthur Andersen LLP, letters dated,
respectively, the date of this Agreement and the time of purchase and
additional time of purchase, as the case may be, and addressed to the
Underwriters (with reproduced copies for each of the Underwriters) in the
forms heretofore approved by the Managing Underwriters.
(d) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the favorable opinion of
Cahill Gordon & Reindel, counsel for the Underwriters, dated the time of
purchase or the additional time of purchase, as the case may be, in form
and substance satisfactory to you.
(e) No amendment or supplement to the Registration Statement or
Prospectus shall be filed prior to the time of purchase or the additional
time of purchase to which you object in writing.
(f) The Registration Statement shall have become effective at or
before 5:00 P.M., New York City time, on the date of this Agreement, or if
Rule 430A under the Act is used, the Prospectus shall have been filed with
the Commission in accordance with Rule 424(b) under the Act at or before
5:00 P.M., New York City time, on the date of this Agreement, unless a
later time, but not later than 5:00 p.m., New York City time, on the
second full business day after the date of this Agreement, shall have been
agreed to by you and the Company; provided, however, that the Company and
you or any group of Underwriters, including you, who have agreed hereunder
to purchase in the aggregate at least 50% of the Firm Shares may from time
to time agree on a later time for the effectiveness of the Registration
Statement.
(g) Prior to the time of purchase or the additional time of
purchase, as the case may be: (i) no stop order with respect to the
effectiveness of the Registration Statement shall have been issued under
the Act or proceedings initiated under Section 8(d) or 8(e) of the Act;
(ii) the Registration Statement and all amendments thereto, or
modifications thereof, if any, shall not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and
(iii) the Prospectus and all amendments or supplements thereto, or
modifications thereof, if any, shall not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
(h) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, (i) no
material and unfavorable change or any development involving a prospective
material unfavorable change in or affecting the business, properties,
results of operations or condition (financial or otherwise) of the Company
and its Subsidiaries taken as a whole shall occur or become known, (ii) no
transaction which is material and unfavorable to the Company shall have
been entered into by the Company or any of its Subsidiaries and (iii)
there has not been any obligation, contingent or otherwise, directly or
indirectly, incurred by the Company or any of its Subsidiaries which is
material to the Company.
(i) The Company will, at the time of purchase or additional time of
purchase, as the case may be, deliver to you a certificate of two of its
executive officers to the effect that the representations and warranties
of the Company as set forth in this Agreement and the conditions set forth
in paragraphs (g) and (h) of this Section 8 have been met and that they
are true and correct as of each such date.
(j) The signed Lock-Up Agreements shall remain in full force
and effect.
(k) The Shares shall have been approved for listing on the American
Stock Exchange, subject only to notice of issuance, at or prior to the
time of purchase.
(l) The Selling Stockholders will at the time of purchase deliver to
you a certificate to the effect that the representations and the
warranties of the Selling Stockholders as set forth in this Agreement are
true and correct as of such date.
(m) The Company and the Selling Stockholders shall have furnished to
you such other documents and certificates as to the accuracy and
completeness of any statement in the Registration Statement and the
Prospectus as of the time of purchase and the additional time of purchase,
as the case may be, as you may reasonably request.
(n) The Company and the Selling Stockholders shall have performed
such of their respective obligations under this Agreement as are to be
performed by the terms hereof at or before the time of purchase and at or
before the additional time of purchase, as the case may be.
9. Effective Date of Agreement; Termination. This Agreement shall
become effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be
subject to termination in the absolute discretion of you or any group of
Underwriters (which may include you) which has agreed to purchase in the
aggregate at least 50% of the Firm Shares, if, at any time prior to the time of
purchase or, with respect to the purchase of any Additional Shares, the
additional time of purchase, as the case may be, trading in securities on the
New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended or minimum prices shall have been established
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market, or if a banking moratorium shall have been declared either by
the United States or New York State authorities, or if the United States shall
have declared war in accordance with its constitutional processes or there shall
have occurred any material outbreak or escalation of hostilities or other
national or international calamity or crisis of such magnitude in its effect on
the financial markets of the United States as, in your judgment or in the
judgment of such group of Underwriters, make it impracticable to market the
Shares.
If you or any group of Underwriters elects to terminate this
Agreement as provided in this Section 9, the Company, the Selling Stockholders
(or, in the case of Jane B. Cornell, the Representatives of the Selling
Stockholder) and each other Underwriter shall be notified promptly by letter or
telegram.
If the sale to the Underwriters of the Shares, as contemplated by
this Agreement, is not carried out by the Underwriters for any reason permitted
under this Agreement or if such sale is not carried out because the Company or
the Selling Stockholders, as the case may be, shall be unable to comply with any
of the terms of this Agreement, the Company or the Selling Stockholders, as the
case may be, shall not be under any obligation or liability under this Agreement
(except to the extent provided in Sections 6(a), 7 and 11 hereof), and the
Underwriters shall be under no obligation or liability to the Company and the
Selling Stockholders under this Agreement (except to the extent provided in
Section 11 hereof) or to one another hereunder.
10. Increase in Underwriters' Commitments. If any Underwriter shall
default in its obligation to take up and pay for the Firm Shares to be purchased
by it hereunder and if the number of Firm Shares which all Underwriters so
defaulting shall have agreed but failed to take up and pay for does not exceed
10% of the total number of Firm Shares, the non-defaulting Underwriters shall
take up and pay for (in addition to the aggregate principal amount of Firm
Shares they are obligated to purchase pursuant to Section 1 hereof) the number
of Firm Shares agreed to be purchased by all such defaulting Underwriters, as
hereinafter provided. Such Shares shall be taken up and paid for by such
non-defaulting Underwriter or Underwriters in such amount or amounts as you may
designate with the consent of each Underwriter so designated or, in the event no
such designation is made, such Shares shall be taken up and paid for by all
non-defaulting Underwriters pro rata in proportion to the aggregate number of
Firm Shares set opposite the names of such non-defaulting Underwriters in
Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company and the Selling Stockholders agree with the
non-defaulting Underwriters that they will not sell any Firm Shares hereunder
unless all of the Firm Shares are purchased by the Underwriters (or by
substituted Underwriters selected by you with the approval of the Company or
selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the
Underwriters or by the Company for a defaulting Underwriter or Underwriters in
accordance with the foregoing provision, the Company or you shall have the right
to postpone the time of purchase for a period not exceeding five business days
in order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 10 with like effect as if
such substituted Underwriter had originally been named in Schedule A.
11. Indemnity by the Company, the Selling Stockholders and the
Underwriters.
(a) The Company and the Selling Stockholders, individually and not
jointly, agree to indemnify, defend and hold harmless each Underwriter and any
person who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, from and against any loss, expense, liability
or claim (including the reasonable cost of investigation) which, jointly or
severally, any such Underwriter or any such controlling person may incur under
the Act, the Exchange Act or otherwise, insofar as such loss, expense, liability
or claim arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus (the term Prospectus for the purpose of this Section
11 being deemed to include any Preliminary Prospectus, the Prospectus and the
Prospectus as amended or supplemented by the Company), or arises out of or is
based upon any omission or alleged omission to state a material fact required to
be stated in either such Registration Statement or Prospectus or necessary to
make the statements made therein not misleading, except insofar as any such
loss, expense, liability or claim arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact contained in and in
conformity with information furnished in writing by any Underwriter through you
to the Company expressly for use with reference to such Underwriter in such
Registration Statement or such Prospectus or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with such
information required to be stated in either such Registration Statement or
Prospectus or necessary to make such information not misleading; provided,
however, that the indemnity agreement contained in this subsection (a) with
respect to any Preliminary Prospectus or amended Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) from whom the person asserting any such loss,
expense, liability or claim purchased the Shares which are the subject thereof
if the Prospectus corrected any such alleged untrue statement or omission and if
such Underwriter failed to send or give a copy of the Prospectus to such person
at or prior to the written confirmation of the sale of such Shares to such
person; provided, further, that no Selling Stockholder[, other than David M.
Cornell,] shall be responsible for losses, expenses, liability or claims arising
out of or based upon such untrue statement or omission or allegation thereof
based upon information other than information provided in writing by such
Selling Stockholder expressly for use in the Registration Statement.
If any action is brought against an Underwriter or controlling
person in respect of which indemnity may be sought against the Company or any
Selling Stockholder pursuant to the foregoing paragraph, such Underwriter shall
promptly notify the Company and the Selling Stockholders (or, in the case of
[Jane B. Cornell], the Representatives of the Selling Stockholder) in writing of
the institution of such action and the Company or such Selling Stockholder, as
the case may be, shall assume the defense of such action, including the
employment of counsel and payment of expenses. Such Underwriter or such
controlling person shall have the right to employ its or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of such Underwriter or of such controlling person unless the employment of such
counsel shall have been authorized in writing by the Company or such Selling
Stockholder in connection with the defense of such action or the Company or such
Selling Stockholder shall not have employed counsel to have charge of the
defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to the Company or such
Selling Stockholder (in which case the Company or such Selling Stockholder shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the Company or such Selling Stockholder, as the case may be,
and paid as incurred (it being understood, however, that the Company or such
Selling Stockholder shall not be liable for the expenses of more than one
separate counsel in any one action or series of related actions in the same
jurisdiction representing the indemnified parties who are parties to such action
which firm shall be designated in writing by Dillon Read). Anything in this
paragraph to the contrary notwithstanding, neither the Company nor such Selling
Stockholder shall be liable for any settlement of any such claim or action
effected without its written consent.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, the Selling Stockholders, their respective directors and
officers, and any person who controls the Company or any Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
from and against any loss, expense, liability or claim (including the reasonable
cost of investigation) which, jointly or severally, the Company, any Selling
Stockholder or any such person may incur under the Act, the Exchange Act or
otherwise, insofar as such loss, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
contained in and in conformity with information furnished in writing by or on
behalf of such Underwriter through you to the Company expressly for use with
reference to such Underwriter in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or in the Prospectus, or arises out of or is based upon any omission or
alleged omission to state a material fact in connection with such information
required to be stated in either such Registration Statement or Prospectus or
necessary to make such information not misleading.
If any action is brought against the Company, any Selling
Stockholder or any such person in respect of which indemnity may be sought
against any Underwriter pursuant to the foregoing paragraph, the Company, such
Selling Stockholder or such person shall promptly notify such Underwriter in
writing of the institution of such action and such Underwriter shall assume the
defense of such action, including the employment of counsel and payment of
expenses. The Company, such Selling Stockholder or such person shall have the
right to employ its own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of the Company, such Selling Stockholder or
such person unless the employment of such counsel shall have been authorized in
writing by such Underwriter in connection with the defense of such action or
such Underwriter shall not have employed counsel to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to such Underwriter (in which case such
Underwriter shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as incurred (it being
understood, however, that such Underwriter shall not be liable for the expenses
of more than one separate counsel in any one action or series of related actions
in the same jurisdiction representing the indemnified parties who are parties to
such action). Anything in this paragraph to the contrary notwithstanding, no
Underwriter shall be liable for any settlement of any such claim or action
effected without the written consent of such Underwriter.
(c) If the indemnification provided for in this Section 11 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 11 in respect of any losses, expenses, liabilities or claims referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, expenses, liabilities or claims
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
expenses, liabilities or claims, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the Company and the Selling Stockholders on the one hand and of the Underwriters
on the other shall be determined by reference to, among other things, whether
the untrue statement or alleged untrue statement of a material fact or omission
or alleged omission relates to information supplied by the Company, by the
Selling Stockholders or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, expenses, liabilities and claims referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action. Notwithstanding
anything to the contrary contained in this Section 11(c), in no event shall the
Selling Stockholders be required to pay an aggregate amount of contribution or
other payments in respect of losses, expenses, liabilities or claims under this
Section 11(c) which would be greater than the aggregate amount the Selling
Stockholders would have been required to pay under Section 11(a) in respect of
such losses, expenses, liabilities or claims if such indemnification were
available.
(d) The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
11 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in subsection (c)
above. Notwithstanding the provisions of this Section 11, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by such Underwriter and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue
statement or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriter's obligations to contribute
pursuant to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this
Section 11 and the covenants, warranties and representations of the Company and
the Selling Stockholders contained in this Agreement shall remain in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter, or any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of
the Company, its directors and officers, the Selling Stockholders or any person
who controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, and shall survive any termination of this Agreement or
the issuance and delivery of the Shares. The Company, such Selling Stockholder
and each Underwriter agree promptly to notify the others of the commencement of
any litigation or proceeding against it and, in the case of the Company, against
any of the Company's officers and directors in connection with the issuance and
sale of the Shares, or in connection with the Registration Statement or
Prospectus.
(f) The Company acknowledges for all purposes under this Agreement
(including this Section 11 and Section 3(a) hereof) that the statements set
forth in the last paragraph on the cover page of the Prospectus, the last
paragraph on the inside front cover page of the Prospectus and the paragraphs
under the caption "Underwriting" in the Prospectus constitute the only written
information furnished to the Company by or on behalf of the Underwriters through
you or your counsel expressly for use in the Registration Statement, any
Preliminary Prospectus, or the Prospectus (or any amendment or supplement to any
of them) and that no Underwriter shall be deemed to have provided any
information (and therefore are not responsible for any statements or omissions)
pertaining to any arrangement or agreement with respect to any party other than
such Underwriter.
(g) Notwithstanding any other provision of this Section 11, the
Selling Stockholders shall not be liable for indemnification or contribution
payments or any other payments under this Section 11 in an aggregate amount
exceeding the proceeds received by the Selling Stockholders from the sale of
Shares hereunder.
12. Indemnification of Qualified Independent Underwriter.
(a) The Company and the Selling Stockholders, individually and not
jointly, agree to indemnify, defend and hold harmless Equitable, in its capacity
as QIU, and any person who controls the QIU within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, from and against any loss, expense,
liability or claim (including the reasonable cost of investigation) which,
jointly or severally, the QIU or any such controlling person may incur under the
Act, the Exchange Act or otherwise, insofar as such loss, expense, liability or
claim arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus (the term Prospectus for the purpose of this Section
12 being deemed to include any Preliminary Prospectus, the Prospectus and the
Prospectus as amended or supplemented by the Company), or arises out of or is
based upon any omission or alleged omission to state a material fact required to
be stated in either such Registration Statement or Prospectus or necessary to
make the statements made therein not misleading; provided, however, that no
Selling Stockholder[, other than David M. Cornell,] shall be responsible for
losses, expenses, liability or claims arising out of or based upon such untrue
statement or omission or allegation thereof based upon information other than
information provided in writing by such Selling Stockholder expressly for use in
the Registration Statement.
If any action is brought against the QIU or controlling person in
respect of which indemnity may be sought against the Company or any Selling
Stockholder pursuant to the foregoing paragraph, the QIU shall promptly notify
the Company and the Selling Stockholders (or, in the case of [Jane B. Cornell],
the Representatives of the Selling Stockholder) in writing of the institution of
such action and the Company or such Selling Stockholder, as the case may be,
shall assume the defense of such action, including the employment of counsel and
payment of expenses. The QIU or such controlling person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of the QIU or of such controlling person
unless the employment of such counsel shall have been authorized in writing by
the Company or such Selling Stockholder in connection with the defense of such
action or the Company or such Selling Stockholder shall not have employed
counsel to have charge of the defense of such action or such indemnified party
or parties shall have reasonably concluded that there may be defenses available
to it or them which are different from or additional to those available to the
Company or such Selling Stockholder (in which case the Company or such Selling
Stockholder shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by the Company or such Selling Stockholder, as the
case may be, and paid as incurred (it being understood, however, that the
Company or such Selling Stockholder shall not be liable for the expenses of more
than one separate counsel in any one action or series of related actions in the
same jurisdiction representing the indemnified parties who are parties to such
action which firm shall be designated in writing by the QIU). Anything in this
paragraph to the contrary notwithstanding, neither the Company nor such Selling
Stockholder shall be liable for any settlement of any such claim or action
effected without its written consent.
(b) If the indemnification provided for in this Section 12 is
unavailable to an indemnified party under subsection (a) of this Section 12 in
respect of any losses, expenses, liabilities or claims referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, expenses, liabilities or claims in such proportion
as is appropriate to reflect the relative fault of the Company and the Selling
Stockholders on the one hand and of the QIU on the other in connection with the
statements or omissions which resulted in such losses, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The relative
fault of the Company and the Selling Stockholders on the one hand and of the QIU
on the other shall be determined by reference to, among other things, whether
the untrue statement or alleged untrue statement of a material fact or omission
or alleged omission relates to information supplied by the Company, by the
Selling Stockholders or by the QIU and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
expenses, liabilities and claims referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action. Notwithstanding
anything to the contrary contained in this Section 12(b), in no event shall the
Selling Stockholders be required to pay an aggregate amount of contribution or
other payments in respect of losses, expenses, liabilities or claims under this
Section 12(b) which would be greater than the aggregate amount the Selling
Stockholders would have been required to pay under Section 12(a) in respect of
such losses, expenses, liabilities or claims if such indemnification were
available.
(c) The Company, the Selling Stockholders and the QIU agree that it
would not be just and equitable if contribution pursuant to this Section 12 were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in subsection (b)
above. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(d) The indemnity and contribution agreements contained in this
Section 12 shall remain in full force and effect regardless of any investigation
made by or on behalf of the QIU, or any person who controls the QIU within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall
survive any termination of this Agreement or the issuance and delivery of the
Shares.
(e) Notwithstanding any other provision of this Section 12, the
Selling Stockholders shall not be liable for indemnification or contribution
payments or any other payments under this Section 12 in an aggregate amount
exceeding the proceeds received by the Selling Stockholders from the sale of
Shares hereunder.
13. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Dillon, Read & Co. Inc., 535 Madison Avenue, New York, New York 10022,
Attention: Syndicate Department, if to the Company or to any of the Selling
Stockholders, shall be sufficient in all respects if delivered or sent to the
Company at the offices of the Company at 4801 Woodway, Suite 400W, Houston,
Texas 77056, Attention: Chief Executive Officer.
14. Construction. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York. The
Section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.
15. Parties at Interest. The Agreement herein set forth has been and
is made solely for the benefit of the Underwriters, the Company, the Selling
Stockholders and the controlling persons, directors and officers referred to in
Section 11 hereof, and their respective successors, assigns, executors and
administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from any of the Underwriters who
shall not be deemed a successor or assign by reason of such purchase) shall
acquire or have any right under or by virtue of this Agreement.
16. Action on Behalf of Managing Underwriters. Any action
required or permitted to be taken by the Managing Underwriters under this
Agreement may be taken by them jointly or by Dillon Read.
17. Counterparts. This Agreement may be signed by the
parties in counterparts which together shall constitute one and the same
agreement among the parties.
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the Underwriters, please so indicate in
the space provided below for the purpose, whereupon this letter and your
acceptance shall constitute a binding agreement among the Company, the Selling
Stockholders and the Underwriters, severally.
Very truly yours,
CORNELL CORRECTIONS, INC.
By: _____________________________
Name:
Title:
[THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE B ATTACHED HERETO
By: _____________________________
Name:
Title:
Accepted and agreed to as of the date first above written, on behalf of
themselves and the other several Underwriters named in Schedule A
DILLON, READ & CO. INC.
EQUITABLE SECURITIES CORPORATION
By: DILLON, READ & CO. INC.
By: ____________________________
Name:
Title:
SCHEDULE A
Number of
Underwriter Firm Shares
Dillon, Read & Co. Inc. .................
Equitable Securities Corporation ................
ING Barings (U.S.) Securities, Inc. ............. _________
Total................................... _________
SCHEDULE B
Maximum
Number of
Number of Additional
Selling Stockholders Firm Shares Shares____
--------- --------
Total ................................ _________ ________
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
CORNELL CORRECTIONS, INC.
UNDER SECTIONS 242 AND 245 OF THE
DELAWARE GENERAL CORPORATION LAW
CORNELL CORRECTIONS, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation and all amendments thereto that
are in effect on the date hereof (the "Certificate of Incorporation") and
further amends the provisions of the Certificate of Incorporation, and hereby
further certifies that:
1. The current name of the Corporation is Cornell Corrections,
Inc. The name under which the Corporation was originally incorporated was
Cornell Cox, Inc. The original Certificate of Incorporation of the Corporation
(as amended, the "Certificate of Incorporation") was filed with the Secretary of
State of the State of Delaware on March 31, 1994.
2. The restatement of and amendments to the Certificate of
Incorporation contained herein have been duly adopted by a resolution of the
Board of Directors of the Corporation (the "Board of Directors") proposing and
declaring advisable this Restated Certificate of Incorporation, and a majority
of the outstanding shares of the Corporation's capital stock has duly approved
and adopted this Restated Certificate of Incorporation, all in accordance with
the provisions of Sections 228, 242 and 245 of the General Corporation Law of
the State of Delaware.
3. This Restated Certificate of Incorporation restates and
further amends the Certificate of Incorporation of the Corporation. The
amendments to the Certificate of Incorporation effected by this Restated
Certificate of Incorporation include, but are not limited to, amendments (i) to
reclassify each share of Class A Common Stock, par value $.001 per share, of the
Corporation and each share of Class B Common Stock, par value $.001 per share,
of the Corporation into one share of Common Stock, par value $.001 per share, of
the Corporation, (ii) to authorize the issuance of up to 10,000,000 shares of
Preferred Stock, par value $.001 per share, of the Corporation from time to time
in one or more series as may be determined by the Board of Directors, (iii) to
add provisions relating to dividends, liquidation and voting with respect to
Common Stock of the Corporation, (iv) to add provisions regarding the denial of
preemptive rights and cumulative voting, (v) to provide for not less than 3 and
no more than 13 Directors of the Corporation, (vi) to provide the procedure for
filling vacancies on the Board of Directors, (vii) to restrict the taking of
action by the stockholders of the Corporation by less than unanimous written
consent without a stockholders' meeting, and (viii) to provide for the amendment
of the Bylaws of the Corporation by the Board of Directors and by the
stockholders of the Corporation and to establish the required vote for any such
amendment.
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4. The capital of the Corporation shall not be reduced under or
by reason of the foregoing amendments to the Certificate of Incorporation.
5. The Certificate of Incorporation shall be superseded by this
Restated Certificate of Incorporation, which Restated Certificate of
Incorporation shall become effective at 8:00 a.m., New York time, on the closing
date of an initial public offering of shares of Common Stock of the Corporation
pursuant to a registration statement that shall have become effective under the
Securities Act of 1933, as amended, so long as such date occurs within 90 days
after the date of filing hereof, and this Restated Certificate of Incorporation
shall thereafter be the Certificate of Incorporation of the Corporation.
6. The text of the Certificate of Incorporation is hereby
restated and amended to read in its entirety as follows (hereinafter, this
Restated Certificate of Incorporation, as it may be further amended or restated
from time to time, is referred to the "Restated Certificate of Incorporation").
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is Cornell Corrections, Inc.
SECOND: The address of the registered office of the Corporation
in the State of Delaware is 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
business, act or activity for which corporations may be organized under the
provisions of the General Corporation Law of the State of Delaware or any
successor statute (the "DGCL").
FOURTH: The aggregate number of shares of capital stock that the
Corporation shall have authority to issue is 40,000,000, divided into classes as
follows:
(1) 30,000,000 shares of common stock, par value $.001 per share
("Common Stock"), and
(2) 10,000,000 shares of preferred stock, par value $.001 per
share ("Preferred Stock").
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Shares of any class or series of capital stock of the Corporation
may be issued for such consideration and for such corporate purposes as the
Board of Directors may from time to time determine.
Upon the effectiveness of the Restated Certificate of
Incorporation under the DGCL, each outstanding share of Class A Common Stock,
par value $.001 per share, of the Corporation and each outstanding share of
Class B Common Stock, par value $.001 per share, of the Corporation shall be
automatically reclassified as one share of Common Stock.
The following is a statement of the powers, preferences and
rights, and the qualifications, limitations or restrictions, of the Preferred
Stock and Common Stock.
SECTION I. PREFERRED STOCK
Shares of Preferred Stock shall be issuable from time to time in
one or more series as may be determined by the Board of Directors. Each series
shall be distinctly designated. The Board of Directors is hereby expressly
granted the authority to fix, by resolution or resolutions (a) adopted prior to
such issuance, (b) providing for the issuance of any shares of each particular
series of Preferred Stock and (c) incorporated in a certificate of designation
filed with the Secretary of State of the State of Delaware, the designation,
powers (including voting powers and voting rights, full or limited, or no voting
powers) and preferences, and the relative, participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof, if
any, of such series, including, without limiting the generality of the
foregoing, the following:
(1) the designation of, and the number of shares of Preferred
Stock which shall constitute, the series, which number may be increased
(except as otherwise fixed by the Board of Directors) or decreased (but
not below the number of shares thereof then outstanding) from time to
time by action of the Board of Directors;
(2) the rate and times at which (or the method of determination
thereof), and the terms and conditions upon which, dividends, if any, on
shares of the series shall be paid, the nature of any preferences or the
relative rights of priority of such dividends to the dividends payable,
and the qualifications, limitations or restrictions, if any, with
respect to such dividends payable, on any other shares of any class or
classes of capital stock of the Corporation or on any shares of other
series of Preferred Stock, and a statement whether or in what
circumstances such dividends shall be cumulative;
(3) whether shares of the series shall be convertible into or
exchangeable for shares of any class or series of capital stock or other
securities or property of the Corporation or of any other corporation or
entity, and, if so, the terms and conditions of such conversion or
exchange, including any provisions for the adjustment of the conversion
or exchange rate in such events as the Board of Directors shall
determine;
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(4) whether shares of the series shall be redeemable, and, if so,
the terms and conditions of such redemption (including whether
redemption shall be optional or mandatory), including the date or dates
or event or events upon or after the occurrence of which they shall be
redeemable, and the amount and type of consideration payable in case of
redemption, which amount per share may vary under different conditions
and at different redemption dates;
(5) the rights, if any, of holders of shares of the series upon
the voluntary or involuntary liquidation, merger, consolidation,
distribution or sale of assets, dissolution or winding-up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of the series;
(6) whether shares of the series shall have a sinking fund or
purchase account for the redemption or purchase of shares of the series,
and, if so, the terms, conditions and amount of such sinking fund or
purchase account;
(7) whether shares of the series shall have voting rights in
addition to the voting rights as shall be provided by law and, if so,
the terms of such voting rights, which may, without limiting the
generality of the foregoing, include (a) the right to more or less than
one vote per share on any or all matters voted upon by the stockholders
of the Corporation and (b) the right to vote, as a series by itself or
together with other series of Preferred Stock or together with all
series of Preferred Stock as a class and/or with the Common Stock as a
class, upon such matters, under such circumstances and upon such
conditions as the Board of Directors shall determine, including, without
limitation, the right, voting as a series by itself or together with
other series of Preferred Stock or together with all series of Preferred
Stock as a class and/or with the Common Stock as a class, to elect one
or more Directors of the Corporation under such circumstances and upon
such conditions as the Board of Directors shall determine; and
(8) any other powers, preferences and relative, participating,
optional or other rights, and qualifications, limitations or
restrictions, of shares of that series.
The relative powers, preferences and rights of each series of Preferred Stock in
relation to the powers, preferences and rights of each other series of Preferred
Stock shall, in each case, be as fixed from time to time by the Board of
Directors in the resolution or resolutions adopted pursuant to the authority
granted herein, and the consent, by class or series vote or otherwise, of
holders of Preferred Stock of such of the series of Preferred Stock as are from
time to time outstanding shall not be required for the issuance by the Board of
Directors of any other series of Preferred Stock, whether or not the powers,
preferences and rights of such other series shall be fixed by the Board of
Directors as senior to, or on a parity with, the powers, preferences and rights
of such outstanding series, or any of them; PROVIDED, HOWEVER, that the Board of
Directors may provide in such resolution or resolutions adopted with respect to
any series of Preferred Stock that the consent of holders of at
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least a majority (or such greater proportion as shall be therein fixed) of the
outstanding shares of such series voting thereon shall be required for the
issuance of shares of any or all other series of Preferred Stock.
SECTION II. COMMON STOCK
(1) DIVIDENDS. Subject to any requirements with respect to
preferential or participating dividends as shall be provided by the express
terms of any outstanding series of Preferred Stock, holders of the Common Stock
shall be entitled to receive such dividends thereon, if any, as may be declared
from time to time by the Board of Directors.
(2) LIQUIDATION. In the event of liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, holders of the
Common Stock shall be entitled to receive such assets and properties of the
Corporation, tangible and intangible, as are available for distribution to
stockholders of the Corporation, after there shall have been paid or set apart
for payment the full amounts necessary to satisfy any preferential or
participating rights to which holders of each outstanding series of Preferred
Stock are entitled by the express terms of such series.
(3) VOTING. Each share of Common Stock shall entitle the holder
thereof to one vote on each matter submitted to a vote of holders of shares of
Common Stock. Holders of shares of Common Stock shall be entitled to vote on
each matter submitted to a vote of stockholders of the Corporation, except (a)
as shall otherwise be provided with respect to the election of one or more
Directors of the Corporation by holders of shares of one or more outstanding
series of Preferred Stock under circumstances as shall be provided by the
Restated Certificate of Incorporation or by any provisions established pursuant
thereto and (b) to the extent holders of shares of one or more outstanding
series of Preferred Stock are entitled to vote separately as a class by law or
under circumstances as shall be provided by the Restated Certificate of
Incorporation or by any provisions established pursuant thereto.
SECTION III. CAPITAL STOCK
(1) REGARDING PREEMPTIVE RIGHTS. No stockholder of the
Corporation shall by reason of his holding shares of any class or series of
capital stock of the Corporation have any preemptive or preferential right to
purchase, acquire, subscribe for or otherwise receive any additional, unissued
or treasury shares (whether now or hereafter acquired) of any class or series of
capital stock of the Corporation now or hereafter to be authorized, or any
notes, debentures, bonds or other securities convertible into or carrying any
right, option or warrant to purchase, acquire, subscribe for or otherwise
receive shares of any class or series of capital stock of the Corporation now or
hereafter to be authorized, whether or not the issuance of any such shares, or
such notes, debentures, bonds or other securities, would adversely affect the
dividends or voting or other rights of such stockholder, and the Board of
Directors may issue or authorize the issuance of shares of any
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class or series of capital stock of the Corporation, or any notes, debentures,
bonds or other securities convertible into or carrying rights, options or
warrants to purchase, acquire, subscribe for or otherwise receive shares of any
class or series of capital stock of the Corporation, without offering any such
shares of any such class, either in whole or in part, to the existing
stockholders of any such class.
(2) CUMULATIVE VOTING. Cumulative voting of shares of any class
or series of capital stock of the Corporation having voting rights is
prohibited.
FIFTH: (1) DIRECTORS. The powers of the Corporation shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed by or under the direction of, the Board of
Directors. The Board of Directors is hereby authorized and empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject to the provisions of the DGCL, the Restated Certificate
of Incorporation and any Bylaw of the Corporation adopted by the stockholders of
the Corporation; PROVIDED, HOWEVER, that no Bylaw of the Corporation hereafter
adopted by the stockholders of the Corporation, nor any amendment thereto, shall
invalidate any prior act of the Board of Directors that would have been valid if
such Bylaw or amendment thereto had not been adopted.
(2) NUMBER AND ELECTION OF DIRECTORS. Subject to such rights of
holders of shares of one or more outstanding series of Preferred Stock to elect
one or more Directors of the Corporation under circumstances as shall be
provided by or established pursuant to the Restated Certificate of
Incorporation, the number of Directors of the Corporation that shall constitute
the Board of Directors shall not be less than three (3) nor more than thirteen
(13) and shall be specified from time to time in the Bylaws of the Corporation.
Election of Directors of the Corporation need not be by written ballot unless
the Bylaws of the Corporation shall so provide.
(3) VACANCIES. Unless otherwise provided by the Restated
Certificate of Incorporation or by any provisions established pursuant thereto
with respect to the rights of holders of shares of one or more outstanding
series of Preferred Stock, newly created directorships resulting from any
increase in the authorized number of Directors of the Corporation and any
vacancies on the Board of Directors resulting from death, resignation or removal
of a Director of the Corporation shall be filled by (a) the affirmative vote of
at least a majority of the remaining Directors of the Corporation then in
office, even if such remaining Directors constitute less than a quorum of the
Board of Directors, or (b) the affirmative vote of holders of at least a
majority of the then outstanding Voting Stock (as defined below), voting
together as a single class. The term "Voting Stock" shall mean all outstanding
shares of all classes and series of capital stock of the Corporation entitled to
vote generally in the election of Directors of the Corporation, considered as
one class; and, if the Corporation shall have shares of Voting Stock entitled to
more or less than one vote for any such share, each reference in the Restated
Certificate of Incorporation to a proportion or percentage in voting power of
Voting Stock shall be calculated by reference to the portion or
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percentage of votes entitled to be cast by holders of such shares generally in
the election of Directors of the Corporation.
SIXTH: From and after the first date as of which the Corporation
has a class or series of capital stock registered under the Securities Exchange
Act of 1934, as amended, no action required to be taken or that may be taken at
any annual or special meeting of the stockholders of the Corporation may be
taken without a meeting, and the power of the stockholders of the Corporation to
consent in writing to the taking of any action by written consent without a
meeting is specifically denied, except for action by unanimous written consent,
which is expressly allowed. Unless otherwise provided by the DGCL, by the
Restated Certificate of Incorporation or by any provisions established pursuant
thereto with respect to the rights of holders of one or more outstanding series
of Preferred Stock, special meetings of the stockholders of the Corporation may
be called at any time by the Chairman of the Board of Directors or by any two or
more Directors of the Corporation.
SEVENTH: No Director of the Corporation shall be personally
liable to the Corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a Director of the Corporation involving any act or
omission of any such Director; PROVIDED, HOWEVER, that this Article SEVENTH
shall not eliminate or limit the liability of such Director (1) for any breach
of such Director's duty of loyalty to the Corporation or its stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under Section 174 of the DGCL, as the same
exists or as such provision may hereafter be amended, supplemented or replaced,
or (4) for any transactions from which such Director derived an improper
personal benefit. If the DGCL is amended after the filing of the Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of a Director of the Corporation, then the
liability of a Director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by such law, as so amended. Any repeal or modification of this Article
SEVENTH by the stockholders of the Corporation shall be prospective only and
shall not adversely affect any limitation on the personal liability of a
Director of the Corporation existing at the time of such repeal or modification.
EIGHTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly empowered to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders of the Corporation. Any adoption,
amendment or repeal of the Bylaws of the Corporation by the Board of Directors
shall require, in addition to any other affirmative vote that may be required by
law, the Restated Certificate of Incorporation or the Bylaws of the Corporation,
the affirmative vote of at least a majority of the Whole Board. The term "Whole
Board" shall mean the total number of Directors of the Corporation as so fixed,
whether or not there exist any vacancies in previously authorized directorships.
The stockholders of the Corporation shall also have the power to adopt, amend or
repeal the Bylaws of the Corporation, or adopt new Bylaws, at any annual or
special meeting by the affirmative vote of holders of at least a majority of the
then outstanding Voting
7
Stock, voting together as a single class, in addition to any other affirmative
vote that may be required by law, the Restated Certificate of Incorporation or
the Bylaws of the Corporation.
8
IN WITNESS WHEREOF, the Corporation has caused the Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officers, this _____ day of ________________, 1996.
CORNELL CORRECTIONS, INC.
By:
David M. Cornell
Chief Executive Officer
9
STATE OF UTAH
DEPARTMENT OF HUMAN SERVICES
Michael O. Leavitt
Governor LOG NO. 1512
Rod L. Betit
Executive Director CONTRACT NO.
DHS CONTRACT
1. CONTRACTING PARTIES: This agreement is between the Utah State Department
of Human Services, Division of Youth Corrections, Region II, 61 West
3900 South, Salt Lake City, Utah 84107-1431, hereinafter referred to as
STATE, and Cornell Corrections of California, Inc., 1823 Knoll Dr.,
Ventura, California 93003, a for-profit organization, hereinafter
referred to as CONTRACTOR.
2. TYPE OF CONTRACTOR: This CONTRACTOR is a Service Provider.
3. TYPE OF CONTRACT: This is an indefinite quantity requirements contract
with a unit rate determined by start-up costs and per diem rate per
program bed not to exceed $11,147,131.20.
4. PROCUREMENT: This contract is entered into as the result of DFCM Project
#HY94222.
5. CONTRACT PERIOD: Effective 01 June 1996 and terminates on 30 June 1999,
unless terminated sooner, in accordance with the terms and conditions of
this contract. Contracts in excess of one year must have an onsite
program and records review on an annual basis by STATE.
6. CONTRACT COSTS: The Contract Amount is Open Ended. The CONTRACTOR shall
be reimbursed by the STATE not to exceed $11,147,131.20 as specified in
Attachment C for the services provided in accordance with the terms and
conditions of this contract. However, the STATE does not guarantee to
make any purchases with an Open Ended Contract.
Funds for this contract are provided by:
CFDA OR STATE FEDERAL OR STATE PERCENTAGE
COMPLIANCE # (ORIGINAL) FUNDING SOURCE OR AMOUNT
=================== ================================= =================
N/A STATE FUNDS 100%
Funds paid to the CONTRACTOR from this contract may only be used for the
purpose specified in item 9, below.
7. ATTACHMENTS INCLUDED AS PART OF THIS CONTRACT: Attachment A--Standard
Terms and Conditions; Attachment B--Additional Terms and Conditions;
Attachment C--Contract Costs, Fiscal Conditions; Attachment D--Federal
Assurances; Attachment E--Program Description; Attachment F-- Objectives
and Evaluation.
8. DOCUMENTS INCORPORATED INTO THIS CONTRACT BY REFERENCE BUT NOT ATTACHED
HERETO:
a. All documents specified in any attachment to this contract.
b. All other governmental laws, regulations, or actions applicable
to services provided herein.
9. PURPOSE OF CONTRACT: To provide for the operation, maintenance and
programming of the 160 bed privatized Detention Facility in Salt Lake
County.
IN WITNESS WHEREOF, the parties sign and cause this contract to be executed:
CONTRACTOR
David M. Cornell, President Date
Cornell Corrections of California, Inc.
Marvin H. Wiebe, Vice President Date
Cornell Corrections of California, Inc.
STATE
Gary K. Dalton, Director Date
Division of Youth Corrections
REGION
William C. Nelsen, Director Date
Division of Youth Corrections, Region II
APPROVED AS TO AVAILABILITY OF FUNDS
Charles Bentley, Budget Officer Date
Bureau of Finance
APPROVED AS TO PROCUREMENT
State Purchasing Date
State Division of Finance
APPROVED
Richard Barker Date
State Division of Finance
SIGNATURE PAGE
<PAGE>
ATTACHMENT A
STANDARD TERMS AND CONDITIONS
1. AUTHORITY: Provisions of this contract are pursuant to the authority set
forth in Sections 63-56 and 62A-7-120, UCA 1953 as amended, Utah State
Procurement Regulations (UAC Section R33), and related statutes which
permit the STATE to purchase certain specified services, and any other
relevant Federal regulations and any relevant provisions of the STATE.
2. CONTRACT JURISDICTION: The provisions of this contract shall be governed
by the laws of the State of Utah.
3. SEPARABILITY CLAUSE: The declaration by any court or other binding legal
source that any provision of this contract is illegal and void shall not
affect the legality and enforceability of any other provision of this
contract unless said provisions are mutually dependent.
4. ASSIGNMENT: The CONTRACTOR shall not assign its benefits and
obligations, under this contract, to any other legal entity, without the
prior written consent of the STATE. Upon written approval of the
assignment, the contract shall be binding upon and benefit the assignee
and its successors.
5. RENEGOTIATIONS OR MODIFICATIONS: This contract may be amended, modified,
or supplemented only by written amendment to the contract, executed by
the parties hereto, and attached to the original signed copy of this
contract. No claim for services furnished by the CONTRACTOR, not
specifically authorized by this contract, will be allowed by the STATE.
6. TERMINATION: This contract may be terminated in advance of the specified
expiration date with or without cause, by either party, upon thirty (30)
days prior written notice being given to the other party. On termination
of this contract all accounts and payments will be processed according
to financial arrangements set forth herein for services rendered to date
of termination.
7. CONTRACT RENEWAL: The CONTRACTOR agrees, for any contract issued as a
result of an RFP, that the STATE shall unilaterally have the right to
initiate renewal of such a contract, in accordance with the provisions
of the RFP at a level of funding to be determined at the time of
renewal.
8. REDUCTION OF FUNDS (N/A TO OPEN ENDED CONTRACTS): The maximum amount
authorized by this contract shall be reduced or contract terminated if
required by Federal/State law, regulation, or action or there is
significant underutilization of funds, provided the CONTRACTOR shall be
reimbursed for all services performed in accordance with this contract
prior to date of reduction or termination. If funds are reduced, there
will be a comparable reduction in amount of services to be given by the
CONTRACTOR. The STATE will give the CONTRACTOR thirty (30) days notice
of reduction.
9. CONFLICT OF INTEREST: The CONTRACTOR represents that none of its
officers or employees are officers or employees of the State of Utah,
unless disclosure has been made in accordance with Section 67-26- 8, UCA
1953, as amended.
10. CITING DEPARTMENT IN ADVERTISING: The CONTRACTOR agrees to give credit
Division of Youth Corrections for funding in all written and verbal
advertising or discussion of this program such as brochures, flyers,
informational materials, talk shows, etc.
11. SEXUAL HARASSMENT: The CONTRACTOR agrees to abide by Utah Executive
Order, dated June 30,1989, which prohibits sexual harassment in the
workplace.
12. CIVIL RIGHTS: The CONTRACTOR agrees to abide by UCA ss. 13-7-1 through
-4, which prohibits discrimination on the basis of race, color, sex,
religion, ancestry, or national origin by any business establishment,
place of public accommodation, or enterprise regulated by the STATE.
Attachment A
13. INDEMNITY CLAUSE: PRIVATE AGENCIES -- INSURANCE REQUIRED: The CONTRACTOR
agrees to provide and to maintain during the performance of the
contract, at its sole expense, a policy of liability insurance naming
the CONTRACTOR and the State of Utah as insured parties under the
policy. Such insurance shall be amended to indicate that it is the
primary coverage and not a contributing coverage for the STATE.
The limits of the policy shall be no less than $500,000.00 for each
occurrence and $1,000,000.00 aggregate. The CONTRACTOR shall provide to
the STATE a certificate of insurance evidencing that the coverage
required hereunder is in effect. The certificate will also state that
the insurer will give the STATE thirty (30) days notice of cancellation
or nonrenewal.
14. CONTRACTOR, AN INDEPENDENT CONTRACTOR: The CONTRACTOR shall be an
independent contractor, and as such, shall have no authorization,
express or implied, to bind the State of Utah or the above State Agency
to any agreements, settlements, liability, or understanding whatsoever,
and agrees not to perform any acts as agent for the State of Utah,
except as herein expressly set forth. Compensation provided for herein
shall be the total compensation payable hereunder by the State of Utah
or the above designated State Agency. Persons employed by the STATE and
acting under direction of the STATE shall not be deemed to be employees
or agents of this CONTRACTOR.
15. ADMINISTRATIVE AND REPORTING REQUIREMENTS: The CONTRACTOR shall maintain
or supervise the maintenance of records necessary for the proper and
efficient operation of the program, including records regarding
applications, determination of eligibility (when applicable), the
provision of services and administrative cost; and statistical, fiscal
and other records necessary for reporting and accountability required by
the STATE and shall retain such records for at least four (4) years
(five (5) years in the case of records supporting Title XIX
reimbursements) after last payment has been made on this contract, or
until all audits initiated, within the four (4) years, have been
completed, whichever is later. Records of a child under the age of
eighteen (18) must be maintained until the child is twenty-two (22)
years old to comply with Utah law.
16. ACCESS TO RECORDS: The CONTRACTOR shall allow independent, STATE, and
Federal auditors/program reviewers to have access to its records,
including all financial records, for audit review and inspection on
request.
17. DRUG FREE WORKPLACE: The CONTRACTOR will maintain a drug free workplace
in accordance with Federal Regulations.
Attachment A
<PAGE>
ATTACHMENT B
ADDITIONAL TERMS AND CONDITIONS
1. LICENSING AND STANDARD COMPLIANCE: The CONTRACTOR currently meets all
applicable licensing or other standards required by Federal and State
laws or regulations and ordinances of the City/County in which services
and/or care is provided and will continue to comply with such licensing
or other applicable standards and ordinances for duration of this
contract period.
2. GRIEVANCE PROCEDURE: The CONTRACTOR agrees to establish a system through
which recipients of the purchased services may present grievances about
the operation of the program as it pertains to and affects said
recipient. The CONTRACTOR will advise recipients of their right to
present grievances concerning denial or exclusion from or operation of
the program, and to a hearing by the Department of Human Services in
these instances. The CONTRACTOR will advise applicants in writing of
rights and procedures to appeal.
3. SERVICES: The CONTRACTOR agrees to supply those activities and services
described under "PROGRAM DESCRIPTION" in Attachment E.
4. IMPOSITION OF FEES: The CONTRACTOR will not impose any fees upon clients
given services under this contract except as authorized by the STATE.
5. PROTECTION AND USE OF CLIENT RECORDS: The use or disclosure by any party
of any information concerning a client for any purpose not directly
connected with the administration of the STATE's or the CONTRACTOR's
responsibilities with respect to services purchased under this agreement
is prohibited. All records maintained by programs that are under
contract with the division to provide services to youth offenders are
the property of the Division and shall be returned to it upon the
Division's request and/or the termination of the youth from the program
or service. (UCA62A-7-121) All requests for information shall be
forwarded to the Division of Youth Correction for appropriate action.
6. MONITORING: The STATE will monitor the service given by the CONTRACTOR
for each eligible client and the results obtained using this contract
and the attached goals and service objectives and methods as criteria.
(See Attachments E and F)
7. CONSULTATION/TECHNICAL ASSISTANCE: The STATE will supply appropriate
consultation/technical assistance as indicated/requested by the
CONTRACTOR to assure satisfactory performance in providing the
contracted services.
8. SUBCONTRACTS: The CONTRACTOR may not subcontract to provide the services
specified in the contract. This does include contracts for ancillary
services such as medical, psychological, psychiatric, or dental
contracts.
9. CODE OF CONDUCT: The CONTRACTOR agrees to follow and enforce the
Department of Human Services' and DYC Code of Conduct. The CONTRACTOR
assures that each employee/volunteer receives a copy of Code of Conduct.
A signed statement to this effect must be in employee's/volunteer's
file. The CONTRACTOR agrees to prominently display a poster regarding
Code of Conduct provided by the STATE.
10. HUMAN SUBJECTS RESEARCH: The CONTRACTOR shall not conduct research
involving employees of the Department of Human Services or individuals
receiving services (whether direct or contracted) from the Department of
Human Services until such research and methodology has been approved by
the Department of Human Services, Protection of Human Rights Review
Committee.
Attachment B
<PAGE>
ATTACHMENT C-1
CONTRACT COSTS
1. PAYMENT RATES: Payment on this contract will be made at STATE set rates.
2. SERVICES:
<TABLE>
<CAPTION>
SERVICE NAME CODE KIND RATE UNITS DOLLARS ACCOUNT
========================== ========= ========== ====================== ========= ============ ===========
<S> <C> <C> <C> <C> <C> <C>
Detention YDD Daily 1-136 = $84.54 9291
Detention YDD Daily 137-160 = $50.86 9291
Facility Start-up & Training YDM Month Actual 9291
</TABLE>
3. METHOD OF PAYMENT:
a. Payment will be made upon receipt of invoice using the State of
Utah's accounts payable system. Computation of operational per
diem will be based on the daily count at 11:30 pm each day.
b. The STATE will make payments to the CONTRACTOR of amounts
(including Start-up and Per-diem Costs) not to exceed
$2,970,796.80 in the first year.
c. The Program Operational per diem rates will be adjusted annually
as outlined below (see item 4b).
d. This contract will be effective when signed by both parties and
will terminate on 30 June 1999, unless terminated sooner, in
accordance with the terms and conditions of this contract.
4. PAYMENT SCHEDULE:
a. START-UP COSTS: The STATE realizes that in order for the
CONTRACTOR to fulfill its obligations under this contract,
program employees will need to be hired and trained prior to the
acceptance of clients into the program. The STATE agrees to pay
the CONTRACTOR, actual start-up costs related to the hiring and
training of those personnel. These are employees who would
normally be paid through the operational per diem rates in item
4b below, once clients are placed in the program.
b. DETENTION OPERATION PER DIEM RATE: Payment for the operational
portion of this contract will be on a per diem rate, per program
bed. Upon opening of the facility, the State guarantees payment
of $11,497.44 per day for 136 beds (85% of facility capacity)
regardless of utilization. The STATE assumes that there are cost
savings since certain overhead cost are fixed and some savings
occur for more than 136 (85% of capacity) in custody. The per
diem rate, per bed, per day, is as follows:
NUMBER OF DETAINEES/DAY
1-136 137-160
Year 1 (5/15/96 TO 6/30/97) $84.54/Detainee/Day $50.86/Detainee/Day
Year 2 (7/1/97 TO 6/30/98) $86.66/Detainee/Day $52.13/Detainee/Day
Year 3 (7/1/98 TO 6/30/99) $89.26/Detainee/Day $53.75/Detainee/Day
Attachment C-1
In accordance with Proposal #94222, the following rates are established:
<TABLE>
<CAPTION>
Year Cost Per Youth Per Day No. of Youths No. of Days Cost for Youths 1-136 TOTALS
- ---- ---------------------- ------------- ----------- --------------------- --------------
<C> <C> <C> <C> <C> <C>
1 $84.54 136 210 $2,414,462.40 $11,147,131.20
2 $86.66 136 365 $4,301,802.40
3 $89.26 136 365 $4,430,866.40
Year Cost Per Youth Per Day No. of Youths No. of Days Cost for Youths 136-160 TOTALS
- ---- ---------------------- ------------- ----------- ----------------------- --------------
1 $50.86 24 210 $256,334.40 $ 1,183,843.20
2 $52.13 24 365 $456.658.80
3 $53.75 24 365 $470,850.00
- ---- ---------------------- ------------- ----------- ----------------------
GRAND TOTAL $11,947,964.40
==============
</TABLE>
1) Should the STATE find it necessary to exceed the design
capacity of the facility (160 detention bed), the STATE
will pay the CONTRACTOR the applicable per diem
operational rates specified for utilization exceeding 136
beds for all client increases. In no event, will the STATE
require the CONTRACTOR to exceed the design capacity by
more than 30 percent. The STATE must give prior
authorization to exceed the design capacity of 160 with
the exception of emergencies. The STATE must be notified
of any such emergencies within 24 hours of the occurrence.
2) In the event of contract termination at a date earlier
than 30 June 1999 (see Attachment A, item 6), in order to
insure the continued safety and security of juveniles, a
mutually agreed upon termination date will be negotiated
between the CONTRACTOR and the STATE.
c. CONTRACTOR BILLINGS AND STATE PAYMENTS: The CONTRACTOR will
prepare and send the STATE invoices, using an approved format,
once per month for services through the last day of the month.
Invoices will be paid by the STATE to the CONTRACTOR no later
than 30 days following receipt of invoice.
5. CONTRACTOR SPECIFICS:
a. Billing name and address of the CONTRACTOR:
CORNELL CORRECTIONS OF CALIFORNIA, INC.
1823 KNOLL DRIVE
VENTURA, CALIFORNIA 93003
b. IRS number: 94-2411045
c. Telephone number: 805-644-3765
d. Address/location where the services will be provided:
3460 SOUTH 900 WEST, SALT LAKE CITY, UTAH 84119
Attachment C-1
e. Name and address of financial reporting entity, (entity which
provides audit report or financial statement):
6. THIRD-PARTY REIMBURSEMENT AND PROGRAM INCOME (DHS/OLM ESTABLISHED
RATES): The CONTRACTOR is allowed to bill DHS up to the maximum
contracted rate prior to collecting third-party reimbursements
(insurance, Medicaid, etc.). The CONTRACTOR is required to pursue
reimbursement from all other sources of funding available for services
performed under this contract.
When the third-party reimbursements and program income (gross income
other than government funds generated by the funded program, including
client fees, sales of commodities, and rental fees) do not exceed the
DHS/OLM established rate and DHS participates in the total cost, the
client is considered a State-funded client. In this case, the
combination of third-party reimbursements, program income, and billing
to DHS shall not exceed the DHS/OLM established rates.
When the third-party reimbursements and program income exceed the
DHS/OLM established rate, the client is not considered a State-funded
client. In this case, the CONTRACTOR must reimburse DHS if funds were
advanced for that service. All third-party payments and program income
may be retained by the CONTRACTOR.
Attachment C-1
ATTACHMENT C-2
FISCAL CONDITIONS
1. METHOD AND SOURCE OF CONTRACTOR PAYMENT: The STATE agrees to reimburse
the CONTRACTOR in accordance with Attachment C-1, CONTRACT COSTS, by
warrant drawn against the State of Utah, upon receipt of itemized
billing for STATE authorized services provided and supported by
information contained on reimbursement forms supplied by STATE.
2. OVERPAYMENT/AUDIT EXCEPTIONS/DISALLOWANCES: The CONTRACTOR agrees that
if during or subsequent to the contract period it is determined by the
STATE, through audit or DHS fiscal reviews, that payments to the
CONTRACTOR (as specified in Attachment C-1) were incorrectly reported or
paid, the STATE may amend the contract and adjust the CONTRACTOR payment
rates for the remainder of the contract period, or any renewal period.
Any excess payments are, upon written request, immediately due and
payable to the STATE. In contracts which include a budget, CONTRACTOR
expenditures under this contract, determined by audit or DHS fiscal
review, to be ineligible for reimbursement because they were not
authorized by the terms and conditions of the contract, or that are
inadequately documented, and for which payment has been made to the
CONTRACTOR, will upon written request be immediately refunded to the
STATE by the CONTRACTOR. The CONTRACTOR further agrees that the STATE
shall have the right to withhold any or all subsequent payments under
this or other contracts with the CONTRACTOR until recoupment of
overpayment is made.
3. PAYMENT WITHHOLDING: The CONTRACTOR agrees that the reporting and record
keeping requirements specified in this contract are a material element
of performance and that if, in the opinion of the STATE, the
CONTRACTOR's record keeping practices and/or reporting to the STATE are
not conducted in a timely and satisfactory manner, the STATE may
withhold part or all payments under this or any other contract until
such deficiencies have been remedied. In the event of the payment(s)
being withheld, the STATE agrees to notify the CONTRACTOR in writing
prior to denial of payment of the reasons for the denial and of the
actions that the CONTRACTOR will need to take to bring about the release
of withheld payments.
4. SERVICE CODE COST SUMMARY: When requested by the STATE, the CONTRACTOR
shall submit to the STATE actual cost expenditures under this contract
and specific service code. If selected for review, the STATE will
request cost data as early as ninety-one (91) days after completion of
the prior contract period. If the CONTRACTOR fails to submit Cost
Summaries within twenty (20) working days from the date of request,
payments on subsequent contracts with the STATE may be withheld until
Cost Summaries are received. The cost data shall be in the Service Code
Cost Summary format provided by the STATE. Reported costs shall be in
accordance with the STATE Cost Principles. Service Code Cost Summaries
submitted are subject to audit by the Bureau of Audit. Therefore, Cost
Summaries should agree in total (and in detail where possible) to any
other financial information submitted to the STATE. Such financial
information would include audit reports, financial statements, etc. Cost
Summaries which are found to disagree with other financial information
submitted to the STATE may be subject to further investigation.
5. AUDITS:
a. The following classifications of CONTRACTORS shall provide an
independent audit of their entity in accordance with OMB A-128 or
A-133, as applicable, and the Audits or Political Subdivisions
Act, U.C.A. 51-2 et. seq. (as amended):
1) a subrecipient, or
2) a not for profit service provider which receives more than
$2000,000.00 of its funding from the Federal, State,
and/or local government. DHS funds received as OLM rates
should not be included in the $200,000.00 threshold.
b. The following classifications of CONTRACTORS shall provide an
independent audit of their entity in accordance with Government
Auditing Standards (GAS Yellow Book):
Attachment C-2
1) a profit oriented service provider which receives more
than $200,000.00 of its funding from the Federal, State,
and/or a local government.
DHS funds received at OLM rates should not be included in the
$200,000.00 threshold.
c. The following classifications of CONTRACTORS shall provide
financial statements (a balance sheet, income statement,
statement of cash flows (non-profits), statement of functional
expense, and notes to the financial statements) prepared in
accordance with generally accepted accounting principles:
1) a profit-oriented, service provider which receives less
than $200,000.00 of its funding from the Federal, State,
and/or a local government.
2) a not-for-profit service provider which receives less than
$200,000.00 of its funding from the Federal, State, and/or
a local government.
DHS funds received at OLM rates should not be included in the
$200,000.00 threshold.
d. The following classifications of CONTRACTORS have no audit or
financial statement filing requirements:
1) a vendor (an entity which does not perform services
directly to DHS clients), or
2) a service provider which receives less than $25,000.00 of
its funding from Federal, State, and/or a local
government.
DHS rates should not be included in the $25,000.00 threshold.
A non-governmental (private non-profit or profit) entity and government
entities shall submit a copy of its audit report to the STATE within one
year of the close of the entity's fiscal year.
An entity filing only financial statements shall submit the financial
statements within five (5) months of the close of the entity's fiscal
year. If an entity chooses to submit the audit report instead of
financial statements, the entity shall have the full time requirement
allowed in the first preceding paragraph. If this entity chooses to
submit an audit report instead of financial statements, DHS, Bureau of
Audit, must be notified of this decision prior to the end of the five
month reporting deadline.
If more time is needed, prior approval may be obtained from DHS, Bureau
of Audit.
Audit reports and financial statements should be sent to the Bureau of
Audit, 120 North 200 West (Room 218), P.O. Box 45500, Salt Lake City,
Utah 84145-0500.
All CONTRACTORS are subject to periodic fiscal reviews by DHS.
6. BILLINGS: Billings and claims for services must be received within
twenty (20) days after the last date of service for the period billed
including the final billing, which must be submitted within twenty (20)
days after the termination of the contract. Payment for final billings
received more than twenty (20) days after contract termination may be
delayed or denied.
7. BILLING FOR FIRST AND LAST DAYS: The STATE will reimburse the CONTRACTOR
for both first and last days of service for clients in Long Term
Residential Care. The STATE will reimburse the CONTRACTOR for first and
last service days for clients in Emergency or Short Term Care. The STATE
shall specify terms on Attachment C-1 of this contract.
8. FINANCIAL AND COST ACCOUNTING SYSTEM: The CONTRACTOR agrees to maintain
a financial and cost accounting system in accordance with generally
accepted accounting principles. At a minimum, the CONTRACTOR's
accounting system shall provide for a General Ledger, and cost
accounting records adequate
Attachment C-2
to assure that costs incurred under this contract are reasonable,
allocable to contract objectives, and separate from costs associated
with other business activities of the CONTRACTOR. The CONTRACTOR further
agrees that all program expenditures and revenues shall be supported by
reasonable documentation (vouchers, invoices, receipts, etc.) which
shall be stored and filed in a systematic and consistent manner. The
CONTRACTOR further agrees to retain and make available to independent
auditors, State and Federal auditors, and program and contract reviewers
all accounting records and supporting documentation for a minimum of
four (4) years after the expiration of this contract. The CONTRACTOR
further agrees that, to the extent it is unable to reasonably document
the disposition of monies paid under this contract, it is subject to an
assessment for over-payment.
9. ANNUAL FISCAL REPORTING: Annual fiscal reporting shall be on an accrual
or a modified accrual basis as required by generally accepted accounting
principles. Smaller entities which file cash basis income tax returns
may submit annual fiscal reports on a cash basis with prior written
approval from DHS, Bureau of Audit. Monthly or quarterly reports
required may be on a cash basis.
10. DEPARTMENT COST PRINCIPLES: The CONTRACTOR agrees to abide by Federal
and Department Cost Principles as applicable to the contract.
11. NOTIFICATION OF THE INTERNAL REVENUE SERVICE: It is Department of Human
Services' policy to notify the Internal Revenue Service of any
violations of IRS regulations uncovered as a result of its dealings with
providers.
12. RELATED PARTIES: The CONTRACTOR shall not make payments to related
parties in any category of Administration, Capital Expenditures, or
Program Expenses without the prior written consent of the STATE.
Payments to related parties may include, but are not limited to:
salaries, wages, compensation under employment or service agreements, or
payments under purchase, lease, or rental agreements. Payments made by
the CONTRACTOR to related parties without such prior written consent may
be disallowed and may result in an overpayment assessment. For the
purpose of defining payments to related parties under a contract:
a. The CONTRACTOR shall be defined to include all owners, partners,
directors, officers of the CONTRACTOR or others with authority to
establish policies and make decisions for the CONTRACTOR.
b. Persons and/or organizations shall be considered related parties
when any of the following conditions exist:
1) A person and/or organization with directors, officers, or
others with the authority to establish policies and to
make decisions for the organization who is/are related to
the CONTRACTOR through blood or marriage, as defined by
U.C.A., Section 52-3-1(d) as father, mother, husband,
wife, son, daughter, sister, brother, uncle, aunt, nephew,
niece, first cousin, mother-in-law, father-in-law,
brother-in-law, sister-in-law, son-in-law, or
daughter-in-law.
2) An organization has in common with the CONTRACTOR either:
a) owners or partners who directly or indirectly own ten
percent (10%) or more of the voting interest of the
organization; and/or b) directors, officers or others with
authority to establish policies and make decisions for the
organization.
The CONTRACTOR is obligated to immediately call any contemplated or
actual related party payment to the attention of the STATE. Upon
notification of related party payment, the STATE may, at its discretion,
require that the CONTRACTOR undertake competitive bidding for the goods
or services, require satisfactory cost justification prior to payment,
or take other steps that may be necessary to assure that the goods or
services provided afford the STATE a satisfactory level of quality and
cost. Any related party payments contemplated under this contract are
specified as follows: (if none, please so state)
Attachment C-2
NAME Purpose Amount Justification
========== ================= ====================== ========================
NONE
13. CHANGES IN BUDGET (COST REIMBURSEMENT CONTRACTS ONLY): The budget,
presented in Attachment C-3, shall be the basis for payment. The
CONTRACTOR may not make any adjustment in budgeted funds from Category
III, "Program Expenses" to either Category I, "Administration" or
Category II, "Capital Expenditures" or between Categories I and II,
without prior written approval by the STATE. Expenditures in excess of
those budgeted in either Categories I or II may be considered questioned
costs. Resolution of such questioned costs will normally result in a
request that such excesses be refunded to the STATE. The CONTRACTOR may,
however, shift between either Categories I or II to Category III without
prior approval. Expenditures in excess of those budgeted in Category III
will not normally result in questioned costs unless restrictions have
been placed on subcategories within this major category. When the
contract restricts expenditures within defined subcategories, any
unapproved excess will be considered a questioned cost.
14. PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA: If any price,
including profit or fee, negotiated in connection with this contract, or
any cost reimbursable under this contract was increased by any
significant sum because the CONTRACTOR furnished cost or pricing data
(e.g., service code cost summaries, salary schedules, reports of prior
period costs, etc.) which was not accurate, complete, and current, the
price or cost shall be reduced accordingly and the contract shall be
modified in writing as may be necessary to reflect such reduction, and
amounts overpaid shall be subjected to overpayment assessments (see
Attachment A). Any action the STATE may or may not take in reference to
such price reduction shall be independent of, and not be prejudicial to,
the STATE's right to terminate this agreement.
15. NON-FEDERAL MATCH: For those contracts requiring a non-federal match
said match shall be in accordance with provisions of Title 45 CFR, Part
74, Sub-part G. Other funding sources may require different non-federal
match amounts which are shown on Attachment C-1.
16. PAYMENT RATES (DOES NOT APPLY TO CONTRACTS WITH OLM SET RATES): Initial
payment rates for negotiated contracts may be calculated based on actual
expenditures for prior period, available budget and changes in the type
or quality of service. The rates may be adjusted up or down during the
contract term in accordance with prior paid actual costs or a review of
current costs verified by audit or fiscal review. Such a rate adjustment
may be retroactive to the beginning of the contract. Rates for contracts
awarded as a result of the competitive bidding process will not be
changed during the contract term.
17. ADMINISTRATIVE EXPENDITURES: Total administrative expenditures (Category
1) may not exceed twenty-five percent of total program expenditures
without prior written approval from DHS, Executive Director.
Attachment C-2
<PAGE>
ATTACHMENT D
FEDERAL ASSURANCES
The CONTRACTOR hereby assures and certifies that it will comply with the
regulations, policies, guidelines, and requirements as indicated for said type
of institution.
1. HOSPITALS: OMB Circulars A-133 and A-110.
2. STATE AGENCIES, PUBLIC SCHOOLS, LOCAL GOVERNMENTS, AND INDIAN TRIBAL
GOVERNMENTS: OMB Circulars A-102, A-128, and A-87; and the Common Rule.
3. PUBLICLY FUNDED COLLEGES AND UNIVERSITIES: OMB Circulars A-110, A-122,
A-133, and A-21.
4. PRIVATE NON-PROFIT ORGANIZATIONS/PRIVATE SCHOOLS: OMB Circulars A-110,
A-122, and A- 133.
5. INDIVIDUALS/PRIVATE FOR-PROFIT ORGANIZATIONS: Those not Covered by OMB
Circulars, but for which DHS has developed its own cost principles,
fiscal conditions, and audit requirements which are applicable. These
are designed from OMB and USGAO guidelines and GAS governmental
accounting standards applicable to other types of entities, and are
described in the contract.
Also, the CONTRACTOR assures and certifies with respect to the project that:
1. ALLOWABLE COSTS/COST PRINCIPLES: The cost of a Federal and/or State
supported program is comprised of the allowable direct cost of the
program plus its allocable portion of allowable indirect costs less
applicable credits. Federal and State cost principles are designed to
provide that programs bear their fair share of recognized costs as
determined by allowable cost principles. No provision for profit or
other increments above cost is intended.
A cost is allowable for reimbursement only to the extent of benefits
received by programs, and costs must meet the basic guidelines of
allowability, reasonableness, allocability, and remain the net of all
applicable credits.
2. LEGAL AUTHORITY: It possesses legal authority to apply for the grant;
that a resolution, motion, or similar action has been duly adopted or
passed as an official act of the applicant's governing body, if
necessary, authorizing the filing of the application, including all
understandings and assurances contained therein, and directing and
authorizing the person identified as the official representative of the
applicant to act in connection with the application and to provide such
additional information as may be required.
3. DISCRIMINATION: The Contractor assures and certifies that with respect
to the project that:
TITLE VI OF THE CIVIL RIGHTS ACT OF 1964. It will comply with
Title VI of the Civil Rights Act of 1964 (Pub. L. 88-352), as
amended, which prohibits discrimination on the basis of race,
color, or national origin in programs or activities receiving
federal financial aid.
EXECUTIVE ORDER 11246. It will comply with Executive Order 11246,
as amended by Executive Order 11375, which prohibits
discrimination in employment on the basis of sex, race, color, or
national origin by federal contractors.
AGE DISCRIMINATION ACT OF 1975. It will comply with the Age
Discrimination Act of 1975 (Pub. L. 94-135), as amended, which
prohibits discrimination on the basis of age in programs or
activities receiving federal financial assistance.
SECTION 504 OF THE REHABILITATION ACT OF 1973. It will comply
with Section 504 of the Rehabilitation Act (Pub. L. 93-112) which
prohibits discrimination on the basis of disability in programs
or activities receiving federal financial assistance.
Attachment D
AMERICANS WITH DISABILITIES ACT OF 1990. It will comply with the
Americans With Disabilities Act of 1992 (Pub. L. 101-336) which
prohibits discrimination on the basis of disability by employers,
government agencies, and public accommodations. It will also
comply with any other applicable provisions of this act including
its telecommunications provisions.
The contractor will comply with any other civil rights provisions to
which it is subject.
4. TRAINING: Every Contractor agrees to attend at least one Department
training on the above civil rights laws.
5. HATCH ACT: It will comply with the provision of the Hatch Act which
limits the political activity of employees.
6. FAIR LABOR STANDARDS ACT: It will comply with all provisions of the Fair
Labor Standards Act, including minimum wage, child labor limitations,
and the overtime provisions of the Wage and Hour Division.
7. EMPLOYMENT ELIGIBILITY VERIFICATION: It will comply with the Immigration
and Naturalization requirement to maintain a signed copy of the I-9
Employment Eligibility Verification form for each employee.
8. CONFLICT OF INTEREST: It will establish safeguards to prohibit employees
from using their positions for a purchase that is or gives the
appearance of being motivated by a desire for private gain for
themselves or others, particularly those with whom they have family,
business, or other ties.
9. RECORDS ACCESS: It will give the grantor agency or the Comptroller
General, through any authorized representative, the access to and the
right to examine all records, books, papers, or documents related to the
grant.
10. ENVIRONMENTAL PROTECTION AGENCY'S LIST OF VIOLATING FACILITIES: It will
insure that the facilities under its ownership, lease, or supervision
which shall be utilized in the accomplishment of the project are not
listed on the Environmental Protection Agency's (EPA) list of Violating
Facilities and that it will notify the federal grantor agency of the
receipt of any communication from the Director of the EPA Office of
Federal Activities indicating that a facility to be used in the project
is under consideration for listing by the EPA.
11. FLOOD INSURANCE: It will comply with the flood insurance purchase
requirements of Section 102(a) of the Flood Disaster Protection Act of
1973, P.L. 93-234, 876 Stat. 975, approved December 31, 1976. Section
102(a) requires, on and after March 2, 1975, the purchase of flood
insurance in communities where such insurance is available as a
condition for the receipt of and federal financial assistance for
construction or acquisition purposes for use in any area having special
flood hazards. The phrase "federal financial assistance" includes any
form of loan, grant, guarantee, insurance payment, rebate, subsidy,
disaster assistance loan or grant, or any other form of direct or
indirect federal assistance.
12. NATIONAL HISTORIC PRESERVATION: It will assist the federal grantor
agency in its compliance with Section 106 of the National Historic
Preservation Act of 1966, as amended (16 USC 470), Executive Order
11593, and the Archaeological and Historic Preservation Act of 1966 (16
USC 469a-1 et seq.) by (a) consulting with the State Historic
Preservation Officer on the conduct of investigations, as necessary, to
identify properties listed in or eligible for inclusion in the National
Register of Historic Places that are subject to adverse effects (see 36
CFR Part 800.8) by the activity, and notifying the federal grantor
agency of the existence of any such properties, and by (b) complying
with all requirements established by the federal grantor agency to avoid
or mitigate adverse effects upon such properties.
13. DEBARMENT AND SUSPENSION: It nor its principals is presently debarred,
suspended, proposed for debarment, declared ineligible, or voluntarily
excluded from participation in this transaction by any Federal
department or agency. Where the CONTRACTOR is unable to certify to any
of the statements in this certification, such CONTRACTOR shall attach an
explanation to this contract.
Attachment D
14. ENVIRONMENTAL STANDARDS: If the amount of this contract exceeds
$100,000.00, it agrees to comply with applicable standards, regulations,
or orders issued pursuant to the Clean Air Act of 1970 (42 USC 1857 et
seq.) and Federal Water Pollution Control Act (33 USC 1251 et seq.) as
amended. Violations shall be reported to DOE and the Regional Office of
the Environmental Protection Agency.
15. LOBBYING CERTIFICATION: If the amount of this contract exceeds
$100,000.00, it will comply with the following:
a. No federal appropriated funds have been paid or will be paid, by
or on behalf of the undersigned, to any person for influencing or
attempting to influence an officer or employee of an agency, a
member of Congress, an officer or employee of Congress, or any
employee of a member of Congress in connection with the awarding
of any Federal contract, the making of any Federal grant, the
making of any Federal loan, the entering into of any cooperative
agreement, and the extension, continuation, renewal, amendment,
or modification of any Federal contract, grant, loan, or
cooperative agreement.
b. If any funds other than Federal appropriated funds have been paid
or will be paid to any person for influencing or attempting to
influence an officer or employee of any agency, a member of
Congress, an officer or employee of Congress, or an employee of a
member of Congress in connection with this Federal contract,
grant, loan, or cooperative agreement, the undersigned shall
complete and submit Standard Form LLL, "Disclosure Form to Report
Lobbying," in accordance with its instructions.
c. The undersigned shall require that the language of this
certification be included in the award documents for all
subawards at all tiers (including subcontracts, subgrants, and
contracts under grants, loans, and cooperative agreements) and
that all subrecipients shall certify and disclose accordingly.
This certification is a material representation of fact upon which
reliance was placed when this transaction was made or entered into.
Submission of this certification is a prerequisite for making or
entering into this transaction imposed by Section 1352, Title 31, USC.
Any person who fails to file the required certification shall be subject
to a civil penalty of not less than $10,000.00 and not more than
$100,000.00 for each such failure. (If the CONTRACTOR is out of
compliance with this requirement, Attachment G, Disclosure of Lobbying
Activities, must be part of the contract.)
16. DAVIS-BACON ACT: When required by Federal and/or State legislation, all
laborers and mechanics employed by contracts or subcontracts to work on
construction projects financed by contract funds must be paid wages not
less than those established for the locality of the project by the
Secretary of Labor, (40 Stat.
1494, March 3, 1921, Chapter 411, 40 USC 276A-276A-5).
17. DRUG/SMOKE FREE WORKPLACE: It will maintain a drug/smoke free workplace
in compliance with the requirements of 45 CFR, Part 76 and the Utah
Clean Air Act.
Attachment D
<PAGE>
ATTACHMENT E
PROGRAM DESCRIPTION
1. POPULATION TO BE SERVED: Youth meeting the statewide guidelines for
admission to a Detention Facility.
2. ELIGIBILITY CATEGORIES: UN: Universal.
3. ELIGIBILITY DETERMINATION: Eligibility will be determined by the STATE
(Division of Youth Corrections).
4. PROGRAM DESCRIPTION: The Division of Youth Corrections, it's authority
and responsibilities, are established and provided by UCA 62A-7. Region
II of DYC serves three counties (Salt Lake, Tooele, and Summit) of the
State. This detention facility will provide services identified within
this contract, primarily to eligible residents of Salt Lake, Tooele, and
Summit Counties, but may also provide for other areas of the state,
depending on space availability and a trend in resources and needs. This
contract is intended to meet the growth and increasing demand for
detention services for youth meeting the statewide admission criteria
promulgated by the Division of Youth Corrections.
a. DETENTION FACILITIES (UCA 62A7-201): Juvenile Detention is the
temporary and safe custody of juveniles, both male and female,
10-18 years of age, who are accused of conduct subject to the
jurisdiction of the juvenile court or the jurisdiction of the DYC
Youth Parole Authority who require a restricted and secure
environment for their own or the community's protection while
pending legal action, transfer to another jurisdiction or agency,
or have been committed as a disposition.
Further, juvenile detention provides a wide range of services
which support the juveniles' physical, emotional, and social
development.
Services minimally include: education, recreation, counseling,
nutrition, medical and health services, library, visitation,
communication and continuous supervision.
b. PROGRAM STANDARDS: The detention facility will be operated
according to applicable standard of the American Correctional
Association (ACA), Utah State Detention Standards, The Americans
with Disabilities Act, and DYC Detention Facility Policies.
c. MANAGEMENT/SUPERVISION: The detention facility will be operated
by qualified and regularly trained personnel in the most
cost-effective manner, utilizing a direct supervision management
philosophy. Youth will be housed in living units. Each unit will
house 16 youth, who will be assigned to rooms according to
individual needs and classification. Youth will be under direct
and continuous supervision of line staff who will control youth
behavior through effective interpersonal communication
techniques.
d. ON-SITE LIAISON: A liaison employed by the Division of Youth
Corrections will be located on-site. The responsibilities of this
position include monitoring the services of the service provider
to assure compliance with the contract. The provider shall
provide clerical services for the On-site Liaison. The provider
shall provide private, enclosed office space, at least 120 square
feet, with furnishings and equipment including computer and
telephone.
e. DETENTION FACILITY ADMINISTRATION: The detention facility and its
program shall be managed by a single facility administrator. The
administrator will be selected with the concurrence of DYC. The
administrator must meet routinely with the DYC Region Director or
designee in order to facilitate communications, establish policy,
explore problems, and ensure conformity with applicable DYC
policy and the contract.
1) POLICY AND PROCEDURAL MANUAL: The facility shall have a
Division approved policy and procedure manual which
specifically describes its purpose, programs, procedures,
and
Attachment E
services offered prior to occupancy. The manual shall be
reviewed annually by the Division of Youth Corrections and
the facility administrator and updated when necessary.
Where applicable, the manual shall adhere to DYC "Policy
and Procedures Manual", and Utah Detention Standards.
2) ORGANIZATIONAL CHART: The facility administrator must
provide an organization chart that accurately reflects the
structure of authority, responsibility, and accountability
within the facility.
3) FISCAL MANAGEMENT: The CONTRACTOR shall prepare and
distribute to the Division of Youth Corrections the
following documents: annual budget, income and expenditure
reports, financial reports, independent audit reports,
other fiscal management reports requested by DYC.
The CONTRACTOR shall ensure the policies are written,
which include, at a minimum: internal controls, petty
cash, bonding, signature control on checks, employee
expense reimbursements.
There shall be written policy for purchasing and
requisitioning supplies and equipment, as well as methods
which document and authorize wage payments to employees
and consultants.
4) PERSONNEL: The facility shall be staffed 24 hours a day,
seven days a week. The staffing pattern shall have a
staffing ratio of 1-8 (one child care worker to eight
residents) during work hours. A staff ratio of 1-16 (one
child care worker to 16 residents) will be scheduled
during graveyard shifts. The staffing pattern shall
address the programs, transportation, maintenance, and
security needs of the facility. The proposed staffing
pattern shall be submitted to the Division of Youth
Corrections for review and approval. The facility shall
provide, at a minimum written job descriptions and job
qualifications for all positions, including: job title,
responsibilities, required minimum experience and
education.
A personnel record shall be maintained on each employee
and a written annual performance evaluation shall be
conducted.
Child care, clinical, and supervisory staff shall have
education/experience in behavioral or social sciences and
appropriate current licensure.
Support services staff, including security (control
facility), clerical, food service, and building
maintenance shall have required training and experience in
their specific area of responsibility.
Prior to employment, all employees of the facility must
consent to a Bureau of Criminal Investigation (BCI)
background check and review of the Utah Social Service
Delivery System Child Protective Data Base. No individual
will be hired who has previous felony convictions or
crimes against children. Any applicants with drug and
alcohol related convictions must have prior approval by
the Division of Youth Corrections.
At the time of hire, all employees shall have a valid Utah
State Driver License (if required for the job).
5) TRAINING: The CONTRACTOR shall meet training requirements
in accordance with DYC policy for all staff, documenting
amount, content, and time frames for completion. Staff
training shall be documented and provided by qualified
trainers.
f. ADMISSION CRITERIA: Admission to Detention shall only occur in
accordance with written guidelines promulgated by DYC or in
accordance with a court order.
Attachment E
g. RELEASE AND TRANSFERS: A youth's release from Detention or
continuance in detention shall be determined by order the
Juvenile Court.
h. SANITATION AND HYGIENE ACCOMMODATIONS: The CONTRACTOR is
responsible for providing, at a minimum, for each resident within
his/her sleeping room the following: clothing, bed and mattress,
pillow, bed linen, adequate lighting, heating and ventilation.
Written policy and procedures shall ensure the issue of clean,
usable bed linen and towels to new residents, with provisions for
exchanging or laundering. Sanitation and hygiene accommodations
shall be in accordance with the American Correctional Association
Standards and Division policy.
Each resident shall be provided the following articles for
personal hygiene: soap, toothbrush with toothpaste or powder,
comb, toilet paper, deodorant.
There shall be a system for vermin control, pest control, trash
and garbage disposal. In general, the facility shall be kept
clean and in a good state of repair.
i. SECURITY AND CONTROL:
1) PREVENTATIVE SECURITY: The CONTRACTOR shall provide for
sufficient staff to ensure the appropriate supervision of
detained youth at all times. Provisions shall be made to
ensure that the facility security perimeter is controlled
by appropriate means such that residents remain within the
perimeter and the general public will not be allowed
access to the facility without permission.
At least weekly, inspections shall be conducted by staff
to ensure all locks, windows, and any other security
devices are fully operational. Emergency keys shall be
checked at least quarterly to make sure they function.
2) SEARCHES: The staff shall search all detainees immediately
upon admission and at appropriate times during detainment,
with attention to the youth's privacy, to ensure the
control of contraband in the facility. All policies and
procedures relative to conducting searches of detained
juveniles are in accordance with Division policy.
3) CONTROL AND USE OF KEYS: There shall be published policy
and procedure in accordance with Division policy, for the
use and control of keys. The key control system shall
provide a current accounting of the location and possessor
of each key at all times.
4) CONTROL OF TOOLS AND UTENSILS: The CONTRACTOR shall
provide written guidelines to govern the control and use
of tools, culinary and maintenance equipment, butcher
knives, barber shears, and other instruments which can
cause death or serious injury. The aforementioned
instruments shall be controlled and distributed in
accordance with Division policy.
5) INCIDENT REPORTS: The CONTRACTOR shall adhere to Division
policy for the reporting of major incidents and escapes
from the facility.
6) USE OF PHYSICAL FORCE: The use of physical force shall be
limited to that authorized by Division policy. Under no
circumstances shall physical force by used as punishment.
Staff shall be trained in physical and verbal crisis
intervention technique. Whenever physical force is used, a
written incident report shall be prepared documenting the
nature of the incident, amount of force required, injuries
to staff or detainee and treatment of injuries when
applicable. All reports of the use of physical force shall
be submitted to the facility administrator and the on-site
liaison immediately. Any person injured in an accident
must receive an immediate medical examination and
treatment.
Attachment E
7) USE OF MECHANICAL RESTRAINTS: The CONTRACTOR shall have
established procedures in accordance with Division policy
for the use of mechanical restraints addressing: approval
by facility director or designated personnel; constant
visual and/or audio observation when used; never applied
as punishment nor used for more time than necessary;
whenever transporting youth; medical reasons; by direction
of the medical officer; to prevent detainee self-injury,
injury to others, or property damage; incident reports
filed by facility staff involved. All reports of the use
of physical force shall be submitted to the facility
administrator and the on-site liaison immediately.
8) HOSTAGE SITUATION: The CONTRACTOR shall establish
procedures and guidelines adhering to Division policy to
be followed by staff for hostage situations which maximize
the safety of hostages and hostage takers and minimize the
disruption and security of the facility.
9) MAJOR DISTURBANCE: The facility shall have a written plan
to be followed in the case of a major disturbance in the
facility. That plan shall be available to all personnel
who shall receive periodic training in its implementation.
The plan is reviewed and approved by the Division annually
and updated as necessary.
10) FIREARMS: The use or possession of firearms for control of
residents shall be prohibited. Firearms shall not be
permitted in the facility at any time. A system of receipt
for the temporary safe storage of such equipment brought
on grounds by law enforcement officers or others shall be
required.
11) TRANSPORTATION: The CONTRACTOR shall establish procedures
in accordance with Division policy which shall be followed
to ensure the safety and security of youth and staff when
it is necessary for a youth to be transported outside the
facility.
12) EVIDENCE AND CONTRABAND: The CONTRACTOR shall ensure staff
follow appropriate procedures if it becomes necessary to
retain evidence at the facility temporarily in order to
avoid breaking the chain of evidence. Staff shall follow
necessary procedures to avoid the introduction of
contraband into the facility and to prevent contraband
from being accessible.
j. SAFETY AND FIRE PREVENTION: The CONTRACTOR will ensure that a
qualified state fire official routinely inspect the facility for
compliance with safety and fire prevention standards. There shall
be routine fire and safety inspections of the facility by an
administrative staff member. Written guidelines in accordance
with Division policy shall be established specifying the
facility's fire prevention regulations and practices.
The CONTRACTOR is responsible for and shall assure an approved
fire alarm system and automatic smoke control system is
operational and maintained regularly.
k. PROGRAMS: The facility shall ensure that quality programs are
available to all residents regardless of the length of time
detained. Programs and services are available to all residents
immediately upon admission to the facility.
The CONTRACTOR shall provide or make available, at a minimum, the
following programs/services to residents:
1) EDUCATION: The facility shall have education programs in
accordance with the Utah State Education of Youth in
Custody Law. Educational services shall be funded by the
State Office of Education and administered cooperatively
between the Granite School District and the facility. All
residents shall be expected to attend school while in the
facility.
2) LIFE SKILLS: Life skills classes equip residents with the
mechanisms necessary to successfully integrate into
productive community life. Life skills include the
fundamentals of every day living, which most people have
naturally learned through their developmental years.
Topics
Attachment E
include time management, use of community resources, anger
management, effective communication, health issues, victim
awareness, etc.
3) CLINICAL SERVICES: The facility shall utilize range of
services to meet the needs of residents for crisis
intervention, assessment, group, individual and family
counseling, and clinical assessment and therapy. Personnel
shall be licensed in accordance with the Division of
Occupational and Professional Licensing requirements and
must provide the Division with consent to conduct a
criminal record check, consent to the review of the Utah
Social Services Delivery System Child Protective Data
Bases, and must be trained in the Department's Provider
Code of Ethics.
4) RECREATION: The CONTRACTOR shall ensure that all youth are
provided the opportunity to participate in constructive
leisure time activities and exercise involving
large-motor, recreational activities for a minimum of two
hours on school days and three hours on non- school days,
not including time spent watching television. The
CONTRACTOR shall provide for a variety of indoor and
outdoor recreational activities.
5) ARTS AND CRAFTS: The CONTRACTOR shall facilitate arts and
crafts activities for residents, when possible. The
recruitment of volunteers with arts and crafts skills to
provide these services are encourage.
6) CLERGY PROGRAM: The facility shall ensure the availability
of religious services and counseling to residents. All
youth shall have the opportunity to voluntarily practice
their respective religions. Youth shall be permitted to
attend services of their choice, when possible, and to
receive visits from representatives of their respective
faiths. Religious services may be coordinated through a
volunteer chaplain.
7) LIBRARY SERVICES: Appropriate library services at the
facility shall be provided through the local school
district and community donations.
8) HOUSEKEEPING AND WORK PROGRAMS: The detention facility
shall require all youth to perform housekeeping functions,
such as necessary maintenance of their own rooms and
general maintenance of the living areas. Opportunities
shall be provided for youth to voluntarily perform
additional work for restitution or fines ordered by the
Juvenile Court.
9) VOLUNTEER PROGRAMS: Opportunities shall be provided for
detainee to maintain contact with the community through a
volunteer services program. The use of volunteers shall be
designed to enhance and improve the services and programs
offered by the facility and not used to supplant regular
program activities or staff. Volunteers are required to
have a BCI criminal records background check.
l. FOOD SERVICE: The CONTRACTOR shall provide for at least three
meals, of which two are hot meals, at regular times during each
24 hour period, with no more than 12 hours between the evening
meal and breakfast. Provided basic nutritional goals are met,
variations may be allowed, based on weekend and holiday food
demands. Special diets must be provided, as required, to meet the
medical and religious needs of incarcerated youth. Food shall not
be withheld for disciplinary purposes. Careful planning of menus
and competent supervision of food preparation is required.
m. DISCIPLINARY PROCEDURES: The CONTRACTOR shall provide a resident
disciplinary process in accordance with Division policy.
1) WRITTEN RULES OF CONDUCT: The facility shall have written
rules of conduct which outlines acts prohibited within the
facility and sanctions that may be imposed for rule
violations.
2) DISCIPLINARY ACTION/CONFINEMENT: The facility shall
provide discipline which shall be equitable and consistent
in its administration and commensurate with the violation.
Attachment E
Discipline shall be designed to balance and preserve the
interests of both the resident and the institution and
shall be used to manage behavior, not for retaliation.
Disciplinary actions taken shall be the least restrictive
measure available to effect control. Disciplinary
sanctions shall not deny the youth's legal and ethical
rights. Facility staff shall follow Division disciplinary
policy and procedures.
3) INCIDENT REPORTS: Following DYC policy, all unusual
incidents will be documented and distributed following any
non-routine event, including, but not limited to, any
accident, low violation, suicide attempt, assault, crisis
or extreme upset occurring at the facility. Copies of all
incident reports shall be written and forwarded to the DYC
liaison within 24 hours of the incident.
n. RESIDENT RIGHTS: The CONTRACTOR shall ensure that resident rights
are protected and afforded at all times during the youth's time
of incarceration. The CONTRACTOR shall adhere to Division policy
and ensure the resident's rights regarding: telephone calls,
visitation, mail, access to court, availability of services and
programs, fingerprinting and photographing, hair (length, style,
and service), protective services to residents.
o. GRIEVANCE PROCEDURES: A resident grievance procedure will be
established at the facility in accordance with Division Policy.
The on-site liaison will act as the Division's appeals officer
for this procedure, using existing Division mechanisms for
review.
p. PLANT MAINTENANCE: The CONTRACTOR shall be responsible for
providing all routine maintenance of the facility and shall not
allow more than normal wear and tear to occur while providing the
operational services. Any repairs related to structural or design
defects, natural disasters, poor workmanship, changes mandated by
the STATE or other governmental agencies, or any other occurrence
beyond the control of the CONTRACTOR shall be the responsibility
of the STATE. The CONTRACTOR shall be responsible for any repairs
occurring as a result of its actions in managing the facility.
Qualified personnel trained in major system maintenance shall be
available to operate and maintain the facility.
1) During the first year of occupancy, the building
constructed Contractor's warranties and guarantees will
cover primary building equipment repairs.
2) The Contractor (Cornell Corrections of California, Inc.)
shall be responsible for coordinating initial training and
instruction of maintenance personnel in basic plan
operations and maintenance with the building contractor
and its subcontractors.
3) The Contractor shall, at its sole expense, maintain the
physical structure of the facility and all equipment and
tangible personal property contained herein, in accordance
with ACA Standards, commonly accepted correctional
practices, and Contractor Policy and Procedures, including
all maintenance related to structural conditions or
defects as well as ordinary routine and preventive
maintenance, to maintain, preserve, and keep the facility
and equipment in good repair, working order and condition,
subject to normal wear and tear. The Contractor will from
time to time, as needed, make or cause to be made all
necessary and proper repairs, replacements, and renewals,
which shall thereupon become part of the facility. During
the term of this contract, DYC shall have no
responsibility, financial or otherwise, with respect to
maintenance of the facility. Failure to comply with
maintenance requirements shall result in a reduction of
the final year's operational price by the cost of any
repairs.
4) Subject to the prior written approval of DYC, which
approval shall not be unreasonably withheld, the
CONTRACTOR, shall have the authority to remodel the
facility or make substitutions, alterations, additions,
modifications and improvements to the facility from time
to time, the cost of which remodeling, substitutions,
alterations, additions,
Attachment E
modifications and improvements shall be paid by the
CONTRACTOR, and the same shall become part of the
facility.
q. TRANSPORTATION: The CONTRACTOR shall be responsible to transport
residents for emergency medical care and to other facilities to
prevent overcrowding. When possible facility staff will also help
facilitate transportation to necessary and approved appointments.
r. POPULATION CONTROL: If a condition of crowding occurs at the
facility (a condition of being required to house more than design
capacity), the CONTRACTOR is allowed a period of 48 hours to
notify DYC of the overcrowding, receive direction from DYC,
mutually resolve the condition.
s. MEDICAL SERVICES: All youths in detention shall have ready access
to needed medical services. Comprehensive medical care will be
provided by contract or in cooperation with contracted health
providers. The contractor shall make diligent efforts to ensure
that the medical needs of all detainees are attended to in an
expeditious and professional manner. The contractor shall adhere
to all DYC detention policies regarding medical care.
Attachment E
<PAGE>
ATTACHMENT F
OBJECTIVES AND EVALUATION
PROGRAM QUALITY ASSURANCE AND OUTCOME MEASURES
1. The CONTRACTOR agrees to comply with negotiated data requirements, and
negotiated resource requirements for outcome evaluations conducted by
the Division.
2. The Division shall evaluate the program by mutually agreeing with the
CONTRACTOR to minimum threshold for each program component. The
CONTRACTOR agrees to comply with and participate in the quality
assurance system developed by the Division.
a. The facility director agrees to participate on a minimum of one
on-site quality assurance review of a similar program in Utah
during the fiscal contract year.
b. The CONTRACTOR agrees that the program shall meet minimum
thresholds for program quality and understands that failure to
achieve compliance with the threshold within six months of an
on-site review, unless there are extenuating circumstances
approved by the Division, will result in either adherence to a
remedial action plan developed by the Division of Youth
Corrections or cancellation of the contract.
Attachment F
EXHIBIT 11.1
CORNELL CORRECTIONS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------------------- PRO FORMA
SIX MONTHS ENDED ------------
YEAR ENDED DECEMBER 31, JUNE 30, YEAR ENDED
----------------------------------------------------- -------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).................... $ (742) $ 940 $ (915) $ (600) $ (989) $ (40) $ (710) $ 1,981
========= ========= ========= ========= ========= ========= ========= ============
Shares used in computing earnings
(loss) per share:
Weighted average common shares
and common share equivalents... 1,500 1,603 1,807 2,923 3,188 3,196 3,190 3,188
Less treasury shares............. -- -- -- -- (93) -- (555) (93)
Effect of shares issuable under
stock option plans and warrants
granted subsequent to July 15,
1995, based on the treasury
stock method................... 888 888 888 888 888 888 888 888
Common shares offered by the
Company........................ -- -- -- -- -- -- -- 3,523
--------- --------- --------- --------- --------- --------- --------- ------------
2,388 2,491 2,695 3,811 3,983 4,084 3,523 7,506
========= ========= ========= ========= ========= ========= ========= ============
Earnings (loss) per share............ $ (.31) $ .38 $ (.34) $ (.16) $ (.25) $ (.01) $ (.20) $ .26
========= ========= ========= ========= ========= ========= ========= ============
(table continued below)
</TABLE>
PRO FORMA
----------
SIX MONTHS
ENDED
JUNE 30,
1996
----------
Net income (loss).................... $ 867
==========
Shares used in computing earnings
(loss) per share:
Weighted average common shares
and common share equivalents... 3,348
Less treasury shares............. (555)
Effect of shares issuable under
stock option plans and warrants
granted subsequent to July 15,
1995, based on the treasury
stock method................... 888
Common shares offered by the
Company........................ 3,523
----------
7,204
==========
Earnings (loss) per share............ $ .12
==========
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 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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
September 10, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 390 556
<SECURITIES> 0 0
<RECEIVABLES> 3,436 4,007
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,540 5,354
<PP&E> 2,346 4,891
<DEPRECIATION> 437 650
<TOTAL-ASSETS> 14,184 19,773
<CURRENT-LIABILITIES> 3,015 3,256
<BONDS> 7,625 13,844
0 0
0 0
<COMMON> 32 32
<OTHER-SE> 3,021 2,335
<TOTAL-LIABILITY-AND-EQUITY> 14,184 19,773
<SALES> 0 0
<TOTAL-REVENUES> 20,692 11,337
<CGS> 0 0
<TOTAL-COSTS> 20,702 11,600
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,115 498
<INCOME-PRETAX> (989) (710)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (989) (710)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (989) (710)
<EPS-PRIMARY> (.24) (.19)
<EPS-DILUTED> 0 0
</TABLE>
